ANALYSIS Competing and partnering for resources and profits: Strategic shifts of oil Majors during the past quarter of a century Ruud Weijermars a, b, * , Oswald Clint c , Iain Pyle c a Department of Geoscience and Engineering, Delft University of Technology, Stevinweg 1, Delft 2628CN, The Netherlands b Alboran Energy Strategy Consultants, Molslaan 220, Delft 2611CZ, The Netherlands c Sanford C. Bernstein, 50 Berkeley Street, London W1J 8SB, United Kingdom A RT I C L E IN F O Article history: Received 14 January 2014 Received in revised form 15 May 2014 Accepted 20 May 2014 Available online 21 June 2014 Keywords: Oil Majors Capital expenditure Asset shifts ROCE Cash flow Shareholder returns Retained earnings Energy transition Shale corrections Corporate realignment A B S T RA C T This article analyzes the change over the past 25 years in selected financial and opera- tional performance indicators of US and EU based peer groups of oil Majors. After the Millennium’s turn, all peer group companies experienced steep rises in their unit cost of production. Until 2000, oil Majors could replace reserves depleted by production, typi- cally by splitting capital employed equally between upstream and downstream activities. Upstream assets include progressively more deepwater fields and unconventional re- sources, resulting in increased reserve replacement costs. This means the share of capital employed on upstream projects has risen to 70% in 2013. Capital expenditure (Capex) in the upstream segment for oil Majors is nearly 80% of the total, and for downstream (and other activities) Capex has been reduced accordingly (partly by asset divestures). In spite of sharply increased Capex on upstream projects, production output of the peer group has declined 6% since 2006. The profitability of upstream projects peaked in 2008, then declined and subsequently steadied at returns on capital employed (ROCEs) of about 20% in the period 2010e2012. US Majors have returned a greater proportion of cash generated from operations to shareholders than their EU counterparts, consistently so over the past 6 years. US companies achieved this better outcome in part by rapidly decreasing capital employed in downstream assets when these became less profitable. Downstream ROCEs have been weak over the past decade, but a modest recovery has begun. Downstream ROCEs of 15% in 2012 are sharply up from a low of 5% in 2009. For the coming decade, we expect fierce competition for technology leadership. To meet rising demand, oil and gas companies must increasingly produce from very complex fields, development cost of which will inevitably require high oil and gas prices. The rising cost of hydrocarbon extraction creates a strong incentive to accelerate the energy transition away from costly hydrocarbons toward progressively more affordable renewable energy resources. Ó 2014 Published by Elsevier Ltd. 1. Introduction This article analyses time-series of 25 years of past performance to abstract the major changes that have been achieved by the world’s leading vertically integrated international oil and gas companies. Steering oil and gas companies in the right direction from the present state toward a future business state requires continual adaption by these companies to meet the challenges and opportunities offered by the changing business environment. The choices made by the com- panies have resulted in a very clear pattern of shifts in the upstream asset portfolios, which now include progressively more offshore, deepwater assets and unconventional resources. Changes in the up- stream segment have been accompanied by larger Capex allocations at the expense of downstream and other asset investments. In the past decade, asset divestures by the traditional, western Majors mostly outpaced acquisitions, reflecting the fact that organic growth, in spite of rising cost, still remains less costly per barrel than the acquisition of acreage developed by others. * Corresponding author. Department of Geoscience and Engineering, Delft University of Technology, Stevinweg 1, Delft 2628CN, The Netherlands. E-mail address: R.Weijermars@TUDelft.nl (R. Weijermars). Contents lists available at ScienceDirect Energy Strategy Reviews journal homepage: www.ees.elsevier.com/esr http://dx.doi.org/10.1016/j.esr.2014.05.001 2211-467X/Ó 2014 Published by Elsevier Ltd. Energy Strategy Reviews 3 (2014) 72e87