In today’s low-price oil environment, securing the social license to operate can prove crucial to an oil and gas company’s bottom line. PwC’s energy executive podcast, “Protecting License to Operate,” examined the importance of managing the set of external obstacles that can prevent a company from conducting its business and practical ways operators can address these challenges.
Obstacles can range from social issues such as local community resistance to environmental issues such as water scarcity to related regulatory factors such as government requirements that if handled improperly can disqualify a company from starting or continuing operations at a specific site.
Many oil and gas companies are facing rising expectations for how they manage the results of their activity on the environment and within the communities where they operate. “Not meeting these expectations can result in costly operating disruptions,” said George Favaloro, managing director of PwC’s Sustainability Business Solutions group.
These external obstacles can be a major source of delays. “The message we want to deliver is companies that analyze and understand the broad social, environmental and economic impacts are in the best position to proactively manage this issue set and avoid operating interruptions,” Favaloro continued.
License to operate issues can cause costly delays either at the start of work or through its continuation, which can ultimately affect the bottom line and the economics of a project. “These delays are expensive, carrying both tangible costs like penalties and additional taxes, as well as opportunity costs,” said Britt Harter, manager of PwC’s sustainability business solutions. “With such a high proportion of expensive delays focused on license to operate issues, companies are starting to see these issues as strategic and are managing them more actively.”
Many recent issues have centered around hydraulic fracturing, with the most extreme cases involving the outright revoking of that license for fracturing technique in some locations. “Given the economics of extraction, banning the technique frequently creates an effective ban on oil and gas operations in that location,” Harter noted.
Harter pointed to the recent proposed ban on fracking in Santa Barbara County, which was eventually defeated. “It’s worth noting that even when oil and gas operators maintain the license to operate, as happened in Santa Barbara, Calif., it still carries significant financial costs, not to mention labor and opportunity costs. Managing these issues in an effective and strategic way is increasingly crucial to companies.”
With tight oil plays becoming more economically challenging to produce in the current low oil price environment, even slight delays to production caused by license to operate issues could add to a project’s overall expense. This added expense could be the tipping point that causes a company to back out of a play or project altogether.
PwC combined data from research and client engagements to highlight specific issues relating to shale plays and securing a license to operate. Harter noted that much of the focus centers around potential changes to the current operating model, the debate around the perception of safety and changes in the regulations governing how companies operate and how they disclose information. “Similarly, changes to the expectations about what equipment is required can change the capital structure of a project and, ultimately, its profitability, which is increasingly relevant in a low-cost oil environment,” Harter said.
Uncertainty about hydraulic fracturing’s community and environmental impacts also play a large role in securing the social right to operate. “The debate about its impacts such as local seismic activity—does it cause earthquakes—as well as its potential impact on groundwater will play a major role in influencing license to operate going forward,” Harter said. Other issues include whether companies are paying their fair share in taxes, whether operations are harming the safety of workers or members of the community and whether sensitive habitats are being disrupted.
“We see a lot of variation in how firms tackle these issues, from largely ignoring them to extensive systems and processes,” Harter continued. “Multinational integrated firms were much more active in this space than smaller firms due to increased brand recognition and the diversity of their operating skills.”
When selecting a strategy to deal with license to operate issues, just being responsive to those concerns can make all the difference. “If you’re seen as unresponsive, it can make the company more likely to be targeted and you can neither influence nor monitor effectively what’s happening,” he explained.
Taking a holistic view of negative and positive factors surrounding the core operations of a company can help in analyzing the importance of those factors. By doing so, companies can begin to form a realistic plan of action in addressing license to operate issues.
For example, if a company and stakeholders are discussing the issue of wastewater, looking at how many jobs a particular project will bring to the region could help in determining how much wastewater the community is willing to view as acceptable when economic growth is on the line.
“By considering all these things together, you can begin to understand the whole picture rather than necessarily a single issue,” said Tom Beagent, director of PwC’s sustainability and climate change division.
When companies are considering rushing drilling to hold deadline to acreage licensing contracts, there often can be friction with outside stakeholders who want to take their time debating various issues. Companies may want to realize cash flows as soon as possible, but Beagent recommends they take the time to communicate with concerned stakeholders and community members. Not doing so can actually lead to stakeholder groups responding in a way that slows down projects. In addition, by engaging with stakeholders in an honest way and acknowledging challenges that need to be addressed, companies can build their credibility.
“How would you feel if you were going into a discussion with a local community group that’s concerned about the amount of water that’s being used, and you’re showing a picture that says it’s not a problem?” Beagent said. “Actually, by putting it on the table and saying, ‘It is a problem, we recognize it’s a problem, and this is what we’re doing about it,’ [you’re going to have] a much more comfortable discussion with stakeholders.”
Contact the author, Mary Hogan, at firstname.lastname@example.org.
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