The Future of the major International Oil Companies (IOCs) such as BP, Chevron, ExxonMobil, Shell and Total, has never been as much in doubt in these days of low prices of oil and prevailing concern over the earth Climate Change.  

According to the author of the proposed article, the business model that sustained these companies recently labelled ‘Big Oil’, during the 20th century is no longer fit for purpose.  

In effect, it brings to our attention that “Oil has taken between 50 to 300 million years to form .   We have managed to burn roughly half of all global oil reserves in merely 125 years or so.”

And that “The world now consumes 85 million barrels of oil per day, and demand has never stopped growing during that time.”

International Oil Companies: The Death of the Old Business Model

Written by   Professor Paul Stevens, Distinguished Fellow, Energy, Environment and Resources

Published by Chatham House on May 5th, 2016

The IOCs are faced with the choice of managing a gentle decline by downsizing or risking a rapid collapse by trying to carry on business as usual.

The future of the major International Oil Companies (IOCs) – BP, Chevron, ExxonMobil, Shell and Total – is in doubt.  The business model that sustained them during the 20th century is no longer fit for purpose. As a result, they are faced with the choice of managing a gentle decline by downsizing or risking a rapid collapse by trying to carry on business as usual.

Most commentary on the IOCs’ problems has focused on the recent fall in oil prices and the growing global commitment to tackle climate change. Important though these are, the source of their predicament is not confined to such recent developments over which they have no control. Their problems are more numerous, run deeper and go back further. The prognosis for the IOCs was already grim before governments became serious about climate change and the oil price collapsed.

The most recent iteration of the IOCs’ business model emerged during the 1990s and was built upon three pillars: maximizing shareholder value based on a strategy that provided benchmarks for financial returns, maximizing bookable reserves and minimizing costs partly based on outsourcing. This model began to face serious challenges as the operating environment changed. It is the accumulation of these challenges, on top of those evident since the 1970s, and the failure of the IOCs to adapt to them that indicates that their old business model is gradually dying.

The IOCs have been able to survive over the last quarter of a century, but signs that their business model is faltering have recently begun to show. As well as poor financial performances, the symptoms include growing shareholder disillusion with a business model rooted in assumptions of ever-growing oil demand, oil scarcity and the need to increase bookable reserves, all of which increasingly lack validity.

There are, however, options that might allow the IOCs to improve their situation, namely:

  • Squeezing costs in the hope oil prices will revive
  • More mega-mergers
  • Playing vultures with remnants of the US shale gas revolution
  • Reshuffling their portfolios
  • Diversification
  • Becoming a purely OECD operation
  • Rebuilding in-house technology

However, none alone is sufficient to solve the fundamental challenges, and even if implemented together they would amount only to fiddling around the edges while the model threatens the companies’ survival. In particular, the IOCs cannot assume that, as in the past, all they need to survive is to wait for crude prices to resume an upward direction. The oil market is going through fundamental structural changes driven by a technological revolution and geopolitical shifts. The old cycle of lower prices followed by higher prices is no longer applicable.

In this new world, the only realistic option for the IOCs lies in restructuring and realizing many of their current assets to provide cash for their shareholders. Inevitably, this means that they must shrink into the remaining areas of operation, functionally and geographically, where they can earn an acceptable return. This would require a major change in the corporate culture of the IOCs. It remains to be seen whether their senior management could handle such a fundamental shift. If they can, the IOCs will be able to slip into a gentle decline but ultimately survive on a much smaller scale.

Read the article on Chatham House publication.