canadian oil sands - investor expectations for improving environmental social performance

7/31/2019 Canadian Oil Sands - Investor Expectations for Improving Environmental Social Performance

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INVESTOR EXPECTATIONS

for Improving Environmentaland Social Performancein Canadian Oil SandsDevelopment

October 22, 2012


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1 International Energy Agency, World Energy Outlook 2011

2 Canadas Oil Sands Innovation Alliance (COSIA), Our Charter

Investor Expectations for Improving Environmental and Social Performance in Canadian Oil Sands Development

Investor Expectations for

Iproving Environental and

Social Perforance in Canadian

Oil Sands DevelopentOctober 22, 2012

We are a group of 49 investors, representing $2 trillion in assets under management,

with holdings in companies that operate in Canadas oil sands. We recognize the

economic signicance of the resource, but are concerned that the current approach

to development, particularly the management of the environmental and social

impacts, threatens the long-term viability of the oil sands as an investment.

Controversy about the environmental and social impacts of oil sands development is

escalating and recent developments raise concern about the associated nancial risks.

These developments include the US delay of the Keystone XL pipeline, Canadas delay

of the Northern Gateway pipeline and the reversal of the Line 9 pipeline, the high-

carbon classication of oil-sands-derived fuel in Californias Low Carbon Fuel Standard

and the EU Fuel Quality Directive, the announced goals of several major companies to

reduce their use of oil-sands-derived fuel, and lawsuits by Canadian First Nations. This

controversy creates unwelcome uncertainty for investors and could potentially limit the

growth of oil sands development, according to the International Energy Agency. 1

While we recognize and appreciate the leadership that a number of companies in

the sector have demonstrated, the collective nature of the risks facing the industry

requires collective action. As a result, we were encouraged by the announcement

earlier this year of the formation of Canadas Oil Sands Innovation Alliance (COSIA).

We are supportive of COSIAs goal to accelerate the pace and scope of environmental

innovation to put the oil sands on a more sustainable path, as well as its focus on

transparency and accountability.2

We believe that COSIAs effectiveness will be greatly enhanced by setting specic

goals for improving environmental and social performance along with detailed plans

for achieving them. We also believe that these goals will have greater legitimacy if

stakeholder input is incorporated throughout the process.

Below, we outline the performance improvements we believe are needed in the areas we

see as posing the most material risks: greenhouse gas emissions, water withdrawals and

freshwater contamination, land disturbance and reclamation, and responsibilities to First

Nations, Mtis, and Inuit communities. We believe these performance improvements

should be prioritized ahead of unmitigated growth ambitions for oil sands development.

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We believe that COSIAseffectiveness will begreatly enhanced by settingspecic goals for improvingenvironmental and socialperformance along with

detailed plans for achievingthem.


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3 U.S. Department of State, Final Environmental Impact Statement for the Keystone XL Project, August 26, 2011

4 Canadian Association Petroleum Producers, 2010 Report: How We Are Doing

5 Pembina Institute, Drilling Deeper: The In Situ Oilsands Report Card, March 2010

6 Environment Canada, Canadas Emissions Trends, July 2011

7 Op. Cit. Environment Canada

8 Pembina Institute, responsible action? an assessment of albertas greenhouse gas policies, December 2011

Investor Expectations for Improving Environmental and Social Performance in Canadian Oil Sands DevelopmentGHG

Greenhouse Gas Eissions

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Oil sands production is more greenhouse gas (GHG) intensive than conventional oil(average oil rened in the U.S.) and fuels derived from oil sands are more GHG intensive

than fuels derived from conventional oil on a lifecycle basis.3 The oil sands industry made

considerable progress in reducing its GHG intensity from 1990 to 2004, but the trend

attened from 2004 to 2009 and has reversed since 2010,4 due to the relative increase

of in situ production, which is 2.5 times more GHG intensive than mining production.5

This emissions trend is concerning because the market for oil sands-derived fuel may

be limited where policies are being adopted to reduce the GHG intensity of fuel, such as

in California and the European Union. In addition, oil sands development is the fastest

growing industrial source of GHG emissions in Canada, projected to approximately double

by 2020.6 This emissions growth presents a considerable challenge to Canada in meeting

its national GHG emissions reduction targets under the Copenhagen Accord. Existing

measures announced by federal and provincial governments will reduce GHG emissionsby 65 Mt, which is only one quarter of the 243 Mt needed by 2020. 7

