Word to the Wise: ARO and ESG – Tackling liabilities to attract investment

June 16, 2020

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.

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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 a growing awareness of historical liability and clean-up costs which have direct implications for investor confidence and economic integrity of any company.

Liabilities associated with the retirement of assets in the WCSB are now 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.

Following landmark court decisions like the Redwater case, the importance of Asset Retirement Obligations (ARO) within the industry and among investors became top of mind. Energy producers can only expect the intensity of that spotlight to increase in a post-COVID-19 world. The government response to the pandemic-induced struggles of the industry was to focus on abandonment and liabilities, providing a framework to inject funds into the industry, preserve jobs, tackle environmental concerns, and reduce the amount of potential liabilities introduced into the Orphan Well funds (and equivalents) of Western Provinces.

This decision has raised concerns with some advocacy groups that taxpayers were bailing out the obligations of the oil and gas industry. It is perceived that our industry is quick to profit from the exploitation of natural resources, but slow to make good on its environmental and social responsibilities.

Of course, the truth is far more complex. The exploration of oil and gas has long benefited many in Canada and now that we are facing an unprecedented and unpredictable event causing an artificial lack of demand, even the most responsible producer is tested in their ability to meet short-term obligations. But producers will need to work harder than ever post-recovery, to prove to ESG-minded investors that they are, indeed, responsible environmental stewards when it comes to tackling abandonment and reclamation work. Evidence-based performance management has become paramount moving forward.

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.

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 one company reduce the time they spent compiling ARO reports by five weeks by clicking here.