- EY analysis shows how harsh lessons from the shale boom era have set the path for producers in the decarbonization era.
- 43 of 50 companies in the study report at least one scope of emissions, 33% of those companies report Scope 1 and 2, and at least one category of Scope 3 emissions.
US oil and gas producers recovered and reset in 2021, posting increased profits of $73.7 billion and $211.9 billion in revenues, with significant deal activity that drove $144.1 billion in capital expenditures (capex), according to the EY US oil and gas reserves, production and ESG benchmarking study. The study documents how the industry’s 50 largest publicly traded exploration and production (E&P) companies (based on year-end 2021 US oil and gas reserves) responded to higher commodity prices in 2021 with an analysis of reserve and production information, as well as their environmental, social and governance (ESG) disclosures.
Higher commodity prices and increased pressure from investors for returns led independents to increase their share repurchases and dividend payments by 122% from $8.1 billion in 2020 to $18.1 billion in 2021. This trend in capital allocation was reinforced when reviewing development and exploration costs, which, as a percentage of netback (revenues less production costs), decreased from 64% in 2020 to 32% in 2021, according to the study. The integrated oil and gas companies (integrateds) in the study acted similarly, while also demonstrating a focus on decarbonization via their asset strategy, shifting assets to the larger independents.
“The resilience of the oil and gas sector is being tested — from economic and geopolitical uncertainty to access to capital and climate change. However, our historical studies show that E&P companies have learned significant lessons about operational excellence and capital discipline that will serve them well now and in the future,” said Herb Listen, EY Americas Energy and Resources Assurance Leader. “The price improvement during 2021 enabled E&P companies to turn the corner toward significant cash flow, but the majority of companies tempered drilling activity, choosing instead to focus their capital allocation strategy on returning capital to investors and optimizing portfolios.”
Oil and gas production remained materially flat year over year, growing to its highest level in the study period to 3 billion barrels and 13.9 trillion cubic feet (tcf) in 2021. Production costs per barrel of oil equivalent increased slightly (15%) due to higher commodity prices that impact production taxes and potential cost inflation. The companies in the study reported combined oil reserves of 31.8 billion barrels and combined gas reserves of 188.6 tcf, a 21% and 27% increase, respectively, compared with 2020. The increases were primarily driven by purchases of 3.5 billion barrels and the 4.6 billion barrels of extensions and discoveries in oil reserves, as well as 24.2 tcf of extensions in discoveries in natural gas reserves.
Record year for reserve acquisition with large independents as the biggest buyers
Nearing pre-pandemic levels, capex in 2021 totaled $144.1 billion, 136% higher than 2020. According to the study, 2021 was a record year for reserve acquisition, representing approximately $94 billion, or 65%, of total capex compared with development spending, which was at its lowest amount in the five-year study period at $41.7 billion. The integrateds decreased year-over-year development expenditures by about 25%, whereas the independents increased by about 14%.
“The energy transition and focus on managing emissions have caused oil and gas companies to rethink their portfolios,” said David Johnston, EY US-West Region Strategy and Transactions Energy Leader. “The diversity of opinion about the future of oil and gas is evident by the three divergent strategies that are emerging. Working to rebalance their portfolio toward lower-carbon businesses, the integrated companies were big sellers, while smaller independents sold assets due to pressures from capital providers. The buyers have been the large independents looking for value and doubling down on the reality that oil and gas will be needed for decades to come.”
ESG: moving from a compliance exercise to a catalyst for innovation
The study found that ESG matters remain high on the minds of management teams of the companies studied. Increasing six percentage points from 2020, 82% of all companies in the study published a sustainability or ESG report. Thirteen companies obtained third-party assurance of their reported ESG metrics, with only two of those companies obtaining reasonable assurance. Further, 43 of the companies reported at least one scope of greenhouse gas emissions, with 33% of those companies reporting at least one category of Scope 3 emissions in addition to their Scopes 1 and 2 emissions.
“More oil and gas companies will begin to embrace ESG and sustainability as a catalyst to innovation throughout their strategy and in operations, rather than view it merely as a compliance exercise,” said Pat Jelinek, EY Americas Oil and Gas Leader. “While the approach companies take will look different, the intersection of digital technology and sustainability provides a tangible path to drive strategy and support ongoing resilience.”
About the study
The EY US oil and gas reserves, production and ESG benchmarking study is a compilation and analysis of US oil and gas reserve and production information reported by publicly traded companies to the Securities and Exchange Commission and an analysis of certain publicly reported ESG disclosures, as applicable. It presents results for the five-year period from 2017 to 2021 for the 50 largest companies based on 2021 end-of-year US oil and gas reserve estimates.
EY | Building a better working world
EY exists to build a better working world, helping to create long-term value for clients, people and society and build trust in the capital markets.
Enabled by data and technology, diverse EY teams in over 150 countries provide trust through assurance and help clients grow, transform and operate.
Working across assurance, consulting, law, strategy, tax and transactions, EY teams ask better questions to find new answers for the complex issues facing our world today.
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation are available via ey.com/privacy. EY member firms do not practice law where prohibited by local laws. For more information about our organization, please visit ey.com.
This news release has been issued by Ernst & Young LLP, an EY member firm serving clients in the US.