The energy transition will require both significant new investments in low-carbon energies and continued use of traditional hydrocarbons to meet the expected energy demand of an expanding global economy. Fortunately, the past two years have demonstrated that the U.S. oil and gas sector has the capability to lead in both facets of the new energy economy.

Most immediately, responding to strong global expansion and supply disruptions around geopolitical unrest, companies operating in the U.S. oil and gas sector have steadily increased production of oil and natural gas. They have done so while still driving greater efficiency, and amid market uncertainties, continuing to return value to shareholders even as oil prices cooled. This continued discipline positions the sector well for the increasing likelihood of much slower economic growth, or even the possibility of a recession in the U.S. or other major markets in 2024.

U.S. oil and gas companies have committed billions of dollars to develop future businesses around carbon capture, utilization and storage (CCUS) and hydrogen, aimed at abating the climate impact of hydrocarbon fuels and providing decarbonized energy solutions for those industrial emissions not easily decarbonized through electrification. By some estimates, committed CCUS projects will reduce carbon emissions at a scale equal to those mitigated by the rapid adoption of electric vehicles (EVs).

Importantly, these companies are doing so while continuing to deliver value to shareholders, basing their strategic turn into the energy transition on solid footing with their investors. To continue this strong performance in 2024, oil and gas companies should focus on four main actions:

  1. Transform through strategic mergers and acquisitions (M&A);
  2. Continue to maximize operations across the front and back office;
  3. Embrace more proactive, strategic emissions planning, management and operational decarbonization; and
  4. Innovate new markets for carbon capture and hydrogen beyond traditional cases.

Transformative, strategic M&A

While high interest rates and inflationary pressures cooled dealmaking in many sectors last year, the oil and gas sector saw a surge in M&A activity driven by strong cash flows, renewed investor confidence and increasing recognition that oil and gas will continue to play an important role in the energy landscape.

While deals have grown again, including more enterprise-level transactions than in the recent past, companies are executing transactions in areas that meet well-defined strategic rationales in both the traditional oil and gas space, as well as in new low-carbon businesses. The industry wants to match the best operator with each asset, drive performance across operations and optimize capital and carbon management. This has set the stage for a wave of consolidations, with integrated oil companies and large E&Ps looking to secure acreage, enhance cash flow and maximize returns via acquisition rather than traditional exploration.

One indication of this disciplined approach is the lower premiums paid for in many of these deals, compared with similar deals in the recent history of the sector. Identifying a target, completing the due diligence and announcing the deal is only the beginning of the hard work. Oil and gas companies need to attack post-close integration with the same vigor to realize the full value of these deals. Integrating the best of both organizations, across their front- and back-office operations, enables success.

Maximizing operations

The influx of M&A also creates a case for companies to improve business fundamentals, such as driving down operating costs, leveraging scale, jumping the curve on differentiated capabilities and strategically thinking about talent management. 

Maximizing operations is not a new description for simply doing “more with less.” Rather, it is operating by exception and problem-solving using technology at speed and innovation at scale with humans at the center. To drive immediate results and limited disruption, there must be collaboration among teams responsible for performance in the field: subsurface, production-operations, facilities, maintenance and supply chain. Companies need to take a people-led approach in business or technology transformation implementations. In every project, people are critical and the change champions that ultimately drive success. 

Real-time data and emerging technology are essential to enable better, faster and more strategic decisions. This is true holistically across the entire value chain—in both the front and back office, but also specifically in subsurface prediction, drilling and completions, asset surveillance and optimization, maintenance and materials management.

Considering different operating models, such as managed services, is particularly important when companies develop new business areas. For example, the front- and back-office functions for low carbon will be different from traditional oil and gas. As low-carbon business areas begin to scale, companies should consider multiple operating models before committing to specific processes and technologies. This will allow them to find synergies by integrating traditional business areas or pivot to innovative and emerging ecosystem models.

Lastly, oil and gas companies that are able to integrate artificial intelligence (AI) and generative AI (GenAI) capabilities in their everyday decision-making will jump the curve on business value. This shift requires companies to establish a strong foundation of trusted data while implementing AI and GenAI engineering best practices, robust governance and risk management. The adoption curve for AI is faster than for any other technology so far, so companies must act quickly.

Managing emissions

New operating models and the introduction of low-carbon businesses both underscores the ways oil and gas companies can accelerate the net zero journeys of their customers and places a premium on having a more strategic perspective around their own greenhouse-gas (GHG) footprint. In 2023, the state of California and the EU finalized and provided clarity around reporting requirements for affected companies—some of these impacts could occur in 2024 with reporting in 2025, the SEC proposed rules that it has yet to finalize but finalization is expected in the near term. This regulatory uptick led petroleum companies in the U.S. to accelerate efforts to reliably monitor and report Scope 1 and 2, and at least some Scope 3 emissions. Uncertainty around the timing and fullest scope of the proposed SEC rule—and the lack of uniform standards for GHG emissions reporting more generally—has been a complicating factor; there is also an opportunity for companies to move to an approach that treats emissions data almost on par with production data.

Understanding the emissions footprint in near real time will be critical for the strategic planning and operational decarbonization of energy companies. Therefore, a shift in thinking from compliance to operational intervention can help companies make real strides in reducing emissions as a part of overall operational optimization. It also prepares companies for future commercial opportunities in carbon-differentiated product markets.

Developing decarbonized markets

Once oil and gas companies have an enterprise view of the emissions of their product, they also unlock the opportunity to rethink their product portfolios.

Carbon exists not only as an attribute for a company’s existing products, but also as a future stand-alone product. Oil and gas companies have already responded dramatically to changing investment conditions for carbon capture and other decarbonized energy technologies, especially hydrogen. The federal government has offered generous support via tax credits in the Inflation Reduction Act (IRA) for hydrogen production and CCUS and a further $7 billion from the Infrastructure Investment and Jobs Act (IIJA) to establish seven hydrogen hubs around the country.

Government support for low-carbon solutions has not been met with similar subsidies or tax credit for downstream CCUS of hydrogen markets. And adoption of a federal carbon tax—a straight-forward means of fostering these markets—is not politically viable in the short term.

Architects of the IRA believed the support for hydrogen production and CCUS would incentivize the market to create its own demand. And the real winners of the IRA and IIJA will be those companies that can best innovate new commercial approaches to these novel business areas.

To accelerate decarbonized development, oil and gas companies will need to adopt more holistic views of their ecosystem and more collaborative ways of working with their value chain, from suppliers through the customers of their customers.

Oil and gas companies that seize opportunities to maximize operations, proactively manage emissions, transform via transactions and embrace new energies will thrive in the decades to come.

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.