February 6, 2020

ARO and ES&G – Linking two of the most relevant topics in Canadian Energy

In the last 5 years, Environment, Social and Governance (ES&G) strategy and reporting has emerged as a foundational piece in all sectors of the energy industry.  This meteoric rise has quietly elevated the importance of asset retirement obligations (ARO) within all three components of the ES&G acronym.

At 360, we have felt the shift in industry and a shift with our clients with respect their decision making and their communications strategies.  This in turn has changed their dialogue with executive boards, lenders, regulators and the public.  In saying that, we feel there is still an opportunity to bring ARO further to the forefront and establish a stronger strategy and message for industry in this space.

In this post, we are going to present a few ideas which we hope can help industry in driving ES&G discussions to link more closely to ARO activities and to give thought to how to communicate those activities as part of a broader corporate strategy.

“Easy E”

We all know that reclaiming land is a sound practice.  But the framework to date hasn’t pushed industry to close sites, so there hasn’t been a focus on this objective over the past century or so.  With increasing pressure from all sides, there has been a migration away from performing fragmented activities to competing closure work.  Retirement activities are, by virtue of their core function, good for the environment.  Now the responsibility lies with us to report on the metrics derived from performing those asset retirement activities.  A few easy starting points might be:

  • Acres of land and number of leases reclaimed
  • Numbers of wellbores/facilities/pipelines retired
  • Trees and natural habitat returned
  • Closure activities performed
  • Reduction in travel/kms
  • Reduction or elimination of disposal/fluids

Every company will have varying metrics which will appeal to them, but the most important part of the environmental component is to measure the impact of the ARO activities.  The second important step is to analyze how to improve and then set a strategy which will achieve that improvement (this will tie into the G section).

Being “Social”

Our world has changed and will continue to do so.  That’s the obvious statement.  But it is very evident that society today places an even greater emphasis on the world at large and how we are treating other humans and our societies within it.

Performing ARO activities goes a long way to re-building damaged relationships with landowners, indigenous communities, government agencies to name a few.  It also shows people inside and outside of an organization that the leadership cares about the full lifecycle of a development project and that there exists an altruistic thought process. 

Tying ARO to community efforts and to the good they can produce will go a long way to building confidence for stakeholders across all corporations.  These are largely communications exercises, but will also become a deep involvement in our communities over time.

“G”reat Governance

With the finance sector asking deeper questions around liability and reshaping their lending criteria, the producers and explorers in our basin have had to re-think their governance strategies with respect to liabilities and inactive oil and gas sites.  In our business the 3 most important aspects we stress in governance and strategy are:

Planning, Planning and Planning.  Oh, did we mention planning?    

With proper plan(s) in place, strong organizations are able to withstand the impacts of things like regulatory change, political upheaval and public pressures.  Additionally, the foundation of a good plan is an understanding of what liabilities exist and how much they will cost.  This topic has been covered exhaustively in the public, so suffice to say it’s important to have a real clear picture of the costs associated with ARO.

With a plan in place and an understanding of the costs associated with ARO, the dialogue with boards, lenders, regulators, and the public becomes much easier.  It also becomes much easier to express this in your communications strategy as it is something built into the fabric of the business strategy.

There is no doubt that we sit in the most turbulent times the conventional oil and gas sector has faced in years (if not ever).  We must recognize in these times that we can choose to lead, or we can choose to be left behind as the world moves towards a new energy future (what ever that might look like!).  Focusing energy and time on tying ARO to ES&G is a useful and rewarding effort which will find support across all levels of a business and which will support broader strategy and communications strategies at large.

 

The world leaders in acronyms,

 

360

Let’s Make a Deal: Opportunities and Concerns with E&P Consolidation
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Beyond the Fog Lies Clarity – The History, Perils, and Future of ARO Evaluation
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Adapting to Change – Liability Management and Asset Retirement in Western Canada
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The Case for Investing in Closure Right Now
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