Investors need improved disclosure regarding management of Indigenous Rights
With the recent United States Department of the Army denial of an easement that would allow the proposed Dakota Access Pipeline to cross under Lake Oahe in North Dakota, the fate of this $3.8 billion project now faces unprecedented uncertainty. As financial backers of the project are left wondering the fate of their investment, the need for standardized disclosure by companies of their management of indigenous rights has never been more urgently needed by the market.
An Oil Boom and an Indigenous Rights Bust
In the first decade of the 21st century, sustained high oil prices led to a boom in unconventional energy production – both from the oil sands in Canada as well as shale production in the United States. Information from the Energy Information Administration shows that total production from the Bakken shale region in North Dakota averaged about 138,000 barrels per day in 2007. At its peak in December of 2014, output from the Bakken region reached 1.26 million barrels, an almost tenfold increase. In Canada, data from the National Energy Board showed an increase in production of heavy oil, primarily associated with oil sands production, from approximately 835,000 million barrels per day in 2000 to 1.88 million barrels in 2016.
This boom in energy production created significant demand for transportation infrastructure to move these products to existing markets – whether to domestic refineries or to marine terminals for sales internationally. To meet this demand, several pipeline projects were proposed, including Keystone XL, Northern Gateway, Energy East, and Dakota Access. Although each of these projects had associated economic, regulatory, and/or political concerns, all of them have two things in common: first, that concerns were raised by indigenous peoples regarding impacts of these projects, and second, that none of them are currently operating. At a combined value of approximately $24 billion US, these yet-to-be-realized projects exemplify the potential magnitude of investor exposure to midstream companies that fail to properly account for indigenous rights.
An Industry in Search of Sustainable Solutions
With the production boom came significant demand for crude oil transportation infrastructure, and the industry responded by pursuing any and all options available to it – including transportation by pipeline, rail, and road.
A significant portion of production from the Bakken region has relied on rail transportation infrastructure to reach existing markets. This alternative has been fraught with incidents, with over 30 derailments involving cars carrying crude oil since 2013. The most serious of these derailments was that which occurred on July 6, 2013, when a 74-car freight train carrying Bakken Formation crude oil derailed in the town of Lac-Mégantic, Quebec, killing 47 people.
Studies, including those performed by the Energy Information Administration and the Fraser Institute, suggest that rail incidents occur at a higher rate than for pipelines. At the same time, data from the Pipeline and Hazardous Materials Safety Administration shows that the volumes associated with pipeline spills can be much larger than those associated with rail incidents.
Considering the complicated risks facing Midstream projects, the need for standardized disclosure of material environmental, social, and governance issues across midstream projects – pipeline, rail, or road – has never been more important for the industry.
Investors Need Standardized Disclosure
For investors, the recent events surrounding the Dakota Access Pipeline have made it clear that indigenous rights can represent a material risk to the financial performance of midstream companies. But how can companies in the industry be differentiated with respect to their management of this risk?
SASB analysis of the regulatory filings made by ten midstream companies worth a combined market capitalization of approximately $190 billion revealed that disclosure of risk factors related to the management of indigenous rights is lacking, with only two of the ten companies including a discussion of this risk in their filings:
The emergence of indigenous rights as a topic that is likely to have material financial impacts for companies in the Oil and Gas – Midstream industry exemplifies the dynamism of sustainability reporting. Currently, SASB’s provisional standard for the Midstream industry does not include a topic related to the management of indigenous rights. However, recent events such as those that occurred surrounding the Dakota Access Pipeline have emphasized the need to consider this issue for inclusion in future revisions of the standard.
As such, SASB has proposed adding the Management of Indigenous Rights to the Midstream Standard, and has specifically added a metric recommending disclosure of the miles of pipeline in the design and construction that pass in or near indigenous lands, as well as a discussion of a company’s management process for addressing indigenous rights.
With just 1,100 feet remaining to be built of the almost 1,200-mile pipeline that was expected to bring in more than a billion dollars in revenue, the need for clear, comparable, and transparent disclosure of indigenous rights management has never been more important.
David Parham is SASB’s Non-Renewable Resources sector analyst. Please follow @SASB_NonRenew for regular updates on sustainability topics for the Non-Renewable Resources sector.