Wind turbine and fossil fuels

How oil and gas can leverage past lessons for future resilience

Meeting short-term energy demands while planning for a more sustainable future requires capital, carbon and operational resilience.

In brief

  • Our 2022 oil and gas reserves, production and ESG benchmarking study highlights the trends that will define this year and beyond.
  • Sky-high commodity prices typically lead to greater investments — yet that hasn’t occurred, highlighting the balance companies must achieve.
  • Reduced capital expenditures, to shore up balance sheets and satiate investors, could create another supply bubble in future cycles.

This article is co-authored by:

  • Herb Listen, EY Americas Energy Assurance Leader
  • Dr. Paul Bogenrieder, EY US Energy Analyst
  • David Johnston, EY US-West Region Strategy and Transactions Energy Leader
  • Ryan Bogner, EY Americas Digital Sustainability Leader

Oil and gas companies have a challenging role to play: providing secure, affordable energy to consumers and customers globally while also embracing the urgent need to address climate change. They must remain nimble, as we see the balance within the energy trilemma — affordability, security and sustainability — recalibrate amid economic and geopolitical pressures.

We see these complications manifested in the desire for greater supply in the short term, alongside a commitment to reducing greenhouse gas emissions in the long term. However, even in this inflationary economy further squeezed by war between Russia and Ukraine, an intractable logic persists: 30-year projects such as refineries are ill-suited for solving 10-year problems (especially as the desire for a shift away from fossil fuels grows, as an environmental and geopolitical imperative).

Therefore, despite the need for increased product now, the investments that historically follow sky-high commodity prices have not materialized. In fact, the 2022 EY US oil and gas reserves, production and ESG benchmarking study found that expenditures for extensions and discoveries ranked at the second-lowest level in the last five years. Also, the number of working rigs hasn’t returned to pre-pandemic levels — and probably never will.

Historical data offers greater understanding of our current moment, with the state of oil and gas in flux between these competing demands and varying timelines.

This annual study analyzes reserve and production information from the industry’s 50 largest publicly traded companies (based on year-end 2021 US oil and gas reserves), as well as environmental, social and governance (ESG) disclosures. While the extreme tightening in the supply-demand balance is only partially reflected in the 2021 data, our study highlights the trends that will define 2022 and beyond.

There is a balance to maintain when it comes to energy security and equity globally. Every step forward is a positive one when it comes to reducing the emissions of our industry’s operations and products. But how does the industry satisfy investor appetites for immediate returns from fossil fuels without greater investment in the infrastructure needed to extract and refine them? Or to placate consumers concerned about today’s prices and climate challenges?

“Historical data offers greater understanding of our current moment, with the state of oil and gas in flux between these competing demands and varying timelines,” said Herb Listen, EY Americas Energy Assurance Leader.

The answer lies in resilience across three dimensions: operational, carbon and capital.


Chapter 1

Carbon resilience

Facing contradictory goals, oil and gas companies must be clear about what they are — and what they want to be.

Given the focus on climate disclosures by the US Securities & Exchange Commission (SEC), investors and the general global regulatory environment, it is no surprise that oil and gas management teams have ESG matters high on their agendas. There is a critical need to translate more substantive reporting into meaningful impact on climate change. As life returned mostly to normal from the COVID-19 pandemic in 2021, so did energy usage and carbon emissions.

Oil and gas companies should be deliberate and transparent about what they are and what they want to be to manage the complex political landscape – including the contradictory goals of boosting capital expenditures to increase supply while also reducing fossil fuel consumption. To this end, many companies are refreshing their sustainability materiality assessments to appropriately align with their ESG strategy.

Some oil and gas companies are positioning themselves as energy companies with significant investment away from core oil and gas assets. For example, in 2021, companies in our data set spent $94 billion acquiring proved and unproved properties. The sellers were largely integrated oil companies working to rebalance their portfolio toward lower-carbon businesses, as well as large independents facing pressure from capital providers with a heightened ESG focus; the buyers were independents and private equity looking for value. While these moves may positively impact individual companies’ emissions reporting, the net effect of this realignment may be higher industry-wide emissions, as less carbon-intensive operators sell their worst-performing assets to operators with less scrutiny over their carbon emissions.

