Editor’s note: This is an excerpt from the 2024 Top Operators Report, brought to you by KPMG in Canada & geoLOGIC systems ltd. Download a free copy of the full report here.

Geopolitical uncertainty resulting from the Ukraine war and its impact on oil and gas supply and prices dominated industry discussions in 2022, with energy security and affordability concerns coming to the forefront.

In late 2023 the conflict in the Middle East broke out, adding to global instability.

But risk management also became more local in 2023, with wildfires interrupting operations in Alberta and drought in northeast B.C. limiting water supplies.

New federal and provincial regulatory and political risks were layered on top of the existing logjam, adding more uncertainty and roadblocks to raising capital and getting projects built.

All added to pricing volatility, making already challenging market risks more difficult to manage.

In short, the risk management landscape for Canada’s oil and gas operators became more crowded in 2023, and that trend will continue.

“When you consider global instability, volatile government policy, increased and very considerable physical risks, the energy transition, decarbonization and couple that with the ongoing risks the energy industry has faced and continues to face like HSE, spills, abandonment and reclamation and commodity pricing the enterprise risk matrix has an increased number of “top 10” risks,” said Heather Steinley, Partner, Audit, KPMG in Canada.

With risks proliferating, having a corporate culture where risk is identified, understood, and managed throughout the organization is paramount.

“We cannot eliminate risk. Now more than ever, we are facing increased and more complex risk factors we need the entire organization to manage. Strong oversight from senior leadership and those charged with governance is crucial.”

Physical risks coming to forefront

While price and market risk are omnipresent, physical risks like wildfires or drought are a challenge to manage. In the spring of 2023 wildfires in northwest Alberta affected multiple operators and infrastructure companies, resulting in production coming off-line.

Concerns about drought this spring had operators updating water management plans. And a summer heat wave is once again fanning the flames with some production put at risk in the oilsands region and the northwest.

Managing these non-financial risks that could have major financial impacts requires integrating ESG across corporate structures, said Atin Prakash, Partner, ESG and Sustainability Reporting, KPMG in Canada.

“The ESG goals and focus of the entity needs to be woven into the overall strategy and risk management framework. ESG is not a document or process that lives on the side or in another silo; it is part of the overall fabric of the entity, its operations, and its strategic priorities.”

Dynamic risk assessment processes and controls across functions is key. Companies often have pockets or areas with strong risk management frameworks such as safety and operational excellence that can be leveraged to create a more dynamic risk culture throughout the organization, said Prakash.

“In short, the risk matrix needs to be a living part of the culture that permeates throughout the organization.”

Political risks proliferating

Evolving provincial and federal policies — mostly targeted at emissions reductions — are also layering on risk. Influencing decision makers has become imperative to get policies in place that allow the industry to remain competitive.

“This is tricky as governments are often influenced by the loudest voice regardless of if that voice understands the dynamics and complex interplays of the situation. We have seen this with energy transition and energy policies,” said Conor Chell, National ESG Legal Risk and Disclosure Leader, KPMG in Canada.

The industry needs to continue to be a strong voice and get the message heard by as many as possible as often as possible, he added.

“What is the message? The world continues to need carbon-based energy. The Canadian energy sector is committed to decarbonization and will continue to produce the energy the world needs today whilst driving down carbon intensity.”

Bill C-59 changes add new layer of risk

The recent anti-greenwashing amendments to the Competition Act (Bill C-59) add a new layer of ESG risk from a legal liability perspective, said Chell.

The key changes require that companies who make public claims about the social or environmental benefits of their products (e.g., low-carbon fuels) or their business itself (e.g. net-zero or carbon-neutral claims), substantiate those claims in accordance with an “adequate and proper test” in the case of a product claim, or by using an “internationally recognized methodology” in the case of a business interest claim.

Failing to do so can result in significant penalties of up to $10 million, three times the value of the benefit derived from the claim, or three per cent of the gross global annual revenue of a company (whichever is greater).

C-59 also introduces a “private right of action” where members of the public can utilize the Competition Bureau’s process to advance complaints against greenwashing.

“The energy industry has done a lot of good work on the environmental and social fronts over the past number of years. It is important to continue that work and progress,” said Chell.

“At the same time, Bill C-59 has created a significant shift in the reporting and legal liability landscape. Going forward, as important as it will be for the good work to continue, it will be equally important to ensure that companies are thoroughly assessing and substantiating their environmental and social claims, so they can withstand the additional scrutiny that is now required.”

To learn more about the increasing market and non-market risks facing Canadian oil and gas operators download your free copy of the 2024 Top Operators Report here.