Word to the Wise: Don’t forget ARO when developing ESG strategies

April 13, 2021

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As more attention is given to the energy industry in Canada from increasingly vocal environmental groups, stakeholders, and investors, there is an increased focus on Environment, Social, and Governance (ESG) performance. ESG metrics have now become leading indicators for investment, providing a framework for assessing risks and generating sustainable risk-adjusted returns. With some high-profile cases of prominent funds dropping Canadian energy giants over ESG concerns, it’s imperative for our industry to provide evidence that Canadian companies are delivering on ESG commitments.

Among the ESG risk factors most commonly considered when evaluating a company’s performance, people usually think of the higher-profile public issues such as environmental pollution, climate change, and stakeholder relations (especially when exacerbated by protests). However, there is growing awareness of historical liability and clean-up costs that have direct implications for investor confidence and economic integrity of any company.

Liabilities associated with the retirement of assets in the WCSB are a major focus of the provincial and federal governments. Awareness of one’s potential liability is critical for managing and proving performance; you can’t manage what you can’t measure.

When it comes to ARO and ESG, investors want to see a plan. They want to understand a company’s long-term liability management plan and receive credible, standardized information to support long-term risk assessments. And just as important as having a plan is the need to have a way to communicate your plan that gives investors the right information in the right format.

Evaluation of ARO components that could affect an ESG assessment of your company might include:

• A clear understanding of your liability costs, including non-op liability exposure, discounted and undiscounted.
• Understanding your inactive wells by vintage and risk class, and associated costs.
• Your compliant vs non-compliant suspended wells, sites with reported incidents.
• Year-over-year number of well sites and leases reclaimed.
• “Lowest hanging fruit” liabilities to clean up, a focus on efficient and cost-effective site closure.
• Planning and forecasts for cleaning up inactive suspended wells, related facilities and pipelines and the direct impact on ARO.
• An established site closure budget.
• Participation in ABC or other regulator closure initiatives.

With ESG a big part of investing, energy producers need to examine all parts of their operations to see how they can ease concerns and provide investors with the information they need to evaluate their ESG commitment. A growing part of this evaluation is a producer’s plan to manage their asset retirement obligations, placing a greater importance on how the industry prioritizes and communicates their ARO management.

To learn how XI’s ARO Manager can help with the planning and reporting of liability management, visit our website or contact us for a demo. You can also read a case study on how ARO Manager helped a bank assess the potential liability impact of an acquisition for a client by reading our case study.