Upstream is back … but different

This is a thought leadership report issued by S&P Global. This report does not constitute a rating action, neither was it discussed by a rating committee.

New global realities — an oil demand plateau, supply chain volatility and investor demand for cash — are shaping the revival of oil and gas production. Success requires concentrating capital in fewer basins, moving faster on go/no-go decisions, converting resources into reserves in under five years and making contractual terms more attractive to investors. To stay competitive with falling-cost alternatives, operators need to aggressively deploy and adapt advancements in AI, data and automation to cut risk, shorten cycles and reduce costs. At the same time, they must rebuild supply chains with creative long-term service partnerships to avoid cost escalation. Finally, they must reallocate capital from transformative but uncertain bets on clean energy investments while decarbonizing operational emissions pragmatically.

As the energy transition grows more troubled, the world has recognized a greater role for oil and gas in the future. Headlines suggest upstream oil and gas has regained political support, but the business has permanently changed. Three new realities are shaping the future of upstream.

• Revenue replacement versus resource growth: After 150 years of nearly unbroken growth, market maturity and new technologies are leading oil demand toward a plateau and likely decline in consumption. This means the industry will need to find, develop, produce and deliver less oil in the next 20 years than in the past 20 years. It will also need to replace the profits oil provides to remain viable in equity markets and keep governments funded.
• Supply chain security and cost competitiveness: Oil and gas producers have relied heavily on the globalization of manufacturing and trade to deliver low-cost, abundant energy. This is being complicated by increasing friction in global supply chains and the political and regulatory volatility the world is experiencing.
• Investor-first doctrine: Shareholder demands for outsized cash disbursements are now fully built into business models across the oil and gas value chain. According to S&P Global Energy, operators now send on average 30% of their free cash flow back to investors, with some offering more than 45%.

As a result of these three trends, S&P Global Energy expects the revival of upstream to look quite different from previous upcycles over the past several years.

Companies must plan for the reality of a plateau or decline in oil consumption as oil’s monopoly over transport fuel ends. But the goodbye will last decades, and new resources must be found or produced from existing discovered-but-undeveloped resources to offset the inherent decline that every oil asset experiences. While many key international oil companies and a new contingent of highly capable national oil companies (NOCs) are in the process of rebuilding their exploration portfolios, the current “land grab” is surprisingly limited. Companies have not leveraged the strong cash flows of the past five years to ramp up activity and pursue breakthrough discoveries in dozens of frontier basins. Rather, they are carefully parsing risk and focusing primarily on a concentrated set of highly prospective basins.

New strategies focus on compressing the exploration cycle (prospect generation to block award to discovery and first production). The race is on to expedite workflows, lower costs and reduce risk. Different strategies are evolving, split between proven basins and frontier basins. This is leading to a set of breakaway companies, challengers and laggards.

• The breakaway global integrated oil companies (GIOCs) excel at capturing significant resources and converting them into dollars. They leverage a concept of planning for success based on deliverability, commerciality and scale. They also leverage massive computing power and AI.
• The challengers are predominantly NOCs that are ramping up their capabilities and competing directly with breakaway companies for acreage, assets and market share.
• The laggards are companies resetting their upstream/exploration capabilities, often after redirecting capital and focus away from exploration toward low-carbon businesses. Many of these companies are building new portfolios based on a mixture of field redevelopment and exploration. However, in exploration, they often find themselves late entrants in emerging basins.

While some players have decided to focus on fewer geographies and basins, others have left the game altogether. As the list of geographies and basins selected for exploration has become more concentrated, so has the landscape of companies involved in exploring them. Small and medium-sized independents have been important drivers of frontier exploration, but over the past five years, the number of players in that segment has halved due to ongoing industry consolidation and a lack of new companies.

The battleground for these companies is dominantly offshore and ranges across the globe. Broadly speaking, these companies focus on gas from Asia, North Africa and the Eastern Mediterranean, and liquids from the Western Hemisphere, South Atlantic, Norway and the Middle East.

Basins are selected using above- and belowground criteria: the scale of potential, the ability to quickly convert discoveries into production, the presence of multiple play/prospect types, competitive fiscal terms with clear stabilization clauses that protect investors, and proximity to markets. Given the high standards and focus on capital discipline, we expect exploration spending and wildcat wells will recover only modestly, remaining far below the highs of the last supercycle in 2014.

