The fossil fuel industry continues to face pressure from stakeholders including shareholders, financiers and employees as well as other parties taking aim at the industry’s environmental, social and governance (ESG) record.
Over the last decade, we have seen Canadian producers continue to grow as global leaders in research and development spending and deployment of clean technologies. They have also progressed their objectives in terms of broader ESG trends, toward improved environmental performance, relationships with Indigenous groups, employee safety, and diversity in corporate governance structures. With these industry trends set to continue, investors with a holistic view of ESG indicators may do well to keep watch on the opportunities that are being cultivated.
Globally, the fossil fuel industry has addressed the increasing importance of ESG in different ways. In Europe there has been a significant focus on environmental impacts, with less emphasis to date on the social and governance factors. European majors, such as BP, Shell and Total, have publicly stated their intention to transform their businesses to align with a global transition to renewable energy sources. Recent investments from these players have focused on the power and mobility sectors, including solar, wind and electric vehicle charging networks. In contrast, investments in renewables and other low carbon technologies by U.S. majors, such as Chevron and ExxonMobil, have been less common. However, it appears that may be starting to shift with ExxonMobil announcing the creation of a new business, ExxonMobil Low Carbon Solutions which will initially focus on carbon capture and storage.
The Canadian energy sector has and is continuing to invest heavily in diverse and low-carbon energy and clean technology.
In a characteristically Canadian approach, Canadian producers have sought a middle ground—recognizing that the long-term growth in global energy demand will require a combination of conventional and renewable energy sources for decades to come, they have continued to grow production while improving their ESG profile across environmental, social and governance factors, positioning the sector as the responsible energy supplier of choice on a global scale.
Canadian producers have faced many unique challenges within the global fossil fuel industry. The oil sands in Western Canada have long been the subject of well-organized and well-funded campaigns by climate change advocacy groups that resulted in significant reputational damage. More recently, companies have had to adjust to carbon taxes and new regulations, including clean fuel standards and the Canadian government’s recently announced climate plan that will see the carbon tax surge, from $50 per tonne in 2022 to $170 per tonne by 2030. Furthermore, oil and gas exploration and production by its nature engages a number of other ESG criteria, including appropriate environmental practices; employee safety; Indigenous and community engagement; anti-corruption practices; ESG disclosure practices; and regulatory compliance generally. Companies that fail to innovate and adapt to the changing legal and social realities will find themselves struggling to stay competitive. These realities will continue to drive financing, deal-making and energy sector investments.
As well as being vital to corporate values and reputation, ESG factors are now driving value for strategic corporate transactions. For example, ARC and Seven Generations, which have the two lowest GHG emissions intensities among their Canadian exploration and production peer group, recently announced a strategic combination, elevating the combined company’s status as an ESG leader. Similarly, Crescent Point’s recent acquisition of Shell’s Kaybob Duvernay assets allowed it to enhance its ESG profile through the addition of assets with a low standing well count, minimal reclamation and a low emissions intensity. We expect ESG factors to continue playing an important role in the ongoing consolidation occurring in the Western Canadian energy sector.
The Canadian energy sector has and is continuing to invest heavily in diverse and low-carbon energy and clean technology. For example, oil sands companies are global leaders in research and development spending on a per barrel basis, having invested over $1 billion per year since 2012. Through the deployment of new technologies and other efficiencies, oil sands GHG intensity has declined by over 20% over the last decade and is expected to further decline over the next decade aided by enhanced recovery and carbon capture, utilization and storage (CCUS). For example, the Alberta Carbon Trunk Line captures and transports CO2 to be used in enhanced oil recovery before being ultimately stored. This project alone can capture 20% of all current oil sands CO2 emissions and involves a number of system partners, including Enhance Energy, Wolf Midstream (backed by the Canada Pension Plan Investment Board), North West Redwater Partnership (owned by North West Refining Inc. and Canadian Natural Resources Limited) and Nutrien. There remains ample CO2 storage capacity in Western Canada to develop additional CCUS projects.
Governments across Canada, in conjunction with various oil and gas companies, are also developing and investing in hydrogen strategies that will help Canada meet its own emissions targets and position Canada to be a global supplier of hydrogen. The Canadian energy sector’s vast knowledge of and experience with CCUS, along with its abundant natural gas reserves, create an ideal environment for Canada to become a leading supplier of blue hydrogen. The industry’s advanced development of renewable resource projects combined with ample water supply and access, makes it well positioned to be a leading supplier of green hydrogen as well.
In order for companies to meet their announced emissions reduction targets (a number of which include a commitment to net-zero emissions by 2050), and with the announced surge in carbon taxes, the industry will be incentivized to invest in these and other low-carbon energy and clean technology. This will present opportunities for financial investors looking to partner with strategics on projects intended to advance their ESG performance mandates.
Over the last few years, a number of companies have offered equity partnerships to Indigenous groups instead of (or in addition to) other means of involvement, including impact benefit agreements (read more in “ESG and Indigenous communities – the need to focus on relationships”). This has particularly been the case for pipelines and other linear projects that affect aboriginal and/or treaty rights. For example, TC Energy’s Keystone XL pipeline had an agreement with Natural Law Energy, an alliance of First Nations, to invest up to $1 billion in Keystone XL. Other high-profile projects like the Coastal GasLink Pipeline and the Alaska to Alberta Railway are also offering equity partnerships to First Nations. Equity participation serves to align the interests of industry and Indigenous groups in the continued development of Canada’s natural resources in a manner which is responsive to the rights and interests of affected Indigenous groups, and we expect that Indigenous groups will grow their participation in projects across the industry.
Canadian energy companies are also setting progressive, clear and measurable targets for diversity. Many of these targets focus on board diversity, although some go further. Enbridge, for example, has set targets for diversity in its workforce including gender, racial and ethnic diversity, people with disabilities and veterans. These kinds of measurable targets help keep Canadian energy companies accountable and achieving these targets will be crucial to passing scrutiny from governments, regulators, and investors moving forward.
Canadian oil and gas companies have made great strides on the ESG front and continue to demonstrate their commitment to operating to the highest environmental, social and governance standards. While the industry is uniquely situated to develop a number of capital-intensive clean energy technologies such as CCUS, hydrogen, biofuels, offshore wind and battery storage, it is important to understand that traditional oil and gas production and consumption is expected to dominate the world energy supply mix for decades to come. The strong commitment from the Canadian energy sector to achieve world class ESG standards, paired with Canada’s abundant natural resources, positions Canadian energy companies to be a responsible global energy supplier of choice.