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Is the IOC business model dead?
Is the IOC business model dead?
The business model of the international oil company (IOC) has not died ─ but its vital signs are not encouraging. The question now is what steps IOCs need to take to remain competitive in global markets given changing supply/demand profiles, alternative forms of energy and new entrants.
Adjusting to the new normal
IOCs are particularly challenged by current price and demand levels for oil. Innovations such as a changeover to electric vehicles could result in significant reduction in demand for gasoline, signaling a shift to a new era. In addition, several countries in Europe have announced plans to transition away from the internal combustion engine and many countries are implementing strategies to move away from their dependence on oil and gas by reducing domestic consumption and emphasizing renewables.
Shrinking production and rising debt
Both the IOC share of global production as well as production in absolute terms have experienced stagnation over recent years, with companies unable to return to 2010 volumes. IOC earnings and operating cash flows are also experiencing declines, while the IOC debt level between 2010 and 2016 has increased by over 50 percent. In the meantime, NOCs are becoming ever larger in terms of production levels.
The need for new strategies
Since a sustained recovery in the price of oil seems unlikely and future demand is uncertain, IOCs will need to develop convincing long-term strategies for maintaining and increasing shareholder value. IOCs have many strengths they can leverage as large, highly sophisticated companies.
Changes ahead
IOCs have been able to survive for over a century, but their traditional business model is challenged. IOCs still enjoy significant advantages across the global industry, but they must adapt to current changes or face a future of slow but steady decline.
Footnote
1The World’s Largest Oil And Gas Companies 2017: Exxon Reigns Supreme, While Chevron Slips, Forbes, 24 May 2017, https://www.forbes.com/sites/ laurengensler/2017/05/24/the-worlds-largest-oil-and-gas-companies-2017-exxon-mobil-reigns-supreme-chevron-slips/#4704b3d14f87