This more selective approach is making it difficult for many countries — especially those without a proven petroleum system — to attract investment. In response, the contractual terms offered by many governments have been shifting in favor of oil explorers. This is particularly true in older petrostates, which face diminishing revenue from declining production. More than 40 countries are offering exploration opportunities in 2026. Given the lackluster results in some bid rounds, further concessions are likely necessary as countries compete for scarce capital.

In addition to bid rounds, there is increasing use of memoranda of understanding and technical study agreements by several of the majors to stretch their exploration dollars and get an exclusive look at prospective areas. Such agreements allow operators to quickly make go/no-go decisions and concentrate on the areas of greatest prospectivity. A few companies conducting business this way will not necessarily move the global metric needle, but it is a model primed for wider industry adoption.

Partially offsetting these restrained activity levels are two key areas that are affecting the speed of decision-making and the cost of finding and developing resources.

• Subsurface understanding: The oil and gas business remains one of the riskiest on the planet. Even in well-established basins, success rates are often below 50%, according to S&P Global Energy data. In frontier areas, the success rate is less than 20%. With the drilling of a deepwater well potentially costing over $100 million, technology that can help reliably appraise the earth’s subsurface can have a massive impact on a company’s bottom line.
• Engineering production and development technologies: Developing even medium-sized discoveries often consumes billions of dollars and more than five years. AI and machine learning tools are being used to accelerate the design and performance of company assets for savings and efficiencies.

At every stage of the exploration process — from prospect generation to discovery to first production — geoscientists and engineers have massive amounts of data to sift through. Using AI allows interpreters to build models of the subsurface more quickly, test more theories and assess risks in more ways. Improvements in subsurface footage and speed of analysis can help operators capture opportunities, lower finding and development costs, and leverage smaller workforces. Industry investment in exploration technologies such as seismic and subsurface modeling has increased 22% over the past three years, according to S&P Global Energy, with an even stronger shift toward digitalization, as well as AI- and machine learning-driven seismic processing and interpretation. These new capabilities have the potential to improve workflow efficiency by 95% to 98%, based on S&P Global Energy data, closely supporting the more agile and active exploration models that companies are adopting. Even larger gains may come from developing already-discovered resources as companies leverage their gargantuan data sets to train models and automate operations.

It is uncertain exactly how useful AI will be to the heterogeneous and complex physical systems of oil and gas upstream developments, but the industry is actively pursuing paths to reduce cost structures to deliver energy more efficiently.

Another important element of the rejuvenated upstream business model is the rebalancing of capital away from the more transformative clean energy businesses. A consensus has emerged that the global adoption of clean energy is more an evolution than a revolution, and that businesses are not profitable enough to replace earnings from oil and gas production through eco-friendly investments. Global clean energy investments continue to grow, exceeding fossil fuel investments for the first time in 2025, according to S&P Global Energy data. However, the overwhelming share of this investment is in electricity, rather than oil and gas, which has tended to favor molecule-based solutions such as biofuels, hydrogen, and carbon capture, utilization and storage. After expanding at a compound annual growth rate of 34% from 2021 to 2024, low-carbon investments by GIOCs fell by almost 10% in 2025. Downward revisions to expenditure for the rest of the decade are likely as well.

However, even as these companies emphasize their core oil and gas businesses, they continue to make efforts to deliver their products with lower greenhouse gas emissions (Scope 1 and Scope 2). The technologies and programs aimed at reducing methane emissions are at critical mass, and methane monitoring and abatement are now routine for many field personnel. This trend is not universal, however, and variability among companies and regions remains significant. Nevertheless, many companies, and often the largest producers, are starting to report substantial improvements in reducing venting and fugitive methane. S&P Global Energy’s Permian Basin upstream methane emissions benchmark estimates that intensity in 2024 was 0.44% per barrel of oil equivalent, about half the amount of 2022.

It will take several years to see whether oil and gas companies’ updated strategies, rush for new acreage, de-risking of the supply chain and investment decisions pay off. Will the challengers and laggards catch up or surpass the breakaway companies? How quickly will the use of AI, machine learning and adaptive AI become ingrained in the exploration process? Will the industry implement zero-methane standards and embark on a CO₂-reduction pathway? Only time will tell.