ESG accountability is more important than ever in the oil and gas industry
When oil prices slipped into negative territory amid the onset of the pandemic in 2020, demand plummeted overnight, creating significant challenges for an already struggling industry. As prices continue to improve and the sector creeps toward recovery in 2021, in-house counsel can expect to face a rapidly changing regulatory landscape of workplace health and safety conditions coupled with substantial M&A activity and growing pressure for ESG accountability.
Cenovus Energy Inc. merged with Husky Energy Inc. in January, creating Canada’s third-largest crude oil and natural gas producer, based on total company production. A wave of other players will likely also consolidate as insolvencies inevitably occur.
Pipeline capacity in Canada has troubled the industry for a long time. Still, planned expansions from Trans Mountain and Enbridge should address the issue and contribute to economic recovery.
“The Canadian industry is reacting not only to COVID and all of the issues that came with reduced demand in 2020 but also to the general pressure that the industry has been under for several years,” says Stephanie Stimpson, a partner in the Calgary office of Torys LLP. Depressed stock prices, constraints on capital investment, challenges with access to markets, climate action and increased regulation are all contributing factors, Stimpson says. However, the industry is now feeling more optimism because of the recent uptick in oil prices, production increases and more efficient cost structures achieved during the downturn, she adds.
Pressure on the environmental, social and governance front has continued to rise — from governments, investors and other stakeholders. When COVID first took hold, there was a question about whether ESG considerations would take a back seat to separate operational and financial priorities. But Stimpson says the opposite occurred, as climate action and a focus on social issues accelerated in 2020.
“The ESG record for our oil and gas companies in Canada is very good compared to most other jurisdictions,” she says. “There has already been intense pressure on the industry for several years for sustainability, emissions reduction, workplace safety and proper engagement with Indigenous communities.”
Patrick McNally, a partner in the Calgary office at Stikeman Elliott, agrees that ESG has never been more critical to the oil and gas industry.
“The investor base of the public markets for our clients really shifted to demanding that accountability — especially for oil and gas companies that have been out of favour for the past five or six years,” says McNally. “There’s an accountability coming from the investor side.”
Enbridge Inc. follows a robust and evolving ESG strategy that includes a commitment to achieve net-zero greenhouse gas emissions by 2050, with an interim target of reducing emission intensity by 35 per cent by 2030. The North American energy infrastructure giant is also striving to increase how diverse racial and ethnic groups are represented within the workforce by 2025.
“If you’re not considered one of the best in your industry in terms of ESG, access to capital is going to get more and more difficult because the capital providers — whether they be on the debt or equity side — are going to become much more discerning about where they put their money,” says Bob Rooney, executive vice president and chief legal officer at Enbridge Inc. “There is going to be a lot more ESG focus by investors, and we’re seeing that with what some of the banks are doing and also with some of the large institutional shareholders.”
Many Calgary-based oil and gas companies have been developing renewable power projects for quite some time, making them attractive to investors, McNally says.
“In-house counsel at Canadian oil and gas companies have a bit of a head start because they are already at the forefront from the robust regulatory and environmental perspective,” he says.
Stimpson recommends caution when managing the reputational and legal risks of overstating or misrepresenting ESG practices and commitments.
“We have seen increasing criticism and activism from shareholders, employees, communities and other stakeholders where companies are falling short on their stated commitments to sustainability, diversity and other socially responsible practices,” she says. “Corporate commitments should be supported by an internal system of accountability with clearly articulated roles and responsibilities, properly allocated resources and capital and alignment of performance and compensation criteria.”
From his perspective at Enbridge, Rooney says he is optimistic about the future of Canada’s oil and gas industry.
“The Canadian business on the upstream side is well positioned to take advantage of the North American market in general, and that’s because we’ve got very long-lived assets that are very competitive in terms of total cost,” says Rooney. “Canada is well connected through the pipeline of networks coming into the U.S., so that bodes very well for the Canadian market on the oil side, and it’s a similar scenario for natural gas. It’s not without challenges, but, right now, Canada is positioned to do well.”
Despite declining demand in 2020, Enbridge has continued to operate as an essential service throughout the pandemic. The legal department — consisting of 250 lawyers across North America — continued to support the organization in the remote landscape by navigating approvals, permits and corporate finance work. As Enbridge began construction on its crude oil pipeline replacement in Minnesota in December 2020, Rooney’s team has been heavily involved in supporting the project.
“The role of the legal department is to ensure that we’ve got all the approvals and permits we need to develop that project, so that’s been an immense amount of work,” says Rooney.
As the COVID vaccine rolls out this year, in-house counsel at oil and gas companies will be fundamental in steering their organizations toward a safe economic recovery. McNally notes a shift away from hyper-production growth toward a free cash flow generation.
“Legal counsel will be very involved in making sure they have all the appropriate workplace health and safety policies in place,” says McNally. “Legal departments are going to have to face the reality of finding cost savings and efficiencies wherever they can.”