This is what happens to an oil company's social license obligations when profits dive

In under a generation, social licence commitments have moved from a nice-to-have community relations extra to a regulatory necessity.  Social licence commitments aim to ensure communities and stakeholders affected by resource extraction projects support industrial projects.  That support often comes at a cost, usually in the form contracts, training, jobs and monetary payments.  In a time of low or falling commodity prices, some may question the value and utility of such commitments.  This is short-term view which overlooks the value of obtaining social license for industrial projects and may often be borne out of poor contractual commitments that didn’t plan for down-cycle risks.

Commitments related to obtaining social licence come primarily in two forms: first, commitments required by regulators to monitor and address environmental and socio-economic impacts and, second, contractual commitments that companies make to First Nations, municipalities and other stakeholders.  The regulatory regime and process will largely determine the regulatory commitments required, but contractual commitments to stakeholders can take any form which is agreeable to both the company its stakeholders.

When it comes to First Nations, these two parallel streams meet.  In 2004, Haida confirmed that the Crown must consult First Nations regarding Crown decisions that could affect their asserted or proven rights.  By ensuring that First Nations play a crucial role in the project approval process, Haida also ensured that First Nations had significant leverage when negotiating social licence agreements with industry.  First Nations’ opposition in the project approval process can create substantial uncertainty, delay and costs.  Agreements with First Nations can create regulatory certainty, but also protect industry from potentially costly payments for interference with Aboriginal rights and title.  The Supreme Court of Canada’s 2014 Tsilhqot’in decision confirmed Aboriginal title including the right to benefit economically from the land.  While old case law suggests that industry should not bear the cost for infringement of Aboriginal title, the courts have not ruled directly on this issue and that old case law may not insulate industry from liability.  More recently, the BC Court of Appeal, in Saik’uz First Nation and Stellat’en First Nation v. Rio Tinto Alcan Inc. held that Aboriginal groups could sue a company for nuisance and breach of Aboriginal rights, even though Aboriginal title was unproven.

While it is prudent for companies to pursue benefits agreements with First Nations to obtain regulatory certainty and protection from future liability, some terms of social licence agreements can be imprudent.  The key is reaching an agreement that both parties can live with throughout all phases of the market cycle.  The challenge in achieving this is that First Nations and industry often perceive and plan for risk differently.  First Nations, as governments, want assured streams of payments so that they can make community program commitments.  While some First Nations may see themselves as commercial partners in the project, few have an appetite for taking on the commercial risk a true commercial partner would have.  Compounding this difficulty, is the perception held by many First Nations that social licence agreements are to provide benefits for impacts caused by the project.  From the First Nation’s point of view, most of those impacts materialize on construction and are not contingent on production.

That doesn’t mean that this gap in expectations cannot be bridged.  But it takes time and the results may vary from community to community.  First Nations have become increasingly sophisticated in their commercial interests.  Some may accept a stream of payments over the project’s lifespan that is tied to production in a manner akin to a royalty payment.  This type of arrangement would usually be accompanied by substantial up-front payments tied to project construction.  Where a First Nation insists on fixed annual payments over the project’s life span, the company should ensure that those payments will be economically viable for all phases of the market cycle or can be suspended if production falls below a certain level, is suspended temporarily or terminated if the project is closed.

Social licence agreements, and agreements with First Nations in particular, are here to stay.  They are now a reality in the resource sector.  They ensure that the communities most affected by industrial development share in the economic benefits of it.  For industry, they are now a cost of doing business that must be managed, planned for and very carefully negotiated.