Actions to take:


Minimizing operational carbon intensity of oil and gas extraction and processing is another priority strategy of these companies. It is possible to decarbonize operations without disrupting core business by adding tactics like carbon offsetting; electrifying operations; and/or carbon capture, utilization and storage technology. After the heavy lift of identifying a company’s decarbonization path, execution can begin. Being able to clearly disclose the impact of strategic decisions and operationalize decarbonization in remaining assets will be critical success factors into the future.


Though organizations need to establish their own sustainability goals, the sector is beginning to recognize that collaboration is essential to make meaningful progress and change. Together, companies, suppliers and policymakers need to establish new sustainability agreements and standards. Commitments to implementing full lifecycle assessment standards, for example, can create significant impact across the value chain. Actively collaborating on sustainable strategies is a way to create shared value for all stakeholders and therefore will be a strong driving force toward a meaningful, lower-carbon future. With a teaming approach, standards are more likely to be driven down the entire enterprise; behaviors and mindsets will shift; and greater impact will take place.


ESG is a significant driver for further digitizing operations. Monitoring carbon emissions and embedding operational decarbonization throughout an oil and gas company starts with a strong foundation of operational data to allow for near-real-time monitoring of emissions. Carbon-enabled digital twins and carbon management platforms allow companies to integrate immediate operational intervention into their decarbonization toolkit. Some oil and gas companies are using the traceability of these systems in conjunction with high-quality offsets to offer differentiated products at a significant margin premium in specific markets (such as California and Asia). We also expect market access and premiums to be important in the European market.


Many companies are looking more broadly at their reporting approaches before the SEC and EU Corporate Sustainability Reporting Directive climate disclosure proposals. Enhancing the controls framework and especially automating the data collection and calculation of carbon emissions in an auditable process is a high priority, as increased scrutiny and assurance requirements are likely outcomes of current rulemaking.

ESG reporting


Chapter 2

Capital resilience

If companies want to raise money, they need to make changes, as finance providers ask tough questions about the future.

The bias in the marketplace is toward low- or no-carbon energy companies, as well as integrateds, that can convince the markets they can execute their strategies over the long term. Yet policies that have led finance providers and companies to favor capital return over reinvestment in reserves will be tested if gasoline prices continue to rise and pressure on elected officials continues to grow.

Our study shows how heavily the long-term view continues to prevail in terms of how capital is used. Development and exploration costs as a percent of netback (revenues less production costs) decreased from 64% in 2020 to 32% in 2021, as a result in a shift in capital allocation more toward dividends and share repurchases. Capex totaled $144.1 billion, 136% higher than 2020’s depressed figures and nearing pre-pandemic totals in 2019 — but a closer look reveals that the increase was almost solely attributable to the M&A activity described above. The latest edition of EY Price Point, covering the beginning of 2022, shows that capex is less than half of what it was in early 2014, the last true peak.

Actions to take:


By taking a “future back” approach — defining goals and working back from there — companies can optimize portfolios around a well-defined, scenario-driven strategy. This will give oil and gas companies confidence in the equity story for investors around how capital frame enables EBITDA (earnings before interest, taxes, depreciation, and amortization) expansion and growth (which are generally the most-rewarded metrics when aiming for outsized total shareholder return). Additionally, a proper framework that contains the fulcrum energy suite will help identify the signposts that management teams should be looking for to pivot and inform shifts in a company’s capital frame. Finally, a future-back approach helps surface at-risk (stranded) assets today to maximize proceeds and reinvestment cycles into other high-return value pools.

Boost agility

Since deals in low-carbon or new energies will generally be smaller (on a relative basis), oil and gas companies need to prepare to execute an agile and high-volume M&A strategy. Critical steps will include evolving key performance indicators to stay ahead of the curve and capturing indicated progress to investors against key milestones that are not currently showing up in EBITDA and cash flow.

