In recent years "Big Oil" has gotten even bigger. Companies with a market value under $10 billion are bit players; market leaders are worth $200 billion or more and generate $40 billion a year in cash flow. However, these vast businesses bring unique challenges and risks – chiefly, the challenge of maintaining profitable growth.

As CEOs look for growth strategies beyond continued mergers, several issues have taken on new urgency. These include:

	Reserve replacement. "Most companies deplete about 10 percent of their reserves each year – and some big players that failed to replace their reserves are gone as a result," says Matt Rogers, a partner in the San Francisco office. "Without new capacity they couldn't generate enough cash to compete." However, it's becoming harder and more expensive to develop new reserves. As companies increasingly move to high-risk, deep water drilling, and face more competitors with billions to invest, deep pockets are no longer a luxury, but a necessity.
	Portfolio management and capital deployment. With the size, complexity, and risks of exploration projects increasing, so are the challenges of growing a company's project portfolio. CEOs must exert discipline to avoid overpaying for exploration rights, even as they raise the ante for their competitors. Companies also must build new infrastructure as the market shifts. For instance, an influx of lower quality heavy crude and tightening fuel specifications are forcing many companies to retool their refineries. Longer term, the industry must invest more in natural gas production and transportation, where demand continues to grow rapidly.
	Performance improvement. While deciding which projects to pursue and how much to invest, executives also must get more out of existing assets. For integrated companies, this includes their upstream operations, their refining operations (few of which earn back the cost of capital) and their distribution and retail networks, which are being squeezed by big-box discounters and other new entrants. In doing so, however, they can’t lose sight of the fundamental requirements to participate in the industry, namely a strong safety and environmental record, reliability as a partner and supplier, and the highest ethical standards. Typically companies can achieve 25 percent to 40 percent savings in many operations, and, notes Rogers, "not even 'Big Oil' can afford to fund projects at the needed scale without access to all available cash. That means either improving or selling off underperforming assets."

"The stakes are getting higher for all oil companies," says Pedro Haas, a partner in the Houston office. "The size of projects, their risks, technical complexity, market volatility, geopolitical uncertainty – all are increasing. Success isn't about having one or two good operations, or doing lots of little things right; it's about having 20 or 50 good operations, and doing lots of big things right."

Yet size alone does not guarantee performance. “CEOs cannot focus only on increasing their reserves at the expense of profitability," says Howard Harris, a McKinsey adviser and former director in the London office. "Cash flow will always be king." Likewise, he adds, "vertical integration, with few exceptions, is fundamentally worthless. Investors will continue to reward big companies only as long as each piece of the business earns a profit. And today, contrary to popular perceptions, many do not. "In this challenging world, oil companies must be far more strategic than ever before. Key decisions - market-back assessments of gas and heavy oil opportunities, technology choices, downstream market entry decisions, upstream negotiations, exploration vs. acquisition paths - all need to reflect a fundamental strategic outlook.

National oil companies (NOCs), with their focus on maximizing a country's resources rather than on creating shareholder value, face additional and unique challenges, wrestling with questions of structure, governance, and capability that integrated oil companies often do not.

	Mission: NOCs must balance national and enterprise considerations while being the agent of the state for development of national resources. Deciding how they trade off commercial value versus resource value remains a major decision. Similarly, competing objectives regarding local employment and economic development considerations are always present.
	Performance: NOCs typically face significant barriers in achieving high performance levels. They often have to overcome unclear long-term aspirations, organizational rigidity, complex governance models, and an underdeveloped performance culture. Driving real long-term improvement in this context can be quite challenging.
	Relationships: Managing relationships with foreign partners is an important activity for all NOCs, not only in the initial phase - granting concessions, structuring PSAs and JV agreements - but also for the operational implications of the agreement once it is signed. How NOCs should best manage these relationships with integrated oils and service companies to optimally leverage foreign technology and know-how remains an open question.