We are encouraged that the Alberta government has set GHG emissions reduction

targets and implemented a plan to achieve them through the Specied Gas Emitters

Regulation (SGER), carbon capture and storage (CCS) initiatives, and renewable

energy incentives. However, these efforts have limitations and Alberta appears unlikely

to achieve its 2020 GHG emissions reduction target if oil sands production grows as

projected.8 Although the SGER sets a GHG intensity reduction target and puts a price

on emissions, the price is low enough that compliance by oil sands operations occurs

primarily through payments into the Climate Change and Emissions Management Fund

(CCEMF) and purchases of offset credits instead of actual reductions in GHG intensity.

In addition, Albertas GHG emissions reduction plan relies heavily on CCS, which is notyet technologically or economically viable for oil sands projects. Albertas emissions

reduction targets will also likely need to be more ambitious for Canada to achieve its

national targets agreed to under the Copenhagen Accord.

Oil sands development isthe fastest growing industrialsource of GHG emissionsin Canada, projected toapproximately doubleby 2020.6


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9 Canadian Association of Petroleum Producers, Water Use in Canadas Oil Sands, July 2011

10 Water Monitoring Data Review Committee, Evaluation of Four Reports on Contamination of the Athabasca River System by Oil Sands

Operations, March 7, 2011

11 Government of Alberta, Albertas Oil Sands Provincial Action, December 17, 2010

Investor Expectations for Improving Environmental and Social Performance in Canadian Oil Sands DevelopmentWATER

WE REQUEST THAT OIL SANDS COMPANIES:Q Set goals and timelines for reducing the GHG intensity of oil sands production

to at least that of conventional oil production, including complying with the SGER

entirely by reducing actual operational GHG intensity, rather than through

payments into the CCEMF or purchases of offset credits;

Q Provide disclosure on research and development efforts to reduce GHG intensity,including estimates on the likelihood of success relative to designated targets

and timelines;

Q Invest in renewable energy;

Q Support the Alberta government in strengthening its efforts, including setting a carbon

price sufcient to drive economy-wide emissions reductions, increasing investment

in research and development for technologies that have the promise to signicantly

reduce emissions, and increasing investment in renewable energy; and

Q Support the Canadian government in implementing a national energy strategy

that includes a carbon price capable of achieving Canadas emissions reduction

targets under the Copenhagen Accord.

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There remain a number of unresolved concerns around the impacts of the oil sands

on fresh water, particularly the sustainability of surface and groundwater withdrawals

as well as the potential release of contaminants into aquatic environments from oil

sands operations. Water withdrawals for mining and in situ production are projected

to increase substantially as new oil sands projects come online,9 and tailings ponds

from mining production are projected to grow 30% between 2010 and 2020, from

843 million cubic meters (m3) to 1.1 billion m3. A recent assessment by the Water

Monitoring Data Review Committee, convened by the Alberta government, concludedthat, despite claims to the contrary, [polycyclic aromatic compounds] and trace

metals are being introduced into the environment by oil sands operations.10 Even

though most growth in oil sands development will come from in situ production,

which uses primarily fresh and saline groundwater and does not create tailings

ponds, the effects on fresh groundwater are only beginning to be assessed.11

A recent assessment bythe Water Monitoring DataReview Committee, convenedby the Alberta government,concluded that, despiteclaims to the contrary,

[polycyclic aromaticcompounds] and tracemetals are being introducedinto the environment by oilsands operations.10

Water Withdrawals

and Freshwater Containation


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12 Op. cit. Pembina Institute

13 Energy Resources Conservation Board, Directive 047, February 3, 2009

14 Op. cit. Pembina Institute

15 Alberta Environment Reporting Panel, A World Class Environmental Monitoring, Evaluation and Reporting System for Alberta, June 2011

16 Alberta Environment, Draft Lower Athabasca Regional Plan

Investor Expectations for Improving Environmental and Social Performance in Canadian Oil Sands DevelopmentWATER

The Royal Society of Canada concluded that water withdrawals for mining production

do not threaten the viability of the Athabasca River if the rivers water management

framework is fully implemented and enforced. This is encouraging. However, we

are concerned that the current voluntary approach lacks enforcement mechanisms

to ensure that the framework is actually followed. We also note that there is no

consensus on what constitutes an Ecosystem Base Flow (EBF),12 a critical gap. In

addition, Directive 74 of the Energy Resources Conservation Board (ERCB) requirestailings management,13 but full compliance is not mandatory, only two of nine mining

projects have plans that fully meet its requirements, and the annual performance

and compliance reports for many of the companies are not available online.14 We are

encouraged that the Alberta government is addressing concerns about surface and

groundwater withdrawals and freshwater contamination by creating a world-class

environmental monitoring system15 and the proposed Lower Athabasca Regional

Plan (LARP).16 However, we are skeptical about whether these concerns can be

adequately resolved while oil sands development continues on its present trajectory.

