“Find your next drilling location”: The Heritage Royalty “Carbon Bomb” 100% owned by Ontario Teachers’ Pension Plan
In 2015, the Ontario Teachers’ Pension Plan (OTPP) paid Cenovus Energy $3.3 billion to acquire Heritage Royalty, one of Canada’s largest private oil and gas royalty leaseholders. The purchase gave the pension fund control over nearly 5 million acres of oil and gas producing lands in Western Canada. Since then, OTPP has been generating pension returns for Ontario teachers by leasing land to fossil fuel companies and collecting royalties on oil and gas production.
Through Heritage Royalty, OTPP makes money from a portfolio of “carbon bombs”—oil and gas projects that would drive the climate past internationally-agreed temperature limits, causing catastrophic global impacts. For nearly a decade, OTPP has facilitated the production of millions of barrels of oil with virtually no disclosure to the working and retired teachers whose pension savings were used to buy Heritage Royalty. As the climate crisis accelerates and jeopardizes the retirement security of thousands of Ontario teachers and their families, OTPP members are demanding answers from their pension managers about the role OTPP quietly played in increasing oil and gas production and pumping carbon pollution into the atmosphere.
What is Heritage Royalty?
Heritage Royalty is a private landholding company specializing in royalty lands and mineral rights. Royalty lands are privately-held oil and gas and mineral properties that are not subject to the royalties that producers typically pay to governments on publicly-owned lands. Instead, producers pay a mineral tax, while the royalties go to landowners like Heritage Royalty. In Western Canada, most of these properties date back to the 19th century, when the federal government granted stolen Indigenous land to railway companies. Decades later, many of these lands proved to be rich in oil and gas and minerals.
For investors like OTPP, royalty lands can offer exposure to oil and gas production without the costs of exploring for and developing reserves and operating production infrastructure. In the words of OTPP:
Royalty property cash flows are correlated to the price of oil and natural gas, providing Teachers' investment portfolio with diversification benefits and a hedge against unexpected inflation. Royalty owners contract with oil and gas operators and are paid based on production.
Similar to OTPP’s ownership of Heritage Royalty, the Canada Pension Plan Investment Board owns significant stakes in LongPoint Minerals, a Denver-based company focused on the acquisition of oil and gas royalty interests in the United States.
OTPP’s 2015 purchase of Heritage Royalty
OTPP announced its purchase of Heritage Royalty from oil and gas producer Cenovus Energy for $3.3 billion in June 2015 and completed the acquisition in July 2015. OTPP described Heritage (Heritage Royalty Properties, or HRP) as the owner of:
one of the largest packages of fee title acreage in Canada, consisting of approximately 4.8 million acres in Alberta, Saskatchewan and Manitoba. HRP also holds gross overriding royalties on 0.5 million acres at Cenovus' Pelican Lake and Weyburn properties, two large-scale, long-life oil projects. In 2014, HRP had revenues of approximately $320 million based on average production of approximately 14,800 barrels of oil equivalent per day (BOE/d).
At the time, OTPP’s senior vice-president of natural resources and tactical asset allocation called Heritage “an excellent fit with Teachers’ need to pay pensions for the long term… We look forward to working with the [Heritage] team and applying our collective oil and gas experience to responsibly pursue the business's growth potential." Meanwhile, Cenovus said its sale of Heritage to OTPP would “offer flexibility to invest in growth projects.”
Later in 2015, the federal government signed the Paris climate agreement, committing Canada and nearly every country in the world to strive to limit global heating to 1.5℃ above pre-industrial levels by 2050. After years of unheeded warnings from climate scientists, the Intergovernmental Panel on Climate Change and International Energy Agency are now clear that meeting Paris agreement goals and achieving net-zero emissions by 2050 requires an immediate end to oil and gas expansion and the rapid phase-out of current production.
Heritage Royalty’s fossil fuel assets
Heritage Royalty and its OTPP owners seem to have missed the memo from climate scientists. Heritage loudly proclaims “Find Your Next Drilling Location” on the homepage of its website before going on to clarify that “Heritage is not directly involved in any oil and gas exploration or production.”
Screenshot of Heritage Royalty website, August 12, 2024.
