If it was easy, everyone would be doing it. But running an oil company is not easy, even when commodity prices are high. Particularly for large majors, which can probably do anything they want but not everything they want, it’s important to strike the right balance between being short-sighted and spreading themselves too thin.

When in doubt, it never hurts to do some “history matching” to track the strategies that have been winners in the past. That’s just what Niels Phaf, associate principal with McKinsey & Co., and his colleague Occo Roelofsen, have done. Presenting at the recent “Exploring Exploration” conference in Houston, Phaf outlined some of the results of a study that examines data back to 1985 and analyzes the relative successes and failures of several major oil companies over that period. While the results don’t point to a single “recipe for success,” Phaf has identified several key focus areas that can help big companies continue to get bigger:
• Maintain a “relentless focus” on heritage areas — it is important to try to maintain market share in your core existing basins;
• Go big and early into “mega-trends,” which historically have made up 80% of production growth; and
• Play the consolidation game.

Not all companies can do all three equally and well. Some companies, for instance, have few opportunities to grow in their heritage areas and need to seek out potential in other directions. Other companies do well as early entrants into mega-trends but find their value per barrel suffers for being the first to try something new. Still, these companies benefit by grabbing most of the reserves.

“The net present value per barrel tends to be lower for the early mover, but because they capture the volume, they also capture most of the value,” Phaf said.
Those who play the consolidation game must also be careful. “You need to consolidate for the right reasons,” he said. “You get value from clear cost synergies, but in the end you also need to look for synergies in growth.”

Phaf has created a matrix of these three key drivers, plotting sources of growth — organic exploration, field acquisitions, and company mergers and acquisitions (M&A) — across the horizontal axis, and areas of growth — heritage portfolio, increasing conventional production and mega-trends — along the vertical axis. Plotting the largest international majors on this matrix reveals six growth footprints. Differences in footprints are mainly driven by choices around organic mega-trends (deepwater discoveries, for example), gobbling up other companies or focusing on heritage. He said that many companies with strong heritage areas can support overall growth simply by “keeping the eye on the ball” and continuing to exploit their existing reserves.

“These learnings are applicable going forward; however, the growth arena looks very different with individual companies having very different growth challenges,” Phaf said. “Looking forward, companies need to make growth decisions and balance organic versus M&A growth. The balance might shift more towards negotiated entry for more unconventional reservoirs and company M&A, but there remains an important role for organic growth through exploration.”

In the six go-forward mega-trends (Arctic, Middle East enhanced oil recovery, for example) identified in the traditional exploration model, “elephant hunting” continues to play a critical role in at least three, he added. However, depending on the growth arenas pursued, a company’s exploration model should be consistent in technology portfolio, commercial/access posture and resource availability. This leads to potentially having multiple exploration models along with the additional challenge of managing these simultaneously.

“Even today many companies struggle with the parallel ‘big elephant’ versus the mature near-field model,” Phaf said. “Those are just two models, and there are large challenges on allocating funding and people.”

For additional information, please contact Phaf at Niels_Phaf@mckinsey.com.