Editorial

What can upstream learn from downstream?

How downstream operating models are influencing upstream strategy.

The oil and gas sector has been through a dramatic period of change since the oil price fall in late 2014. One of the most striking changes has been the switch in relative fortunes between the upstream and downstream segments. 

Upstream profitability collapsed in 2014 and, given the continued uncertainty around the oil price, seems likely to face ongoing headwinds. At the start of 2014, upstream operating margins for the majors averaged 12%, but by the end of 2015 had sunk to -6% before edging up to 2% at the end of 2016.

Majors’ average annual earnings from upstream and downstream activities between 2011 and 2016 (source: 2016 Global Upstream Cost Survey)

Upstream and downstream have witnessed a reversal of fortunes

Since 2014, the downstream earnings from the same set of majors increased by over 40%. This turnaround follows years of financial pressure on downstream, which forced it to adapt and make hard choices. Downstream’s success since then is not entirely down to the low oil price, which has reduced the cost of feedstock, but to structural changes it has made to its operations and cost base.

The impact of these measures has been recognised in the boardroom. Downstream leaders have taken the top jobs in a number of the majors and the traditional language of downstream — “managing for margin” — has become pervasive. 

This new Perspective looks at just what structural changes the downstream sector has made — and what the upstream business can learn from it.

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