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Nick Mazan, Oil & Gas Strategy Lead.
Major oil and gas companies are again reporting windfall profits, but will they use that cash to pursue high-risk exploration or strengthen balance sheets and return capital to shareholders?
Industry commentary from Wood Mackenzie and McKinsey has pointed to underinvestment in exploration and a potential gap between global energy demand and production. But this framing overlooks the central financial question most relevant to investors who are mandated to pursue returns: does exploration earn an adequate return on capital? Investors should carefully test any assumption that more investment in oil and gas exploration necessarily produces more value, rather than accepting it as business-as-usual for the industry.
ACCR research published last year (and currently being updated for 2026) found that, on average, every dollar spent on conventional oil and gas exploration since 2000 destroyed 71 cents in value.
At BP’s annual general meeting in April, more than a quarter of voting shareholders backed a stronger approach to capital discipline at the company. The message was clear: BP should explain how new upstream spending, including exploration, will generate an adequate return on capital. In July, BP’s new chief executive Meg O’Neill identified “tight discipline on capex” and long-term shareholder value as company priorities. The test is whether those commitments now shape investment decisions, and investors will be paying close attention. As a result of the shareholder vote, BP must consult shareholders within six months of the AGM to understand their concerns about capital allocation, particularly spending on new exploration.
The need for scrutiny is growing. ACCR’s research found that BP’s conventional exploration is becoming less successful, with 80% of its 2025 production coming from discoveries made in the 20th century. Across the industry, conventional discovery costs have doubled since the 2000s.
Investors should prioritise value over volume
The industry has so far responded cautiously to higher commodity prices. Unlike in previous price cycles, the recent increase has not triggered a sharp rise in upstream capital expenditure. Overall, upstream spending is being reduced, and our research indicates that companies are no longer automatically increasing exploration investment when oil prices rise.
Yet there are other signs that the sector is still largely on autopilot and remains tied to the assumption that continued upstream investment is necessary to deliver value to shareholders. In response to our co-filed resolution, BP highlighted the number and size of its discoveries rather than explaining the returns they generated. Volume is an incomplete measure: a discovery may never be developed, or its costs may outweigh its value. Counting discoveries without considering when – or even if – they will be developed is like counting lottery tickets instead of winnings.
BP appears to assume that a compelling exploration and production growth story is essential to shareholder value. The evidence points elsewhere: not all growth creates value, and in fact, some growth destroys it.
Jefferies oil and gas analyst Mark Wilson finds that European oil and gas companies with the most modest growth plans also have the most resilient balance sheets and disciplined capital allocation. Long-term investors in the sector, including those that supported the BP capital discipline resolution, need a systematic assessment of exploration returns over a meaningful historical period. Companies should also explain how that evidence informs capital allocation.
In short – investors need an assessment of value, not volume for volume’s sake.