As of August 2024, Heritage says it “owns mineral title, royalty interests, and select non-operated working interests in ~4 million acres across Western Canada and the United States.” These assets include oil and gas producing lands in the Western Canada Sedimentary Basin. In 2018 and 2019, Heritage Royalty expanded into the U.S., acquiring mineral and royalty interests in Pennsylvania’s Marcellus Shale Basin (the largest gas field in North America) and Texas’ Delaware Basin (part of the largest oil-producing region in the U.S.).
Through Heritage, OTPP also owns a 4.9% stake in the Weyburn Unit, a Saskatchewan oil asset that OTPP purchased in 2013 for $153.4 million. At the time, the Weyburn Unit produced approximately 25,000 barrels of crude oil per day. Now majority-owned by Whitecap Resources, the Weyburn Unit is a carbon capture and sequestration project that claims to sequester two million tonnes of carbon dioxide per year, which is largely used to increase oil production through a process called enhanced oil recovery. In 2021, Weyburn produced approximately 14,000 barrels of crude oil per day.
Screenshot: Heritage Royalty. Our Assets. August 12, 2024.
OTPP owns and oversees Heritage Royalty, but reports virtually nothing to plan members about the company
OTPP is the 100% owner of Heritage Royalty. Three senior OTPP staff sit on the company’s advisory board.
Screenshot: Heritage Royalty. Advisory Board. August 12, 2024.
Teachers first began asking questions about Heritage Royalty following OTPP’s announcement of the pension fund’s commitment to net-zero emissions in January 2021. This might explain why Heritage appears to have renewed its homepage between March and April 2021 to clarify that “Heritage Royalty is not directly involved in any oil and gas exploration or production.” The company also appears to have added an “Environment & Social” page to its website in May 2021 that reads:
Heritage is not directly involved in oil and gas exploration or production. However, Heritage works closely with regulators and its partners to ensure that it has a positive influence on the direction of the oil and gas industry. Heritage incorporates environmental requirements into its contracts and leases.
Heritage provides no further information about how it “works” with regulators and its partners, or who these partners are. It provides no explanation of how it has a “positive influence on the direction of the oil and gas industry”, or what a “positive influence” means. Heritage provides no information about the environmental requirements incorporated in its contracts and leases. And it provides no information about whether companies producing oil and gas on Heritage-owned land are required to set aside adequate bonding to ensure companies can pay for well decommissioning and land reclamation. As a private company, Heritage is not required to disclose additional information to the public or regulators.
OTPP has reported very little about Heritage Royalty to pension plan members since announcing its acquisition of the company in 2015. In nine years of annual reports, interim results, responsible investing reports, climate change reports and other disclosures, the only OTPP disclosures about Heritage that Shift has been able to identify are:
A single line in annual reports indicating that OTPP holds a stake valued at more than $200 million in Heritage Royalty Limited Partnership, HRG Royalty LLC and/or HRG Royalty II LLC;
A footnote in OTPP’s 2018 climate change report (p.24) indicating that the “emissions associated with [Heritage’s] oil and gas holdings are not included in our [carbon] footprint as Heritage does not own or operate these assets”;
A brief mention of Heritage Royalty’s financial performance in OTPP’s 2017 annual report (p.28).
The limited information disclosed by OTPP about Heritage Royalty means that it’s unclear if OTPP still excludes the emissions associated with oil and gas production on Heritage lands when calculating the pension fund’s carbon footprint. If so, this is a significant omission, considering the value and profitability of Heritage, a company wholly owned by OTPP, is directly linked to millions of barrels of oil being extracted, refined and burned. OTPP itself says that portfolio companies should include scope 3 emissions when material and that it’s developing a more complete accounting of portfolio company scope 3 emissions. Such information is essential to understanding OTPP’s exposure to climate-related financial risks and potential stranded assets.
OTPP’s lack of disclosure and transparency around Heritage stands in stark contrast to the pension fund’s regular communications on climate change and investments in climate solutions, including three recent special reports on investments in green buildings, renewable energy and electricity transmission and distribution infrastructure. Working and retired Ontario teachers have been left in the dark about an oil- and gas-dependent asset that is fundamentally incompatible with OTPP’s net-zero emissions commitment and Canada’s climate targets.
