Report | International Oil Companies ~ The Death of the Old Business Model:

Chatham House | By: Professor Paul Stevens | GPE July 12, 2017:

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.

Summary:

Report Originally Published May 2016: 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.

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