This high level of activity may dishearten the many who want a faster energy transition–but it could be an indicator of progress. It is becoming clear that global capital markets are restricting their funding of new oil and gas projects. With higher costs of capital to fund new projects from a smaller capital base, it will be left to larger players to develop the still-needed resources necessary to manage the net-zero transition.

According to EY’s analysis of Dealogic data, global oil and gas M&A activity topped US$350 billion in 2023, outpacing 2022’s total by 83%, the highest level in the past five years.

Disciplined consolidation

While the M&A spike was boosted by two mega-mergers announced in October, there was a strong uptick in deal volume and size–with the number of transactions greater than US$1 billion up 17% versus 2022. As a result, despite global economic uncertainties, rising geopolitical tensions, intensifying climate change concerns, and a strengthened plan for phasing out fossil fuels, oil and gas M&A comprised 11.6% of deals announced across sectors in 2023.

Oil and gas majors have strategically pursued deals to enhance their production capabilities, underscoring the industry’s focus on delivering oil and gas as part of the energy mix. Meanwhile, smaller oil and gas companies are grappling with restricted access to funding for new exploration and growing cost pressures, leading them to become attractive acquisition targets for larger industry players or pursue their own consolidation.

The other theme is the consolidation among the U.S. shale players in the Permian basin. This is partly cost and capital-driven and partly a function of the basin maturing and rewarding scale and asset concentration over agility and innovation. It’s a normal evolution in a basin’s lifecycle. In addition, the reassessment of geopolitical risks has been a huge driver of the growth of the U.S. as a liquefied natural gas (LNG) exporter, which has underpinned the U.S. shale market in recent years.

The consolidation seen in 2023 has been disciplined. While prior episodes of increased M&A in the industry–especially in 2009–have been marked by high premiums, 2023 saw relatively modest premiums of 17%, down from 2022 and below the long-term average of 20%.

In addition, recent transaction activity has seen oil and gas players switch the mix of fossil fuels–reducing heavy oil production and increasing natural gas production–or diversify away from fossil fuels and gain a stronger footing in other areas, including renewables, critical minerals, and other low-carbon solutions.

The deal uptick reflects expectations, particularly in North America, that while oil and gas will continue to play a significant role in the energy mix for some time, cost and capital pressures will advantage bigger operators.

A shifting regulatory landscape

The regulatory and geopolitical environment is also providing impetus for companies to sustain their net zero agendas. The U.S. and EU have prioritized regulatory efficiencies and subsidies. They are looking to lower overall carbon emissions through regulatory measures while also encouraging investment through large-scale subsidies, such as the Inflation Reduction Act in the U.S. Meanwhile, the EU is making progress through the Carbon Board Adjustment Mechanism which will set the template for assessing tariffs on goods based on the carbon intensity of manufacturing.

We’ve seen other industries, such as tobacco, where major regulatory pressures to reform have shifted the landscape toward consolidation. The result? A surge of capital into alternatives, which then became competitors and targets for the established companies. Similarly, the oil and gas sector is seeing higher external capital investment in developing new alternatives and a boost in research and development and capital expenditure by major players in these alternatives.

Similarly, a flow of capital into new technologies in the automotive industry has accelerated the investment by legacy automotive companies in their own transition. This change also attracted new capital to suppliers and ancillaries to the industry, creating even further energy transition momentum.

Oil and gas M&A is a bright spot for 2024

The latest EY report on the energy transition shows that oil and gas will still be part of the energy mix, but made much greener, through carbon capture and synthetic and alternative fuels. Industrial and residential consumers alike will be the primary drivers of change as they adopt more energy technologies and become the active orchestrators of a flexible, intelligent electricity grid.

The report also finds that while oil demand will peak before the end of this decade and gas demand around a decade later, the following transition from hydrocarbons will be gradual, primarily due to the slow pace at which oil-and-gas-consuming technologies will be replaced. This environment, combined with the gradual rollout of carbon taxes, will continue to apply margin pressure to the producers, increasing both cost and capital efficiency-driven consolidation.

While we can expect M&A activity in the oil and gas space to continue into 2024 and beyond, this consolidation can be seen as a response to the accelerating energy transition consistent with policies that incentivize the switch from legacy assets to renewables and empower consumers to play a bigger part in energy decisions. The additional capital efficiency will also free investment funds for the oil and gas companies to decarbonize their operations and products through the deployment of alternative energy technologies.

M&A will play a vital role in enabling global oil and gas leaders to reshape their portfolios, incorporating both renewables and low-carbon energy solutions to help make their net-zero ambitions a reality.

Andrea Guerzoni is EY’s Global Vice Chair, strategy and transactions. The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

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