The future of the major international oil companies (IOCs) – BP, Chevron, ExxonMobil, Shell and Total – is in doubt and the business model that sustained them during the 20th century is no longer fit for purpose.
That’s the core message of a new research paper on the oil corporates by one of the UK’s leading energy experts.
The research claims that at best, big oil companies will survive in a way much as they do now, after a period of gentle decline.
The worst case scenario, for big oil at least, will come if they do not adapt and change direction, “what remains of their existence will be nasty, brutish and short.”
The message is outlined by expert Paul Stevens, a senior research fellow at the London-based Chatham House think tank, at the Royal Institute of International Affairs.
Stevens says that 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.
“Most commentary on the IOCs’ problems has focused on the recent fall in oil prices and the growing global commitment to tackle climate change,” he said.
“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 professor said.
Present management strategies within the oil majors have failed to deliver value to shareholders and profits are declining sharply, Stevens said.
The sharp drop oil in prices and market instability coupled with a growing public and governmental awareness over the environmental impact of the oil industry and fossil fuels are threatening the survival of the international oil companies.
“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,” Stevens warned.
“The oil markets are going through fundamental structural changes driven by a technological revolution and geopolitical shifts. The old cycle of lower prices followed by higher prices can no longer be assumed to be applicable.”
Stevens says the business model adopted by the IOCs has failed. They have to downsize and many of their assets will have to be sold off. Above all, it is the corporate culture of the oil conglomerates has to change.
There are options that might allow the IOCs to improve their situation. Stevens says that these include squeezing costs in the hope oil prices will revive; more mega-mergers; picking off the remnants of US shale gas ; reshuffling their portfolios; diversification; becoming a purely OECD operation; and rebuilding in-house technology.
“In this new world, the only realistic option for the IOCs lies in restructuring and realising 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.”
Although growing international pressure to take action on climate change and falling prices have together led to a decline in the IOCs’ fortunes, the rot set in many years ago, says the research paper.
The full research paper can be found and read here.
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