WE REQUEST THAT OIL SANDS COMPANIES:Q Set goals and timelines for minimizing surface and groundwater withdrawals and

maximizing water recycling for mining and in situ projects;

Q Provide disclosure on research and development efforts to minimize water

withdrawals and maximize water recycling, including estimates on the likelihood

of success relative to the designated goals and timelines;

Q Limit water withdrawals from the Athabasca River to ensure it maintains an

Ecosystem Base Flow and limit groundwater withdrawals to a sustainable yield,

both determined by an independent, long-term, and science-based assessment

of habitat and water quantity and surface-groundwater interactions;

Q Submit and follow tailings management plans, performance, and compliance

reports in full accordance with Directive 74; and

Q Support the Alberta government in fully implementing and enforcing the water

management framework, ensuring that the new monitoring system incorporates

all the recommendations of the Alberta Environment Monitoring Panel, and

ensuring that the LARP fully addresses the cumulative impacts associated

with surface and groundwater withdrawals and water contamination from mining

and in situ production.

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We are concerned that thecurrent voluntary approachlacks enforcementmechanisms to ensure thatthe framework is actuallyfollowed. We also notethat there is no consensuson what constitutes anEcosystem Base Flow (EBF),12

a critical gap.


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17 Royal Society of Canada, Environmental and Health Impacts of Canadas Oil Sands Industry, December, 2010

18 Op. Cit. Canadian Association of Petroleum Producers

19 Op. Cit. Royal Society of Canada

20 Pembina Institute and Ceres, Full Disclosure, June 9, 2011

21 Op Cit. Pembina Institute and Ceres

22 Rooney, R.C., S.E. Bayley, and D.W. Schindler, Oil sands mining and reclamation cause massive loss of peatland and stored carbon,

March 12, 2012

Investor Expectations for Improving Environmental and Social Performance in Canadian Oil Sands DevelopmentLAND 6|

The Alberta Environmental Protection and Enhancement Act requires land reclamation

for all oil sands projects,17 but the pace and scale of land disturbance raises substantial

concerns about how compliance will be achieved. The total active footprint of oil sands

mining increased 8% from 2009 to 2010, from 67,613 hectares to 71,497 hectares,

while the area under reclamation only increased 0.3% to 7,542 hectares. Only 104

hectares0.13% of the total footprinthave been awarded reclamation certication

and the active footprint is expected to increase as new mining projects become

operational. The number of active in situ wells increased 9% from 2009 to 2010, from

9,405 to 10,229 wells. While the number of wells awarded reclamation certication

tripled to 115, this was primarily an indication of increased drilling activity because

exploration wells are often drilled and abandoned in the same season.18

The Auditor General has expressed concern that the Alberta government is notobtaining sufcient nancial security for reclamation liability for mining projects,

leaving Albertans and potentially investors vulnerable to major nancial risks.19 In

particular, disclosure by oil sands companies of reclamation costs has been poor.20

Unaccounted liabilities for oil sands mines were up to $15 billion in 2008 and could

reach up to $33 billion by 2025.21 The rate of reclamation has not kept pace with

the rate of land disturbance and it is unlikely that this trend will reverse as oil sands

production grows. Additionally, while the land disturbance for in situ projects is

more diffuse than for mining projects, the scale of the impact may be similar if the

landscape fragmentation caused by ancillary developments, such as natural gas

pipelines, is taken into account. The impacts of the land disturbance for oil sands

development on biodiversity and ecosystem function are considerable, but have not

been rigorously assessed.22

Disclosure by oil sandscompanies of reclamationcosts has been poor.20

Unaccounted liabilities foroil sands mines were up to$15 billion in 2008 andcould reach up to $33 billionby 2025.21

