Why oil and gas companies need to transform their upstream operations

BOSTON CONSULTING GROUP | With the pandemic-induced collapse in oil prices sharply reducing free cash flows, international oil company (IOC) leaders must think even harder about where they allocate scarce capital. Even before the crisis, these companies were already grappling with the seemingly opposing goals of expanding into low-carbon growth areas, such as renewables, or sticking to traditional dividend payouts funded through reinvestment in their core businesses. In the current environment, then, increasing total shareholder returns (TSR)—share price changes plus dividends reinvested—will likely be a true test of leaders’ strategic vision.

We believe an effective solution will start with IOCs fundamentally transforming their upstream businesses so that they deliver stronger returns, irrespective of oil price movements. Until now, oil and gas companies’ efforts to transform upstream returns have had mixed results. But with a more ambitious, less incremental approach that improves risk management and capital allocation processes, leverages core capabilities, and uses standardization to drive down costs, companies can generate more free cash. They can then use that cash on a wide range of value creation drivers, including growth initiatives.

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