By Professor Paul Stevens, Chatham House

In recent years it has become increasingly apparent that the old business model upon which international oil companies (IOCs) long depended is no longer fit for purpose¹.

The model was based on four pillars: maximizing shareholder value; maximizing bookable reserves; minimizing costs based upon outsourcing; and using the capital asset pricing model (CAPM) to determine discount rates on projects.


During the 1990s, each of these four pillars were already being undermined by a number of trends:

• Resource nationalism in producing countries meant that henceforth IOCs had limited access to low cost reserves;

• Outsourcing gave away IOCs’ technological edge;

• IOCs’ downstream assets acted as a serious drag on their balance sheets; and finally

• The flaws in the capital asset pricing model became increasingly apparent. In particular CAPM greatly underestimated project risk.


More recently, the IOCs’ business model faced further threats as, post-2008 financial markets became disillusioned with the type of large, long-term, high risk projects upon which IOCs had built their businesses over the previous 100 years. There were also issues linked to ‘unburnable carbon’ coupled with the ‘divest campaign’.

The final nail in the coffin was the much lower oil prices after 2014.

The IOCs, who were well aware of these growing problems, began to seek solutions. Mega-mergers, which had been their response to the price collapse of 1998, were no longer an option as competition authorities throughout the world threatened to intervene.

Cutting costs was one option. But IOCs had been trying to do this for some time and it was getting exponentially harder. Slimming down the balance sheet was another option but raised the issue who would buy poorly performing assets?

Diversification, especially into renewables was another tack. However, renewable projects – small scale, decentralized and system dependent – generally presented a very different business culture compared to upstream oil; the only exception being offshore wind. In any case, there was simply not the ‘economic rent’ in renewables compared to oil. The presence of ‘economic rent’ was central to the rise of the IOCs in the 20th Century. The market for renewables was extremely competitive which meant no ‘super-normal profit’, whilst cost differentials were narrow which meant little ‘producers’ surplus’ both of which account for the ‘economic rent’ in crude oil prices.

However, all this was fiddling round the edges. Most were hanging on to the old business model.


This is why the Repsol decision is such a landmark. The annual shareholders meeting preceded the decision at which the Chairman, Antonio Brufau, spent some time talking about climate change in order to justify greater emphasis for Repsol’s involvement with renewables.

Repsol earlier this month announced an updated business plan to be aimed at developing the energy side of the company rather than oil and gas. Oil and gas reserves will be maintained at current levels with a reserve/production ratio of no more than eight years. This compares to ExxonMobil’s 15 years, BP’s 14 years, Total and Chevron’s 12 years each and Shell’s 9 years.

Repsol’s current output is 700,000-750,000 b/d of oil equivalent, of which 63% is gas.

This decision not to increase bookable reserves therefore removes a key pillar of the old IOC business model.

The initial reaction of the Repsol share price was positive. This in itself is interesting. The ‘energy establishment’ – the IEA, the OPEC Secretariat, and the EIA among others – have been noticeable by the way in which they have been tending to grossly underestimate the current energy transition from hydrocarbon molecules to electrons in terms of its speed and depth.

By contrast the ‘financial establishment’ appear to be much closer in touch to the reality. The immediate response of the Repsol shareholders appears to support this view. Thus the key question is which of the other IOCs will now take major and real steps to change the old business model and follow in Repsol’s footsteps?

Charts included R/P Ratios For Key IOCs (Years)*



All commercial enterprises eventually have limited lives. Kongo Gumi, a Japanese construction company, existed from 578 AD to 2006. The Catholic Church, in the business of selling salvation, has lasted from the 6th Century to the present. The East India Company operated from 1600 to 1874; the Hudson’s Bay Company from 1670 to the present day, and Jardine, Matheson & Co. from 1782. It seems unlikely the IOCs will be able to match such longevity.

¹ Paul Stevens. ‘International oil companies: The Death of the Old Business Model’. Chatham House Research Paper May 2016.