The High Cost of Losing the Social License to Operate

View from Standing Rock, Dakota

By Benoit Froment, Director North America for IsoMetrix.

The Dakota Access Pipeline is becoming the new David against Goliath story. A group of Native American tribes succeeded in protecting their water supply and some sacred burial grounds by blocking and then forcing the re-route of a huge pipeline project owned by some of the biggest and most powerful North American oil companies.

About the DAPL

The Dakota Access Pipeline (DAPL) project is a 1 886 km underground crude oil pipeline designed to transport 470 000 barrels of crude oil per day through the states of North Dakota, South Dakota, Iowa and Illinois in the US.

DAPL is majority owned by Energy Transfer Partners (ETP), with shares held by Enbridge and Marathon, two major North American oil companies.

Impacts on Indigenous Communities

The Obama Administration has decided to pause its construction and launched a review of energy permits on Native American lands. This decision follows peaceful protests involving hundreds of people, most from the Standing Rock Sioux Tribe (SRST) in the state of North Dakota. Support for the blockade forced the company to stop the construction.

While the pipeline does not directly overlap with the SRST reservation, ETP has ignored standards of meaningful consultation required under US law. The pipeline impacts burial grounds and sacred sites, overlaps with the treaty territory of SRST and other tribes and crosses Lake Missouri, the tribe’s main source of drinking and irrigation water.

Social License to Operate (SLO)

There is widespread acceptance that extraction industries – including oil and gas – improve people’s lives and enable the economic growth of countries. However, at the project level, this acceptance is neither automatic nor unconditional.

The concept of a Social License to Operate (SLO) has been applied to extraction industries and has been defined as a community’s perceptions of the acceptability of a company and its local operations. Community can be very broadly defined to include stakeholders and interested parties well outside the immediate areas of operations, or any group or individual who can affect or is affected by the achievement of the organization’s objectives.

The SLO indicates that companies cannot operate sustainably without the support of society. And that license depends on trust. Companies have to be trusted to extract and transport oil and gas safely, with care for the environment and local communities.

High Cost of Losing the SLO

SLO 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. With such a high proportion of expensive delays, companies are starting to see these issues as strategic and are managing them more actively. The financial risks for companies operating without an SLO are especially significant for pipelines.

Protesters argue that the ETP website lacks policies or information on:

  • CSR, community engagement, human rights, or indigenous rights
  • Social investment
  • Sustainability reporting
  • Senior management expertise on social performance
  • Board oversight of social performance

The tribe has real concerns about the pipeline’s environmental impacts, given the lack of responsible engagement by ETP and its past track record. The pipeline’s website contains commitments to safety and an “in the community” page where the company promises to use local labor and minimize disruptions on the land. These commitments fall below industry standards for community engagement and are further weakened by the absence of sustainability reporting that provides evidence of implementation.

How to get it right?

Good practices to build pipeline safely with care for the environment and the people are broadly known. ETP could have carried out environmental and human rights impact assessments and identified the presence of the tribes in the project area, and the presence of the source of the tribe’s drinking water.

It could have chosen to engage with the tribe prior to its construction activities to seek their consent based on accurate project information.

It also could have chosen to route the pipeline in a way that took into account the tribe’s preferences.

However, those missing steps make the situation pretty difficult. The tribe is firmly resolved to continue its opposition to the pipeline and the cost of losing the Social License to Operate seems now an irreversible chasm.