Cost & Performance in

Upstream
An imperative with high rewards
for top performers
BCG Perspective

JANUARY 2025
 Adapt on use

A longitudinal problem: Smaller field development &

higher break even, at a time of increasing OpEx and
inflation

Cost & performance in

upstream is an Intrinsic productivity issue: Upstream ROCEs
systematically underperform, challenging re-
imperative investment efficiency

A performance differentiator: TSR improvement

markedly higher for companies who deliver sustained
improvement
Contraction of the supply curve & maturing fields shows need for greater emphasis on
cost

FID BE oil price (USD/boe) @ 10% IRR ~105 ~175 Avg. size
-55%
Mboe Mboe per field

150
Contraction of the supply curve
implies stronger cost competition
amongst new fields sanctioned for
development
100

50

0
0 2,000 4,000 6,000 8,000

Cumulative peak liquids production (kboed)

Analysis showing supply curves for new conventional fields sanctioned for development, per FID year; FID BE oil price express ed in real 2023 USD and considers Supply curves for FID years 2009-2012
the full lifecycle capex and opex of the asset with an IRR of 10% pre-tax
Source: Rystad Energy; BCG analysis Supply curves for FID years 2020-2023
 OpEx will continue to grow and anticipated to be ~$700bn yearly challenge by 2030.
Meanwhile, inflation is at a record high historically, rising~25% since 2020

Opex/yr expected to reach $700bn Upstream operating cost index Drilling rig day rates

$Bn % K$/day

800 +22% 250 400 +29%

+24%
+22%
200
600 300

150
400 200
100
+25%
200 100
50

0 0 0
Avg. 2015-2023 2030 2000 2005 2010 2015 2020 2024 Jackups Semisubs Drillships

SG&A Opex Production Opex

OpEx Upstream 2020 2022 2024
Transportation Opex
2021 2023

Expressed in real million USD (2024)

Note 1: Considering barrels produced for years 2015-2023 and 2030; Note
2: Not considering impact of future exploration
Source: Rystad Energy; BCG analysis and S&P; Riglogix; Worldbank
Shareholder distribution pressures and weaker market outlook further sharpens the
focus on cost performance
Companies are starting to outspend Debt levels creeping to 20% range Commodity prices trending
their free cashflow challenging payout sustainability lower with bearish sentiment

$B Net Debt/EV

$150 60%

$100 40%

$50 20% 20

$0 0%
1Q:22
2Q:22
3Q:22
4Q:22
1Q:23
2Q:23
3Q;23
4Q:23
1Q:24
2Q:24
3Q;24

3Q:19 3Q:20 3Q:21 3Q:22 3Q:23 3Q:24 Brent TTF, Henry Hub, USG NWE
($/bbl) (EUR/Mwh)
($/mmbtu) Light Light
Sweet Sweet
CFFO Capex Shareholder Payout US E&P US Majors Cracking Cracking
Euro Majors Intl E&P ($/bbl) ($/bbl)
US Majors: ExxonMobil, Chevron
Euro Majors: bp, Shell, TotalEnergies
US E&Ps: ConocoPhillips, Oxy, Diamondback, EOG
5 year range 3Q:24 3Q:23
International E&Ps: Equinor, Woodside, Santos, APA, Murphy
Source: S&P Capital IQ
ROCE | Underperformance of Upstream ROCE in the last 10-15 years
Strong increase in the last two years driven by geopolitical dynamics and emergent capital discipline

ROCE (%) Brent oil ($)

311 306
25% 298 150

269
20% 250
229 230
206
15% 190 192 100
174 169
163 158 163
153
10%
125 121
117
103
5% 50

0%

-5% 0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

16% 7% 4% 16%

ROCE Brent oil ($/barrel) CAPEX ($bn) x Average ROCE in the period (%)

