The past year has been one of seemingly good fortune for oil and gas companies. Price increases, spurred higher by geopolitical factors but fundamentally reflecting stronger global economic activity, put companies in the black.

Strong revenues enabled companies to fund spending out of earnings and still return capital to shareholders — in part allowing for share prices to decouple in a positive manner from underlying oil and gas prices.

But the medium-term outlook remains uncertain. Buyers of natural gas are reluctant to sign long-term purchase agreements, given the questions about climate change and future demand requirements. Similar questions complicate capital planning or approval for long-term projects where the price and demand uncertainties are seemingly growing, despite current conditions that underscore the viability of oil and gas through the energy transition.

The reality of energy transition is not a stark choice between hydrocarbons today and renewables tomorrow. Instead, the answer to solving tomorrow’s energy requirements involves understanding how oil and gas companies can lead energy transition, embrace decarbonization as a catalyst to innovation and actively seek opportunities in a lower-carbon world.

New technologies, expanded energy sources, innovative business models and collaborative ecosystems will unlock opportunities in the energy transition. Policies like the landmark Inflation Reduction Act (IRA) further accelerate the commercial possibilities. To successfully embrace new zero-carbon fuels — especially hydrogen — plentiful capital, technical expertise and experience of complex operations and markets will be critical. Rather than running afoul of the energy transition, can oil and gas companies utilize their expertise and experience to lead it?

Successfully navigating this future will require companies to define a new core, develop markets further downstream and innovate new business models. To this end, three tactics are anticipated to help U.S. oil and gas companies make progress in 2023:

  1. Optimize operations: Arguably at the heart of oil and gas operations for a century, further optimization through the energy transition will require thinking in terms of portfolios of energy technologies, rather than a single asset or asset class. In a similar vein, digitalization efforts at most companies need broadening to approach providing insights across the enterprise. But there must also be a recognition that digital initiatives rather than an IT service are becoming core assets themselves and are invaluable to the successful management of an energy company.
    Optimizing operations will require a reappraisal of the back office as well. The next-generation back office can be an important lab for incubating some of these commercial and operational innovations. Companies that can successfully implement them will be in advantaged positions to capitalize on new market opportunities and win the ongoing competition for talent.
  2. Manage emissions: Oil and gas cannot completely decarbonize, but customers and regulators will increasingly seek progress on various emissions metrics, such as production’s carbon intensity. Coupling emissions management strategies with digital technology provides an enterprise-wide and full lifecycle view of the emissions portfolio, and allows management teams to execute growth strategies aligned with customer needs in a future energy system.
  3. Execute capital strategy: The two metrics EY is watching are the forward price strip and the cost of capital — specifically borrowing costs to inform the velocity of these estimates. Driving this trend is a continued high grading of portfolios among energy producers. For example, in the third quarter of 2022, oil and gas had 198 deals worth approximately US $52.1 billion, according to EY analysis.

The expanded investor focus on energy security and the energy transition will maintain private equity’s appetite for renewed opportunities, however. Corporates are anticipated to leverage a capital allocation strategy via oil and gas assets with low-carbon solutions. Low-carbon businesses like carbon capture, utilization and storage, or carbon capture, utilization and sequestration allow producers to gather up IRA capital to scale solutions with existing assets and offer a differentiated proposition to both customers and investors. Ecosystem strategies, like tech-energy partnerships and joint ventures, will increase as well.  

Current outlooks support a healthy attention to these three areas in 2023 and beyond, allowing U.S. oil and gas companies to not only continue to reap the benefits of recent efficiency improvements and an improved price environment, but also to take steps to realize a robust future and leadership position in defining the energy system of tomorrow.

Patrick Jelinek is EY Americas Oil and Gas Leader. David Kirsch is managing director at Ernst & Young LLP.

The views reflected in this article are the views of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.