While many industries are ending 2022 with tight cash flows, the upstream oil and gas industry is seeing a record year, experiencing a compound annual growth rate of 5.9%.

The COVID-19 pandemic, years of underinvestment, and geopolitical developments led energy commodity prices to rise to record levels, giving the upstream sector momentum for the next several years.

Armed with high cash flows, upstream oil and gas companies face critical decisions on where to spend their surplus dollars in 2023.

How the Upstream Industry Ended 2022

Deloitte found that 93% of oil and gas executives feel positive about the industry’s future in 2023. And for a good reason — the industry entered 2023 with one of its healthiest balance sheets.

The global upstream industry had a strong year, with Deloitte estimating that it generated combined free cash flow somewhere around $1.4 trillion because of high energy prices and capital discipline. The U.S. Energy Information Administration (EIA) reported 96% of companies experienced positive upstream earnings for Q3 2022.

The EIA also reported, “Dry natural gas production averaged 98.0 Bcf/d in 2022, surpassing the 2021 all-time high by 3.5 Bcf/d.”

In 2022, the oil and gas industry also experienced one of its lowest-ever leverage ratios at 20% and one of its highest-ever dividend yields at 6%. Free cash flows per barrel of production were roughly 70% higher than in 2021.

Now, the world is waiting to see what the industry will do with its abundant cash flow, as the decision could impact the timeline to transition to clean energy.

Where Priorities Lie for Global Upstream Industry

So far, the global upstream industry has prioritized capital discipline and shareholder payouts. Shareholder returns have reportedly doubled from 15% in 2013 to 30% in recent years, and the returns continue to grow.

As exploration and production companies reap the rewards of a hot year, they will fund capital programs, pay down debt and grow production to stabilize the global market, according to S&P Global predictions. These base priorities will take up around 70% of future cash flow between 2022 and 2030.

But even after meeting these priorities, Deloitte predicts the global upstream sector will still likely generate up to U.S. $1.5 trillion in surplus cash by 2030, a surplus that could also fund low-carbon priorities over the next decade. 

Why Record Cash Flows Could Accelerate Energy Transition

Over the past decade, oil and gas companies have been working to reduce emissions, develop carbon management technologies and build a foundation for a net-zero future. This year’s cash flow could offer an unprecedented opportunity to hasten the clean energy transition.

According to the Wall Street Journal, if companies chose to invest in low-carbon priorities, it could boost the low-carbon economy, increase renewable power generation and push the industry’s share of green capital expenditure from 5% to 30%.

As deadlines for net-zero goals quickly approach, these investments could be integral to boosting momentum and keeping the timeline on track. Though prioritizing low-carbon goals slightly reduces the overall internal rate of return for oil and gas companies, it would likely still yield returns near previous highs.

And other benefits of investing in low-carbon goals are virtually limitless, including lower emissions, more innovation, environment, social and governance funds, favorable regulations and higher revenue growth.

The $1.5 trillion cash surplus could theoretically fund 15% of the clean energy investments needed to hit net-zero targets. It remains to be seen when and how much the industry invests, but the future could be bright for clean energy.

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