Team and innovate

Embracing an ecosystem mentality to take advantage of industry convergence will be paramount. Further, CEOs and executives must allocate capital to initiatives that drive innovation and disruption. If not, the company will struggle to develop long-term value and reach key objectives around positioning the enterprise to meet and exceed cost of capital requirements, which are constantly evolving. 


Chapter 3

Operational resilience

In the best and worst of times, operational resilience pays off, because superior returns require superior operations.

Our study reflects the tremendous reversal of fortune for the industry — to a profit of $73.5 billion for 2021 compared with a loss of $86 billion in 2020, mainly due to the improved commodity price environment. Oil and gas companies are better positioned to invest in operational resilience, especially as production costs per barrel of oil equivalent (BOE) increased 11% in our studied time period. Production taxes increased due to higher commodity prices, and inflation was also a factor. The studied companies recognized an increase of $1.38 per BOE, or 15%, in production costs year over year, while depreciation, depletion and amortization (DD&A) and oil and gas property impairment charges decreased substantially.

Creating operational resilience will require embracing digital and sustainability throughout the value chain. Increasing the focus on emissions tracking and traceability, optimizing technology and the back office, and facilitating cross-functional collaboration with humans at center will equip and better position oil and gas companies toward transformation and drive long-term operational value.

Actions to take:


Deploying digital technology and data analytics to improve asset performance is imperative. And optimizing supply chains — getting the best deals and keeping just the right inventories — can always improve margins. That said, oil and gas companies have not yet realized the full benefits of many technologies. For example, according to our recent Digital Investment Index, IoT, cloud and artificial intelligence have become table stakes as digital spend accelerates, yet only 22% of energy companies say they have realized the full benefit of AI and 33% say the same for IoT. By 2025, global data creation is expected to reach 175 zettabytes, and the global big data and analytics market is on pace to reach $135.71b. Organizations worldwide are scrambling to re-engineer their data strategy to capture increasing amounts of data, translate it into actionable insights and ultimately empower more intelligent business decisions. Oil and gas companies have significant opportunity to think about and rejigger their data and digital strategy to be even more impactful than it’s been in recent years.


In an industry known for its traditional, siloed functional approach making the full energy value chain work better together to reduce value leakage and improve revenue yields requires integration that is too often lacking. Currently, there is a need to better drive integration across peers, suppliers and customers to optimize carbon, and ultimately, returns. It’s important for companies to create a playbook to prioritize their highest-value initiatives and ensure they are aligning appropriate stakeholders across functions to operationalize. Specifically, from the digital point of view, this enables scaling from proof of concept to scaled full benefit realization. Ultimately, investments that are backed by a clear integration strategy are tied to a value-based outcome. However, leveraging technology to develop complex and integrated processes requires access and coordination across multiple functions and geographies. Enabling these collaboration efforts among market participants creates an integrated alliance mindset that benefits investors, buyers and consumers alike.


Lastly, when we look at operational resilience, we also have to look at the workforces. Prior to COVID-19, the industry was already struggling with significant labor gaps as generations retired and fewer people were entering the industry. This challenge has been exponentially exacerbated with the drawdown in the sector due to the pandemic, and now there is even less qualified labor to meet the current needs. New resourcing models must be established, accelerating the need for digital and automated operations even more and a workforce to drive them. Getting the most out of technology investments requires maximizing the value of an organization’s people. Attracting, training and retaining the workforce should be high on oil and gas agendas, as talent is in short supply. A human-centered approach pays off when you need it most: now and in the future. 

Download the full report


In this gray area between the oil and gas industry’s past and future, resilience is what counts the most. The challenge is threefold: to develop integrated carbon solutions while pursuing decarbonization, to optimize operations across the value chain by leveraging new technologies and to adjust portfolios to make the business more attractive to capital.

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