Land Disturbance

and Reclaation


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23 Ceres, Canadas Oil Sands Shrinking Window of Opportunity, May 2010

Investor Expectations for Improving Environmental and Social Performance in Canadian Oil Sands DevelopmentFIRST NATIONS

WE REQUEST THAT OIL SANDS COMPANIES:Q Set goals and timelines for reducing the rate of land disturbance from oil sands

development and increasing the rate of land reclamation relative to the rate of

land disturbance;

Q Provide disclosure of oil sands reclamation liabilities, disaggregated from total

liabilities, and of research and development efforts to reduce the rate of landdisturbance and increase the rate of land reclamation, including estimates on the

likelihood of success relative to the designated goals and timelines;

Q Establish wetlands and biodiversity offsets for the remaining land disturbance that

does occur and that can not be mitigated through other measures; and

Q Support the Alberta government in limiting the maximum amount of land available

for oil sands development at any time and obtaining sufcient nancial security

for reclamation from oil sands companies.

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Increasingly, First Nations, Mtis, and Inuit communities are expressing concern

about the impacts of oil sands development on their health and livelihoods, and

asserting that these impacts infringe on their treaty rights. First Nation treaties with

the Canadian government date back to 1876 and are recognized by the Canadian

Constitution, which requires national and provincial governments to consult and

accommodate the rights of First Nations. In 2008, 44 First Nations passed a

resolution for a moratorium on new oil sands projects until comprehensive land

management has been done. In 2010, Assembly of First Nations Chief Shawn Atleo

elevated their concerns about oil sands development to the national level.Additionally, the number of legal challenges by First Nations, Mtis, and Inuit

communities to oil sands development is growing. The risk of a court ruling in their

favor is increasing and could lead to the suspension of an oil sands project.23

The number of legalchallenges by First Nations,Mtis, and Inuit communitiesto oil sands development isgrowing. The risk of a courtruling in their favor isincreasing and could lead

to the suspension of anoil sands project.23

Responsibilities to First Nations


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24 Government of Alberta Intergovernmenta l, International and Aboriginal Relations, Working with Fort Chipewyan, September 21, 2011

Investor Expectations for Improving Environmental and Social Performance in Canadian Oil Sands DevelopmentCOmmITmENT

Considering the Water Monitoring Data Review Committees recent conclusion that oil

sands development is resulting in environmental contamination, it is critical to

immediately investigate and address any associated impacts to the health and

livelihoods of First Nations, Mtis, and Inuit communities. The Alberta government

has taken an important step by initiating a community health study in Fort

Chipewyan, where concern has been raised that elevated rates of cancer may be tied

to oil sands development.24 However, this is long overdue and will take years beforethere are conclusive results.

WE REQUEST THAT OIL SANDS COMPANIES:Q Fully incorporate the principle of Free, Prior, and Informed Consent in their

relations with First Nations, Metis, Inuit, and other communities affected by oil

sands operations; and

Q Support the Alberta government in fully incorporating the principle of Free, Prior,

and Informed Consent in all its relations with First Nations and immediately

address any impacts of oil sands development on their health and livelihoods.

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As investors in companies that operate in Canadas oil sands, we have an economic

stake in the long-term viability of the resource, and are committed to constructive

engagement to move the industry toward a more sustainable long-term trajectory.

We look forward to a dialogue with COSIA and with the companies in our portfolios on

how to best accelerate the innovations and regulatory improvements that will be

needed to address these substantial risks. The oil sands industry is now in a positionto demonstrate its commitment to addressing these risks by setting specic goals

for improving environmental and social performance along with detailed plans for

achieving them. As these goals are being determined, we will appreciate

consideration of the requests we have laid out above.

A Coitent to Constructive,

Solutions-Focused Engageent

We have an economic stakein the long-term viabilityof the resource, and arecommitted to constructiveengagement to movethe industry toward a moresustainable long-termtrajectory.


