ESG risk mitigation in Canadas Oil Sands

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ESG risk mitigation in Canadas Oil
Sands Michelle de Cordova Manager,
Sustainability Research September 2008
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Canadian context
Toronto Stock Exchange Source SP/TSX Composite
Fact Sheet Information date December 31, 2007
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Our recent work on Oil Sands

• Ongoing ESG evaluation and engagement
• Research on oil gas company carbon risk
• Head in the Oil Sands report
  https//www.ethicalfunds.com/SiteCollectionDocumen
  ts/docs/Head_in_the_Oil_Sands_Final.pdf
• Work with banks on climate-related credit risk -
• Credit Risk, Biodiversity and Climate Change
  report https//www.ethicalfunds.com/SiteCollection
  Documents/docs/bankreport.pdf
• Alberta oil sands consultations position tighten
  regulations, no new approvals without strategic
  land use planning

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Why more focus on Oil Sands?

• Increasing exposure
• More companies involved
• Companies have more projects
• Slow progress on regulation
• Complex of potential ESG risks
• Evidence of gaps in companies risk mitigation
• Potential solutions for some risks?

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Why the rush into Oil Sands?

• Economics of oil sands production improved
• Pro-development, laissez-faire provincial
  government
• Shrinking conventional oil reserves, located in
  unstable regions
• Recognition of Canadian oil sands reserves

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Wheres the oil going?

• 2004 Canada becomes No. 1 supplier to US
• 2007 Canada provides 18 of US imports

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Understanding Oil Sands

• Types of project (relevant for engagement)
• Mining
• In situ
• Upgrading
• Different investment profile to conventional oil
• Easy to find
• High capital costs to develop a project
• Long investment horizon
• When youre in, youre in

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Whos in - and how far?
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Whats the impact?

• First Nations traditional territory
• Air pollution (NOx, SO2, VOCs, particulates)
• GHG emissions
• Water use Athabasca River (mining)
• Tailings pollution (mining)
• Boreal ecosystem disturbance

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Litigious risk

• Challenges to project approvals
• Litigation on health/environmental impacts
• First Nations litigation
• Constitutional rights, supported by highest
  courts
• Unfamiliar for US/International OG companies

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Asset retirement obligations

• OSC concerns disclosure weakness
• Reclamation to equivalent land capability
• Are current reclamation bonds adequate?
• Is reclamation possible?
• Boreal wetlands
• Tailings

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Regulatory risk

• Water use
• Revised water regime for Athabasca River
• Tailings management
• Draft tailings directive
• Carbon pricing
• (Weak) Alberta/Canada intensity-based regime
  future?
• US regulatory demand risk Low Carbon Fuel
  Standards

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Social license

• Attitudes of Albertans and Canadians
• Environment
• Oil sands development
• Growing reputational risk - negative media

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Emerging solutions?

• Standards for engagement with First Nations
• Free Prior and Informed Consent (FPIC)
• Impact and Benefit Agreements (IBA)
• Air pollution mitigation - best available
  technologies
• Water storage (mining)
• Dry tailings (mining)
• GHG emissions mitigation carbon neutrality
• In situ extraction techniques with lower energy
  requirements
• Carbon offsets
• Carbon capture storage
• Biodiversity impact mitigation biodiversity
  neutrality
• Accelerated reclamation keeping pace with
  disturbance
• Biodiversity offsets

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Strategy and cumulative impacts

• Overarching problem pace and scale of oil sands
  development
• Wiping out per barrel improvements
• Outrunning mitigation capacity
• Driving up costs (environmental, social,
  economic)
• Universal owner perspective
• Corporate leadership also needed on strategy and
  cumulative impact issues
• Slow it down, clean it up

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What next?

• Formulating questions for engagement
• New report - our investor response to oil sands
  (publication in late October)
• Strategy session with other investors
• Contacts at The Ethical Funds Company
• Amanda Carr - Manager, Shareholder Action
• acarr_at_ethicalfunds.com
• Michelle de Cordova - Manager, Sustainability
  Research
• mdecordova_at_ethicalfunds.com