ESG disclosure putting US, Canadian oil firms at a disadvantage: Alberta Premier

Publicly traded oil and natural gas firms in North America are at a disadvantage compared with their government-controlled counterparts in other parts of the world because they have to disclose risks posed by environmental, social, and governance (ESG) factors, according to Alberta Premier Jason Kenney.

The impacts are "very significant," Kenney told US Senator Mike Lee, Republican-Utah, at a 17 May Senate Energy and Natural Resources Committee hearing to examine the US and Canada's energy and minerals partnership.

The US is the world's top ranked oil producer with 18.88 million b/d, while Canada is ranked fourth globally with 5.4 million b/d, according to the US Energy Information Administration (EIA).

Canada is a major oil supplier to the US. In 2021, EIA said 62% of the US' 2.2 billion b/d in imports shipped from Canada, most of which Kenney said came from Alberta.

"Riskier and costlier"

Lee wanted to know whether the "ESG insanity," which has recently gripped financial markets and regulators, made oil production "riskier" and more expensive in Canada, especially from Alberta's oil sands.

Kenney testified that Alberta's oil sands are the world's third largest proven and probable reserves of crude oil, amounting to about 1.8 billion barrels.

The Senate hearing mostly focused on the challenges oil and gas producers are facing in the US and the supply shortages that are driving up gasoline prices.

It also gave committee Chairman Joe Manchin, Democrat-West Virginia, Lee, and other Republicans on the panel an opportunity to express their frustration with President Joe Biden's decision in January 2021 to revoke permits for the Keystone XL pipeline, which would have transported 830,000 b/d of crude from Alberta's oil sands to US refineries.

The leading committee Republican, US Senator John Barrasso of Wyoming, was particularly incensed when Kenney confirmed that the crude extracted from Canadian oil sands and transported via Keystone XL to the US would have been safer than transporting the same shipments via rail and trucks. Moreover, Kenney confirmed it could have replaced the "significantly more than the 670,000 barrels a day of oil ... imported from Russia in 2021."

Feeling the pinch

Kenney, whose province is also responsible for 63% of US gas imports, complained that firms in the sector are facing "prejudicial and inaccurate application of ESG principles" and having difficulty accessing reinsurance.

This, he said, is especially true when discussions involve European financial institutions, which he argued were basing their decisions on inaccurate information about the emissions profile of Canadian oil sands.

A report by S&P Global Commodity Insights, released on 1 February, reported that the carbon intensity of Canadian oil sands production fell to 69 kg per barrel (kg CO2e/b) in 2020. Since IHS Markit began tracking kg CO2e/b in 2009, the GHG intensity of oil sands production has declined by 20%.

Neither the US nor Canada as yet require disclosures from risks posed by ESG factors—particularly those posed by climate-fueled weather impacts or policy changes—from publicly traded companies, but the US Securities and Exchange Commission is expected to finalize a climate disclosure rule by the end of 2022 and begin phasing it in during 2023.

The EU's Sustainable Finance Disclosure Regulation, which came into force in March 2021, requires financial institutions to identify and disclose how they are prioritizing adverse sustainable impacts. The bloc's more detailed reporting requirements have been pushed back to January 2023.

Pulling away from oil sands

Major financial institutions and institutional investors in the US and Canada, however, are voluntarily disclosing that information about their lending portfolios. New York-based American International Group (AIG) announced in March it would no longer underwrite or invest in new oil and gas exploration activities in the Arctic or the oil sands.

AIG's announcement came after similar commitments from AIG's European counterparts, such as the RSA Insurance Group and the Pension Insurance Corporation in UK, Zurich Insurance Group in Switzerland, and AXA and Natixis in France, according to the Institute of Energy Economics and Financial Analysis, which tracks oil and gas divestments.

Moreover, Kenney observed that North American oil and gas firms are publicly traded, and expected to disclose ESG risks, including those posed by climate change. In comparison, largely state-owned oil and gas firms from the remainder of the top 10 oil producing nations in the world are not subject to the same stringent ESG criteria.

"So, if the financial markets strangle publicly traded firms, all it will do is shift production to some of the world's worst regimes and their state-owned enterprises that are not subject to market conditions." Kenney added.

Kenney said he found it bizarre that "we had European banks say to us they will pull out of Canadian oil sands, while they are participated in the [Initial Public Offering] for Saudi Aramco, … and continues to finance Gazprom and Lukoil in Vladimir Putin's Russia, and they are not held to account for financing dictators that fuel violence."

Posted 17 May 2022 by Amena Saiyid, Senior Climate and Energy Research Analyst

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.