The business model of the international oil company (IOC) has not died — but its vital signs are encouraging. question now is what steps IOCs need to take remain competitive in global markets given changing supply/demand profiles, alternative forms energy and new entrants.
IOCs are particularly challenged by current price and demand levels for oil. The general industry consensus is that the world oil price will remain at about USD50 to USD60 per barrel for the foreseeable future. At the same time, innovations such as a changeover to electric vehicles could result in a 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.
The possibility of long-term ‘demand degeneration’ coupled with low prices casts significant doubt on the future viability of traditional business models for IOCs, but perhaps less of a challenge for national oil companies (NOCs). In countries that are heavily dependent on hydrocarbon revenues, the national government represents a full interdependency of interests, which includes but is not limited to NOCs and profitability. In contrast, IOC investors have long expected a steady stream of dividend payments. While the current financial position of the IOCs is such that analysts do not question a short-term ability to pay dividends through a combination of operating cash flows, debt and asset divestments, the ability to meet this requirement could be challenged over the long term.
Innovations such as a changeover to electric vehicles could result in significant reduction in demand for gasoline, signaling a shift to a new era.
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. The declining reserves base reduces the potential of the IOC to increase production. 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.
Compared to the break-even costs associated with asset portfolios of the largest NOCs, those of the IOCs seem to be significantly higher, making sizeable portions of their asset portfolios uneconomical at prices below USD60.
In the meantime, NOCs are becomingever larger in terms of productionlevels. Saudi Aramco alone is producingaround 13.7 million barrels of oil per day compared to the total IOC production of 17.8 billion barrels. As the largest NOC in the world, Saudi Aramco’s recent decision to conduct an IPO would add a major new player in the public investment space for the oil and gas market. In fact, this newcomer might challenge investor appetite for IOC shares worldwide which might affect today’s combined IOC market capitalization of over USD1 trillion.