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Erik Jan StorkSenior Sustainability SpecialistAPG Asset manageent

Francois MelocheExtranancial Risk Manager

Batirente

Steven HeimManaging DirectorBoston Coon Asset manageent, LLC

Manchan SonachansinghTreasurerBritish Colubia Teachers Federation (BCTF)Salary Indenity Plan

Brian RicePortfolio ManagerCalSTRS

Paul Bugala

Senior Sustainability Analyst, Extractive IndustriesCalvert Investent manageent

Les SteelExecutive Director of OperationsCanadian Labour Congress (CLC)Staff Pension Plan

Julie TannerAssistant Director Socially Responsible InvestingChristian Brothers Investent Services

Stephen ViedermanChair, Finance CommitteeChristopher Reynolds Foundation

Ellen Friedman

Executive DirectorCopton Foundation

Thomas H. KjrgaardHead of SRI and Corporate GovernanceDanske Bank

Nam Abou-JaoudCEO & Chairman of the Executive CommitteeDexia Asset manageent

Valerie Heinonen, o.s.u.Director, Shareholder AdvocacyDoinican Sisters of Hope

Kevin LeonardExecutive Director

EJLB Foundation

Reinhilde WeidacherHead of ResearchEthix SRI Advisors

Dr. Dominique BiedermannExecutive DirectorEthos Foundation, Switzerland

Karina LitvackHead of Governance & Sustainable InvestmentF&C Asset manageent Ltd.

Steven J. SchuethPresident

First Afrative Financial Network, LLC

Anders SundstrmCEOFolksa

Mario TremblayVP Public and Corporate AffairsFonds de Solidarit FTQ

Jeffery W. PerkinsExecutive DirectorFriends Fiduciary Corporation

Barbara HeislerExecutive Director

Funding ExchangeKristina CurtisSenior Vice PresidentGreen Century Capital manageent

Helen InglesIHM, CFOIHm Sisters of monroe, michigan

Nathan GilbertExecutive DirectorLaidlaw Foundation

Ian GreenwoodChairLocal Authority Pension Fund Foru (LAPFF)

R. Dean KenderdineExecutive Directormaryland State Retireent and Pension Syste

Jenny RussellExecutive Directormerck Faily Fund

Pat ZeregaDirector of Shareholder Advocacymercy Investent Services, Inc.

Luan SteinhilberDirector of Shareholder Advocacymiller/Howard Investents, Inc.

Sasja BeslikHead of Responsible Investmentsand VD Nordea Funds SwedenNordea

Gary A. HawtonPresidentOceanRock Investents (meritas SRI Funds)

Christine GebelTreasurerOur Ladys missionaries

Julie Fox GorteSenior Vice President for Sustainable InvestingPax World manageent LLC

Matt CrossmanEthical Research & Corporate Engagement

Rathbone Greenbank Investents

Erik BreenHead of Responsible InvestingRobeco

Frank CurtissHead of Corporate GovernanceRPmI Railpen Investents

Bill BoothmanDirector of FinanceSisters of St Ann

Hans AasnsCEO

Storebrand Asset manageentMarianne NilssonActing CEOSwedbank Robur Fonder AB

John F. SwiftPresidentSwift Foundation

Thomas E. Ellington, IIShareholder Advocacy & SRI ResearchThe Sustainability Group ofLoring, Wolcott & Coolidge

Sister Patricia A. Daly, OPExecutive Director

Tri-State Coalition for Responsible InvestentJonas Kron, Esq.Vice-President, Director of ShareholderAdvocacy & Corporate EngagementTrilliu Asset manageent, LLC

Erik MathiesenTreasurerUnited Church of Canada

Valerie Heinonen, o.s.u.Director, Shareholder AdvocacyUrsuline Sisters of Tildonk

David RussellCo Head of Responsible Investment

USS

Dermot FoleyManager ESG AnalysisVancity Investent manageent

Timothy SmithSVP, Director of ESG Shareowner EngagementWalden Asset manageent

Signatories


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FOR MORE INFORMATION,CONTACT:Ryan Salmon

Manager, Oil & Gas Program, Ceres

[email protected]

Andrew Logan

Director, Oil & Gas Program, Ceres

[email protected]

ABOUT CERESCERES is an advocate for sustainability leadership. Ceres mobilizes

a powerful coalition of investors, companies and public interest groups

to accelerate and expand the adoption of sustainable business practices

and solutions to build a healthy global economy. Ceres also directs the

Investor Network on Climate Risk (INCR), a network of 100 institutional

investors with collective assets totaling more than $10 trillion.

Ceres

99 Chauncy Street

Boston, MA 02111

T: 617-247-0700

F: 617-267-5400

www.ceres.org

2012 Ceres

canadian oil sands - investor expectations for improving environmental social performance

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