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Date Posted: 2/19/2018
By Kevin Carpenter, contact:


The New Upstream Paradigm

When does an Upstreamer think like a Downstreamer? When their Objectives change!


I was recently talking to some Rice MBA students and recounting the story of a past life when we moved the accounting group from Oklahoma to the headquarters in Texas.  The move streamlined workflow, simplified trade creations and increased the margin on commercial crude and product trades.

Years later, following a merger, the accountants were relocated back to Oklahoma in a desire to consolidate the group and reduce costs.

One student asked the question, “Why would they do that?  Why would they change the decision?”.  While we might be ProfitableGrowthtempted to say they were acting irrationally, in fact their objectives simply changed.

At the highest level, the objective of profitable growth can be supported by two conflicting objectives of maximizing revenue and minimizing cost. Moving the accountants to Houston supported the first objective while moving them to Oklahoma supported the second.  Objectives will always involve tradeoffs as it’s infeasible to maximize all the objectives. In this case, the priorities of the objectives changed because the business environment changed.


This applies broadly across the industry in today’s environment as well.

Maximum Value

Consider that in the business environment of $100 oil, Upstream Production projects are Production focused.  The key objectives (highlighted in yellow) are to Maximize Volume by bringing effective Engineering Solutions and Executing Effectively.  At $50 oil, the key objectives (highlighted in blue) focus on Executing Effectively and Managing Costs as the goal now is to Maximize Margins. Both goals can support profitable growth, but they become prioritized differently in different business environments.

The decisions facing the company are also different in the two environments.

At $100 oil, Key Decisions and issues are:

· What engineering solutions can maximize flow and reservoir life?

· How do we accelerate first commercial oil?

· How quickly can we execute expansion projects?

· Debottlenecking projects are based on maximizing volume

· Projects are based on technical and engineering issues first, cost second

At $50 Oil, Key Decisions and issues change to:

· How do we capture incremental margins on production?

· Which expansion projects should be implemented?

· Debottlenecking projects are based on incremental economics

· Projects are based on economics first, technical and engineering issues second

In the $50 Oil environment, the leaders in Upstream production assets must become “Downstreamers” in their thinking.  The Downstreamer mentality would typically consider:

· Seek to economically expand production

· Each dollar spend is related to the margin provided

· Re-use technical and engineering solutions

· Template “Kits” are used rather than unique solutions

· Refurbish and re-use hardware rather than purchasing or manufacturing new

· Solutions assessed for the return over the useful life against production gains

· Commercial alternatives to hardware and technical expansion should always be considered

· Capital expenditure estimates become based on assessed uncertainty rather than blanket contingencies

· Deferred production costs become a key value driver

In the last year, KCA has evaluated over a dozen Upstream projects using a Downstream paradigm with a total savings of about $100 Million.  Any one project may not look like the blockbuster a Production company is used to seeing but consolidating many small improvements with the Downstream thinking quickly adds value in these tight economic times.

Which decisions have your team’s focus?

Are you thinking volumes or margins?

Ready to pull a few million dollars from the Downstreamer paradigm?  Let's talk - we can help.   


Kevin Carpenter, Email:




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