Fixing the basics on Capital allocation also a broad issue in O&G industry

Note: ROCE as median of all peers (full company view): EU Majors: BP, Eni, Equinor, Shell, TotalEnergies; US Majors: Chevron, ExxonMobil; IOCs: APA,ConocoPhillips, Hess, Inpex, Murphy, Occidental, Repsol, Santos, Woodside; US
Unconv. Oil: Continental, Devon, Diamondback, EOG Resources, Marathon Oil, Matador Resources; US Unconv. Gas: Antero, Comstock, Coterra, EQT, Gulfport, Ovintiv, Range, Southwestern. ROCE calculated as Net Income Return on
Capital Employed, %
Source: ROCE - S&P Global Commodity Insights; TSR – Value Science Center; Worldbank Annual Oil Price database; BCG analysis
 Focus of effort can be too diluted
Cost initiatives with weak direct link back to EBITDA and address symptoms
not the root causes e.g. focus on Cost Avoidance vs Cost Impact

Letting the easy get in the way of the big

Generation of 1000’s of small initiatives that neglect complex strategic cross-
business opportunities with higher potential e.g. standardization
Many companies have
repeatedly launched Limited objectivity around the tradeoffs
cost & performance Safety, risk & control seen often used as a binary, emotive and subjective veto
to avoid embracing hard change e.g. Classification of Critical Equipment
efforts but fail to
achieve
the full impact Flight to detail vs bias to action
Diffused accountabilities, legacy decision-making systems and weak incentives
reward ’busyness’ or further detailing over achieved outcomes

Culture not Ready, Willing & Able

Delivering high impact necessitates a shift in ways of working, which
requires a programmatic approach with people ready, willing & able to
deliver change
 71% of top performers drove margin expansion, demonstrating a superior
ability to manage costs during a turbulent period vs. peers
Percentage of companies with positive or negative margin contribution to 5-year TSR

+35%
Top performers are 71%
35% more likely to
53%
achieve cost savings 47%

and reductions 29%

Rest of Energy Sector Top performers

% of companies with positive margin contribution

% of companies with negative or 0 margin contribution

Source: S&P Capital IQ; BCG ValueScience® Center; BCG CEI analysis 7
Impact | A typical structured approach leads to 2-5% inc. in production rate and/or 30%
cost reduction

Production: Our typical work yields 2-5% uplift Cost: Our typical work yields ~30% cost impact

Production potential (boe/d) OpEx $M/yr

-29%
-30-40%
Raise the
2 Maximum
production
potential or
ultimate recovery
2 factor

1 1 Minimize losses,
unscheduled
deferment and
Other
safeguard
planned Subsea
production Engineering & Maint
Logistics
3P model
Central charges
Personnel costs
Time Baseline 3P model Contracts Logistics Emergency Staffing Central 20xx
Maximum production potential OpEx efficiency levers (marine response model charges position
& heli) model
Maximum production with current op. envelope
Underpinned by maintenance & operations philosophy e.g.safe crewing levels, activity
Planned production
rationalization, campaign models, zero-basing fleet, etc.

Source: BCG project experience 8

“Always on” companies outperform “periodic” improvement
efforts when it comes to value realized
The Majority of Always-on Companies Achieve 61% of their cost saving targets Features of these
companies…
What percentage of the cost-saving target set by your organization was realized

Take a strategic & continuous

80 1
approach

61 Build cost awareness &

60 2
culture and embed it
% of cost-saving target realized

46
Deploy advanced tech like
40 3
ML or (Gen)AI

Link cost ambition to

20
4
investor value

Drive change from

5
0 CEO down
<=20 21-39 40-59 60-79 80-99

Always on Periodic % of companies

Source: FT Longitude x BCG research, August 2024.

 Shiva Kant Jaime Ruiz-Cabrero
MD and Partner MD and Senior Partner

BCG O&G Upstream

Performance Team
Aman Modi Jean Christophe Bernardini
MD and Partner MD and Partner

Emmanuel Ricolfi Borja Jimenez

MD and Partner Knowledge S. Director

10