Impact Benefit Agreements in a Falling Commodity Price Environment
The cash flow squeeze brought on by falling oil prices can create a conundrum for companies that have entered into Aboriginal Impact Benefit Agreements (IBAs) with local communities.
Fortunately, everyone is well aware that oil & gas is a cyclical business, so negative circumstances like falling oil prices are dealt with up front. Indeed, many obligations in IBAs are conditional on regulatory approvals and require corporate ratification when those approvals are received. IBAs also tend to give companies the right to reconsider the economics to determine whether they are still viable with the passage of time. The precise terms, of course, vary from project to project, but most IBAs have a fair bit of flexibility built into them.
Agreements should also provide for what happens where operations have begun but need to be scaled back or even shut down. The parties may agree that in the event of a temporary dip in prices, the agreements will remain intact but payments will be suspended for a stipulated time.
Things can be different, however, when it comes to other types of obligations. It’s quite common, for example, for responsibilities like environmental monitoring and community investments like building or completing the hockey arena to continue. The trade-off in many cases has First Nations showing flexibility if oil prices drop so long as the company agrees to fulfill its long-term relationship commitments. Short of mothballing the project, it seems, there is a negotiated expectation that the company will stay involved in the community.
Indeed, the public relations side is very important because a developer doesn’t want to destroy the relationships it has built with a community. Even if a company is no longer planning to mine the property itself, it may want to maintain its value—of which the relationships with the community are an important part—for a potential sale.
Oil & gas companies also have to be mindful of the lending community, which is evidencing a growing sensitivity to the risks associated with corporate–community conflicts. That sensitivity, as it turns out, appears to be grounded in hard economic reality: a recent study from the Harvard Kennedy School estimates that delay, including delay at the exploration stage, can add US$20 million weekly to the costs of a major mining project with capital expenditures of US$3–5 billion.
Sole-Sourcing Does Not Offend the Competition Act
In a significant vindication of oil & gas industry practice, the Alberta Court of Appeal ruled that Husky Oil Operations Ltd. and ExxonMobil Canada Ltd. did not offend the Competition Act by entering into a joint sole-sourcing agreement to reduce their fuel hauling costs.
Competitors in the industry commonly resort to joint purchasing agreements of this kind. The Court concluded that where such agreements are aimed at increasing efficiencies and reducing costs, they are not properly the target of anti-competition laws. The decision appears to recognize that cooperation is an important aspect of oil & gas development in Alberta and, as such, legitimate joint venture activity by oil & gas industry participants will not be treated as anti-competitive when the activity is directed toward a legitimate business purpose.
The decision came in the context of a civil claim brought by a local fuel hauler, Kolt, alleging a breach of a pre-2010 version of section 45 of the Competition Act. The section created a criminal offence when two or more persons agreed to unduly prevent or lessen competition in the “production, manufacture, purchase, sale or supply of a product.” Kolt and another fuel hauler, Cardusky Trucking, operating in the same area, were approached by Husky and ExxonMobil, who were seeking a sole-sourcing agreement to reduce their fuel hauling costs. Husky and Mobil had previously divided their hauling requirements between the two companies. After evaluating both companies on a number of criteria, however, the oil giants awarded the contract to Cardusky.
Kolt shut down its operations and sued. The trial judge concluded that Husky and Mobil had “enormous degrees of market power” over fuel haulers in the region and that there were significant barriers to entry in the fuel hauling market. The sole-sourcing agreement, therefore, not only resulted in an undue lessening of competition but also effectively forced the closure of Kolt’s business. The judge awarded Kolt $5 million in compensatory damages and $1 million in punitive damages.
The Court of Appeal overturned the award, ruling that the trial judge had erred by holding that the sole-sourcing agreement “unduly” lessened competition. The “undue” requirement, the Court ruled, was there to ensure that parties had a fair opportunity to compete for business, and not to prohibit rationalization of operations and reduction of unnecessary costs. As the Court of Appeal saw it, the trial judge overlooked the fact that Kolt had an opportunity to bid on the contract. The court also noted that the oil companies made no attempt to reduce the haulers’ profit margins, the prices they charged, or the volume of work that would be available. The result, the court concluded, would have been the same if Husky and ExxonMobil supplied their own hauling services.
Although the decision arose in the context of an earlier version of the criminal conspiracy provisions of the Competition Act, it has quieted industry concerns over joint purchasing practices. Not only did the Court of Appeal right a troubling result from the lower court, lawyers note, it also commented that this type of conduct would not be caught under the current provisions of the legislation.