ESG Front And Centre In Canadian LNG’s Efforts To Attract Investment

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Last month, in London, U.K., an LNG event was organized on behalf of the Government of Alberta by Glacier Media (the parent company of the Daily Oil Bulletin) and the Canadian Society for Unconventional Resources (CSUR) to provide a special briefing to around 140 European energy investors and stakeholders. The DOB over the next few days is providing LNG-themed editorial coverage based on this event.

While Canada’s nascent LNG industry boasts many attractive qualities such as cheap and abundant feedstock, selling the sector’s environmental, social and governance (ESG) attributes is essential if it wants to attract increased foreign investment, attendees of the recent Canadian LNG conference held in London, U.K., heard.

Stewart Muir, executive director of the Resource Works Society, said the ever-increasing emphasis and importance investors and lenders are placing on ESG strategies and performance cannot be understated.

“Canada’s LNG — are they credible ESG players? I know that in Toronto on Bay Street, in our banks and investors in downtown Calgary, this really is an obsession now in ensuring that we can be walking the walk on ESG. Everywhere I go this seems to be central to it,” he said.

“The whole practice of ESG compliance and best practices is developing rapidly, in my opinion.”

As a whole, Muir said Canada’s energy sector is well regarded on the ESG front.

He told the London audience that Canada’s abundant energy resources exist in one of the “most stable, reliable countries in the world,” with recognized leading ESG standards, and a “well-evidenced commitment” to improve, advance and progress to do better.

“If you look at a recent statement from BMO, they cite Canada as having the top global ESG scores across the spectrum of issues they rate,” he said.

“They have stated at BMO that Canadian oil companies deliver stronger ESG scores than companies of almost all other oil producing countries or LNG producing countries in the world.”

Muir said that the Canadian energy sector and governments must strive to do a better job when it comes to spreading the word of ESG performance.

“So if you’re going to go away from here today with a sense that Canada does have its game on in regards to this, I think you can do so with considerable confidence,” he said.

“It’s a call to action for those who are in government in Canada and in industry in Canada to make sure that this is being communicated because there is a sense out there that it’s a bit wobbly – that the confidence in the ESG performance in Canada is sometimes questioned,” he said.

“Well, fair enough. It should be questioned and let’s keep the scrutiny on, but here’s the facts in it.”

Cameron Gingrich, director of strategic advisory services for HSB Solomon Associates LLC, also made the case for Canada’s LNG sector and Western Canada, saying his firm believes that “right now it’s a once in a generation time to invest there.”

“I’d say the ESG component of Canadian LNG is more sustainable on the investing and credit side of things. So, you have a lower risk on your investment going forward as you have a more sustainable value chain in terms of LNG,” he said.

“[Canada has] world class, low cost reserves. And, of course, that’s what wins the day when you talk about putting real dollars into projects, as well. So this is where the rubber meets the road … and it’s sustainable. Long term, ESG top quartile, as well,” Gingrich added.

“So when you invest over a 25-40 year time cycle for LNG, it’s important that you’re checking those boxes as you go forward. There’s a huge amount of resource in Western Canada.”

Andy Brogan, global oil and gas leader for EY, said ESG is a central component evaluated when lenders are making their financing decisions. And LNG has a leg up compared to other hydrocarbon-based industries.

“In terms of accessing financing going forward, you look at what’s changed and what hasn’t changed is there’s still going to be a requirement for a lot of bank debt. The good news is there isn’t actually any shortage of bank debt but there is now coming with it definitely a requirement to meet these [ESG] compliance targets,” he said.

“The good news is that compared to other hydrocarbon-oriented investments it’s relatively easy for LNG projects to meet banks’ requirements in terms of ESG.”

The European context

Patrick Agar, managing director, gas, at Lambert Energy Advisory Limited, said access to European capital and investment could prove vital for Canadian LNG players. But to make headway, Canadian industry must increase efforts to improve and communicate ESG performance to European capital providers.

He noted that the “European context for capital availability” for the energy sector in general, but particularly for Canadian LNG, is “very important.”

“[That’s] for the simple reason that a huge portion of the world’s mobile capital is based in Europe — it’s the second largest centre of such capital outside of North America. And what we’ve been hearing from these European companies in particular is that even within the last year — especially the rate at which GHG issues and particularly the environmental and emissions side of those issues — have ramped up in terms of importance,” he said.

“It’s gone from being an area where these companies and capital providers dabbled with ESG as a differentiating product that consumers might be interested in to being something that they need to consider across their business lines as a core element of what they do,” Agar added.

“That’s not to say that it’s completely taken over but it is becoming much more important and looks to be heading in that direction. Certainly the momentum that we’ve seen recently in Europe around those issues is heading that way.”

And European governments are even more stringent evaluators of ESG issues and performance.

“At the same time the sort of cue from the government perspective is very much being more skeptical of oil and gas investment, not just coal investment, and also putting a carbon intensity assessment into every single investment evaluation that they do.”

The Canadian context

Given the ESG sentiment in Europe, Agar offered some words of wisdom to those in the Canadian LNG industry.

“If we think about what that means in the Canadian context, one way to think about this is the scope one to three emissions criteria,” he said.

Agar explained that the Greenhouse Gas Protocol corporate standard classifies a company’s GHG emissions into three “scopes.” Scope 1 emissions are direct emissions from owned or controlled sources. Scope 2 emissions are indirect emissions from the generation of purchased energy. Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions.

“In the context of Canadian LNG one of the biggest and most critical components is probably the upstream Scope 3 emissions — the actual gas produced at the field level. And here the question is obviously not so much about Canada in isolation, but how it performs relative to other markets,” Agar said.

“So we would compare Canadian LNG projects to their nearest competitors in terms of geography, capital costs and the OECD context in which they operate. The Gulf Coast U.S. LNG projects would be the natural peer group.”

And on the LNG upstream front, Canada fares well when compared to U.S. feedstock sourced from plays like the prolific Permian in Texas.

“In this regard Canada has strong potential to move ahead of those … [U.S.] projects as the environmental record for the Permian gas developed so far has not been great on either methane leakage or a gas flaring perspective, as well as the local physical land impact,” Agar said.

“This is an area where the Montney producers can excel if they maintain their high standards in terms of their production and transportation activities feeding gas into [LNG] plants.”

Agar said that another “unique advantage’ the Canadian LNG sector has is its large hydro-based electrical system which will allow for electric drive for West Coast LNG plants.

“That’s a huge advantage on a global basis because the liquefaction process is the most energy intensive part of the LNG supply chain and is usually the reason why LNG is more carbon intensive than pipe supply,” he said.

“So in the European context that negates the disadvantages Canadian LNG would otherwise have in terms of emissions compared with pipe supply from central Asia, Russia, Norway or North Africa. So it’s an extremely valuable component to provide in that context to be at parity in terms of emissions criteria.”

Agar said Canada is also competitively positioned in terms of the downstream emissions component of the Scope 1 to 3 protocols.

“One needs to also consider the downstream emission component and try to ensure that you optimize shipping distances … but again, Canada’s geographic location on the West and East Coasts makes it a very suitable party to supply Europe from the East Coast and North Asia from the West Coast,” he said.

“Again, it’s well positioned in that regard.”

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