Planning for market cycles

In under a generation, social licence commitments have moved from a nice-to-have community relations to a regulatory necessity.

In fact, social licence commitments today aim to ensure communities and stakeholders affected by resource extraction projects support industrial projects and, like it or not, that support often comes at a cost, usually in the form of contracts, training, jobs and monetary payments. 

In a time of low or falling commodity prices, some may question the value and use of such commitments. This is a short-term view that overlooks the value of obtaining social licence for industrial projects, and this view may be a product of poor contractual commitments that didn’t plan for down-cycle risks.

Commitments related to obtaining social licence come primarily in two forms: first, commitments required by regulators to monitor and address environmental and socio-economic impacts and, second, contractual commitments that companies make to First Nations, municipalities and other stakeholders.

The regulatory regime and process will largely determine the regulatory commitments required, but contractual commitments to stakeholders can take any form that is agreeable to both the company and the parties affected by its project. 

When it comes to First Nations, these two parallel streams meet.

In 2004, Haida confirmed that the Crown must consult First Nations regarding Crown decisions that could affect their asserted or proven rights. By ensuring that First Nations play a crucial role in the project approval process, Haida also ensured that First Nations had significant leverage when negotiating social licence agreements, sometimes called Impact Benefit Agreements with industry. 

First Nations’ opposition in the project approval process can create substantial uncertainty, delay and cost. Agreements with First Nations can create regulatory certainty, but also protect industry from potentially costly payments for interference with aboriginal rights and title.

The Supreme Court of Canada’s 2014 Tsilhqot’in decision confirmed aboriginal title includes the right to benefit economically from the land. The Supreme Court also confirmed that if First Nations holds title consent must be obtained.

While old case law suggests that industry should not bear the cost for infringement of aboriginal title, the courts have not ruled directly on this issue and that old case law may not insulate industry from liability. 

More recently, the B.C. Court of Appeal, in Saik’uz First Nation and Stellat’en First Nation v. Rio Tinto Alcan Inc. held that aboriginal groups could sue a company for nuisance and breach of aboriginal rights, even though the group’s aboriginal title had not yet been proven. 

While it is prudent for companies to pursue benefits agreements with First Nations to obtain regulatory certainty and protection from future liability, some terms of social licence agreements can be imprudent. The key is reaching an agreement that both parties can live with throughout all phases of the market cycle. The challenge in achieving this is that First Nations and industry often perceive, and plan for, risk differently.

First Nations, as governments, want assured streams of payments so that they can make community program commitments. While some First Nations may see themselves as commercial partners in the project, few have an appetite for taking on the commercial risk a true commercial partner would have. Compounding this difficulty is the perception held by many First Nations that social licence agreements are to provide benefits for impacts caused by the project. From the First Nation’s point of view, most of those impacts materialize on construction and are not contingent on production.

This doesn’t mean that the gap in expectations can’t be bridged but it takes time, and the results may vary from community to community. 

First Nations have become increasingly sophisticated in their commercial interests. Some may accept a stream of payments over the project’s lifespan that is tied to production in a manner akin to a royalty payment. This type of arrangement would usually be accompanied by substantial upfront payments tied to project construction. 

Where a First Nation insists on fixed annual payments over the project’s lifespan, the company should ensure that those payments will be economically viable for all phases of the market cycle, or can be suspended if production falls below a certain level, is suspended temporarily or terminated if the project is shut down. 

Social licence agreements, and agreements with First Nations in particular, are here to stay. They are now a reality in the resource sector. They ensure that the communities most affected by industrial development share in its economic benefits.

For industry, they are now a cost of doing business that must be managed, planned for and very carefully negotiated. 

Sean Jones is an associate in Borden Ladner Gervais’ Environmental Municipal, Expropriation and Regulatory Group and practices out of its Vancouver office.