A record attendance at CERAWeek this year already provided a clue. Optimism - and a need to think longer term - was back in vogue for industry leaders', particularly for those from upstream. The industry is a step further to adjusting to a lower price world. So conversations dare to shift from "how to move down the cost of supply curve?" to "how to innovate to achieve growth while sustaining capital discipline and productivity?"

A few takeaways on upstream leaders' response highlight this pursuit of sustainable growth:

• Specialization and differentiation among players remains evident. North America (with its predominantly short cycle, shale and tight oil investments) and the Rest of the World (with its largely conventional, longer cycle) represent quite different camps. Few players can demonstrate strong performance in both. Specialization and focus is required, for players to outperform.
  • Shale is real, but the questions have shifted from how real, toward how long and how strong? Questions around the possibility of sweet spot exhaustion exist, although existing players typically shrug off such concerns. We believe that a number of factors in fact govern longevity: logistics/service sector capacity; capital availability and growth-vs-returns tradeoffs and finally, subsurface limits.
  • Offshore is back! Conventional players argue that cost / design innovations and compressed cycle times are enabling a larger number of offshore assets to compete more strongly on the cost of supply curve. Phased development, running appraisal and development processes in parallel or standardization and procurement approaches as well as new technologies help to limit lead times and costs and could attract would-be onshore investors. Offshore assets in Norway, Guyana, Mexico, Egypt, for example, have shown themselves to be strong contenders for investment and returns. But globally, the list of marginal assets is still long and sanctioning continues to lag.
  • Conventional exploration has become a more specialized activity. The appetite for conventional exploration as a primary method to add value appears limited to a smaller set of conventional players. The implication is that the industry could see fewer companies aggressively pursuing Exploration growth as a major leg of their strategies.
  • Investors are also largely differentiated in terms of expectations of cycle time for returns, the importance of growth vs return and how much focus (versus diversification) they prefer in a company. Investor needs increasingly impact portfolio choices and specialization.
• The prospect of a low carbon future is driving today's upstream portfolios. The belief that a low carbon world is a "given" for the mid to long term is already driving the larger European upstream players to make portfolio choices, e.g. the weighting assigned to gas (versus oil). This also impacts the technology development priorities of those players, e.g. to ensure reduction of their carbon footprint.
• "Innovation" and "digitalization" are all the rage. Few conversations can proceed without showing allegiance to data science - in the form of digital transformation, AI, machine learning, advanced analytics" and so on. This capability perhaps is as important as traditional functions such as Geology or reservoir engineering. CERAWeek speakers provided numerous anecdotes as to how these technologies are benefiting in Upstream already - in cost reduction /operational efficiency; low carbon; productivity uplift. However, few can really say they fully understand how to manage this opportunity in practice. An "innovation tsunami" is sweeping the industry and the challenge for operators is to select the specific solutions in the right measure to add value to their own operations and to develop the human capital required to achieve that.
• Government naturally have a big role to play to adjust upstream policy and terms enable their assets to be competitive. Incentives could, for example, target reduction of cycle times, maximizing productivity and applying new technologies. Governments' policy responses to these opportunities vary, with some still seeking to find optimal solutions.

Clearly, this is a dynamic time for industry players as they seek to navigate with sustained capital discipline, to new growth.

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Paul Markwell is Vice President, Upstream Oil & Gas Research and Consulting at IHS Markit.

Posted 26 March 2018

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.