The problems faced by international oil and gas companies started long before the price collapse | Spencer Platt/Getty Images Oil majors warned to revamp business model or face collapse Without change, oil sector’s future could be ‘nasty, brutish and short.’

The world’s biggest publicly traded oil and gas companies face “rapid collapse” unless they adapt their business models to a world that uses less fossil fuels, according to a Chatham House report published Thursday.

Two of the headline reasons for looming trouble are falling oil prices and new climate change policies, but the core problem is that the energy companies' business and investment strategies are deeply flawed, the report found.

The steady decline in oil prices since mid-2014, from more than $100 per barrel to around $45 now, and the COP21 Paris climate agreement reached in December have both added pressure to drastically cut carbon dioxide emissions and curb global warming. And that means weaning the world off coal, oil and gas.

“You have a situation where the COP21 is more or less publicly saying that we have a large amount of hydrocarbons that we can’t burn if we want to stay at 2 degrees Celsius or less,” said Paul Stevens, the report’s author and a distinguished fellow in the London think tank’s energy, environment and resources department. “It’s the ultimate writing on the wall.”

But the troubles faced by international oil and gas companies started long before the oil price collapse and the Paris deal, he found. They date back to the 1990s, when the industry adopted a financial model that under-priced the risk of big long-term projects, such as deepwater oil and gas or Canadian tar sands.

Crude prices of around $100 largely "disguised" the underlying problem, he said, and the subsequent price fall has now exposed those weaknesses. The urgency of shifting gear is not lost on the companies. “They are aware of the fact that the business model needs to change if they have any hope of surviving.”

Oil prices are expected to bounce back in the coming years, but not to their old peaks. The International Energy Agency expects them to reach around $80 per barrel by 2020, as the current slowdown in production causes supply to tighten.

Rethinking models

A separate report published on Thursday by the London-based financial think tank Carbon Tracker Initiative found that as long as oil prices remain low, the world’s seven largest oil majors would be better off proceeding only with lower-cost projects instead of traditional big-ticket long-term investments that don't take climate change into account.

It found that upstream assets owned by the seven companies — ExxonMobil, Shell, BP, Chevron, ConocoPhillips, Eni and Total — would be worth a combined $140 billion more if their investments are aimed at keeping global warming at 2 degrees.

The oil price drop has already caused financial turmoil for the seven majors, forcing them to cancel or delay investments and sell off assets to make up for huge losses.

In the last two weeks, the U.K.’s BP reported a loss of $583 million the first quarter of 2016, following a $3.3 billion loss in the previous quarter. France’s Total announced its net income for the quarter had dropped by 37 percent, to $1.6 billion, compared to the same period last year. And Shell posted an 83 percent drop in current cost of supplies earnings, to $814 million in the first quarter, compared to the same time last year.

Companies are responding to the pressure.

Total, for instance, announced the creation of a new gas, renewables and power unit last month, which will focus on expanding the company's downstream gas, renewable energy and energy efficiency business.

“Electricity will be the energy of the 21st century and the growth of gas and renewables is driving us to fully capture margins across the entire electricity value chain,” Patrick Pouyanné, Total’s chairman and chief executive, said in a statement. The company aims to become one of the top three solar power players, to expand its electricity trading and storage business, and to become a leader in biofuels, especially for jets — all in the next 20 years, he added.

Risky business

This marks a change from the typical international oil company business model of the past 25 years. That was based on three pillars, according to Stevens: maximizing shareholder value by setting benchmarks for financial returns; maximizing estimated oil and gas reserves; and minimizing costs, partly through outsourcing.

The list of problems with this model is long and diverse, Stevens said.

The rise of resource nationalism in recent years has kept the majors from tapping the easiest and cheapest-to-reach reserves, as governments have taken greater ownership of their own resources and favored their own local and state-owned companies.

Majors also made the mistake of outsourcing the provision of technologies to services providers in order to cut costs, giving international contractors like Schlumberger and Saipem the room to muscle in and expand their technology businesses.

Options for overhauling the oil and gas industry's business model include squeezing costs in the hope that oil prices will rebound; reshuffling portfolios, mainly away from unprofitable downstream businesses such as refining; or building in-house technology, he said in the report.

But the only “realistic” option for the companies is to restructure and shrink their work to operations that can still generate “acceptable” returns.

“If they can, then the [international oil companies] will be able to slip into a gentle decline but ultimately survive, albeit on a much smaller scale,” he said. If not, “what remains of their existence will be nasty, brutish and short.”