Investors seek full disclosure on oil sands investments

9/9/2010

 
Published in Alberta Oil Magazine, September 2010
By Laura Bowman, Staff Counsel, Environmental Law Centre
 
In the wake of Syncrude Canada’s conviction for the death of approximately 1,600 ducks at the Aurora mine tailings pond, investors in oil and gas should give serious scrutiny to the state of tailings ponds and other environmental issues in Alberta’s major oil and gas projects. The trial court’s verdict – guilty of violating the Migratory Birds Convention Act and Alberta’s Environmental Protection and Enhancement Act – demonstrates that non-compliance with environmental laws and regulations can culminate in sudden, serious liabilities.
 
The Athabasca oil sands region is a high-traffic area for what may be up to a million migratory waterfowl traversing the central North American migration route to and from Arctic breeding grounds. Oil sands tailings ponds are attractive landing places for such passers-by. The court in the Syncrude case held that the law requires all reasonable options to be pursued to prevent birds from coming into contact with tailings materials. The assumption may be that other companies meet these and other standards, but compliance varies considerably across operators. Many large industrial facilities, including oil sands, can have an array of compliance difficulties due to the inherent risks of interaction with the environment and how they are managed not only for migratory birds, but for an array of concerns covered by federal and provincial legislation.
 
Regulatory non-compliance issues are not limited to those raised by the Syncrude trial. Many oil sands companies have indicated they will not comply with the Alberta Energy Resources Conservation Board’s (ERCB) new tailings pond standards, aimed at better managing the ponds. Uncertainties in the costs and viability of tailings reclamation abound in many large projects. Some tailings ponds may therefore be fundamentally non-compliant with federal legislation and ERCB directives. There is also an ongoing Environment Canada investigation into whether tailings pond discharges violate federal fisheries legislation.
 
Despite this, several companies have not included this basic non-compliance information in their investor reporting documents. Investors frequently face boilerplate disclosure or no disclosure at all of these risks and contingencies in securities filings. Companies may be choosing lower capital cost tailings management at the outset that will incur longer-term difficulties, prosecutions, litigation and ultimately material liabilities without full disclosure. Some may be engaging in unnecessarily risky practices to boost the bottom line, while others may simply not be managing the inevitable risks in a reasonable way – as was the case with the court’s findings in the Syncrude trial.
 
Compliance reviews by Canadian securities regulators in Ontario and Alberta have demonstrated that disclosure requirements often fail to include quantification of costs associated with environmental protection, and failing to account fully for all material and contingent environmental liabilities. Since these requirements are in place to protect investors, savvy ones will demand full disclosure.
 
Non-compliance with environmental laws is sufficiently widespread that investors should employ healthy skepticism of environmental promotional materials. Both environmental consultants and industry representatives may address environmental risk management as a voluntary corporate responsibility issue where it is actually a legal requirement better understood as a potentially significant liability. This can stem from a variety of sources, including a poor understanding of environmental laws and how they apply and a simplistic understanding of the risks that need to be managed to achieve compliance.
 
Investors should be concerned about non-compliance for a variety of reasons. First, many environmental regulators have the legal power to require compliance, which could entail large capital investments in improved tailings infrastructure and management. Yet the risks and costs of such a compliance order are rarely fully accounted for. Indeed, many oil sands companies are now investigating different tailings options than were originally used in their operations. Such game-plan changes are inevitably costly.
 
Second, investors may consider that a company that is highly reluctant to invest in the capital costs of first-class environmental compliance technology or that fails to properly monitor and maintain the infrastructure it builds may also be poorly managing its other risks. One need only look to the BP oil spill for the potentially catastrophic financial implications of risky environmental practices.
 
Finally, there can be no doubt that some of the toxic liability potential in major resource extraction projects is truly staggering. Fines alone can be up to a million dollars a day for some federal pollution offences that may be routine to some company operations. The cost of reclamation or cleanup in the event of seepage can be in the hundreds of millions of dollars, if not higher.
 
In addition, there is a potential civil liability associated with environmental damage and the cost of bringing the facility into compliance. Many of these potential liabilities are uncertain, but nevertheless quantifiable. In the long term, investors and financial professionals should work with industry to ensure that compliance claims are bona fide and that environmental liability risks are managed honestly and transparently.
 
Ultimately, Syncrude’s conviction and the BP spill demonstrate that the compliance and enforcement context can change suddenly where the problem is public and the political costs of ignoring the situation are high. Yet many investors are unaware of the implications of these issues from a financial risk perspective.
 
Investors have an important role to play in encouraging compliance, but to do so they must be informed. Investors can participate and protect themselves by demanding full disclosure including a thorough audit of compliance, risks and the costs of failing to manage them. Short of this, diligent research on outstanding compliance issues can be fruitful, as many public interest groups make this information available. Until Canadian securities regulators start enforcing disclosure requirements to protect investors, the lesson for them is most certainly “buyer beware.”
 
 

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