Does Heritage Royalty respect Indigenous rights?
As the company explains on its website, “Heritage Royalty’s story is rooted in historical land grants which included the rights to underlying mines and minerals.” Heritage traces its history back to 1676, when King Charles II of England granted 948 million acres of “fee title land” to the Hudson’s Bay Company, including much of what is now Alberta, Saskatchewan and Manitoba. Beginning in 1868, the Hudson’s Bay Company transferred the deed of title to Canada, which in turn granted 25 million acres of fee title land to the Canadian Pacific Railway (CPR) in 1881 after the completion of the western Canadian section of the transcontinental railway. Over the course of the late-nineteenth and twentieth centuries, the CPR’s lands eventually came to be held by the Canadian Pacific Oil and Gas Company in 1958, PanCanadian Petroleum Limited in 1971, Encana Corporation in 2002, Cenovus in 2009, and finally Heritage Royalty and OTPP in 2015.
Screenshot: Heritage Royalty. History. August 12, 2024.
Heritage Royalty makes money from oil and gas production on land that was stolen from Indigenous peoples to make way for the construction of railways and the settlement of western Canada. But it is unclear if Heritage or any of the companies that previously owned its lands have changed their practices to ensure projects receive the free, prior and informed consent of the affected Indigenous peoples or First Nations who have lived there for millennia. Neither Heritage nor OTPP disclose if the company’s lands overlap with treaty lands, First Nations communities, unceded Indigenous lands or other traditional territories of Indigenous peoples. It is also unclear if Heritage or its predecessors compensated Indigenous communities for their displacement or ongoing use of stolen lands. OTPP does not yet have a publicly-disclosed policy regarding Indigenous rights and reconciliation, either for its operations or its portfolio companies.
Ontario teachers deserve transparency about Heritage Royalty
Perhaps Heritage generated strong returns for Ontario teachers over the last nine years, but it’s impossible to know from OTPP’s lack of disclosure. If Heritage Royalty has been profitable, at what cost to the stability of the climate? What are the risks for the value of the company and the retirement security of OTPP members as oil demand peaks and declines in the coming years?
Since purchasing Heritage in 2015, OTPP committed to net-zero emissions by 2050 in 2021 and released a comprehensive climate strategy in 2022. But this climate strategy remains incomplete without a credible plan for OTPP’s significant fossil fuel assets, including the oil and gas underneath Heritage’s lands in Western Canada, Pennsylvania and Texas. The science is clear: in order to achieve net-zero emissions by 2050 and limit global heating to safe levels, oil and gas expansion must halt immediately and existing production must be rapidly phased out.
A company that owns rights for millions of acres of oil and gas producing lands and encourages fossil fuel companies to “find your next drilling location” on those lands is neither aligned with domestic and international climate commitments nor OTPP’s net-zero target. But as recently as January 2024, an OTPP managing director and Heritage Royalty advisory board member said that “we look forward to the continued advancement of the overall business.”
OTPP’s dilemma: oil and gas production assets are fundamentally incompatible with a pension fund’s mandate
OTPP and Heritage Royalty either intend to keep selling their oil and gas producing rights to fossil fuel companies to keep pumping carbon emissions into the atmosphere, or they own a portfolio of stranded assets that must be kept in the ground to avert catastrophic global heating and protect the retirement security of Ontario teachers. As the climate crisis worsens, Heritage is a prime example of the problem with pension funds relying on oil and gas production to generate returns for their members.
By buying Heritage Royalty the same year that the Paris climate agreement was signed, OTPP risked the retirement savings of Ontario teachers on a bet that the energy transition would fail and that Heritage would keep making money from the production and combustion of oil and gas. But peer-reviewed studies show that to achieve net zero by 2050, nearly 60% of currently-proven oil and gas reserves and 90% of coal reserves must remain unextracted. There are escalating costs to delay – the longer we wait to phase out fossil fuels, the worse the climate crisis gets, the harder it becomes for pension funds to generate financial returns, and the unlikelier it becomes for plan members to enjoy a dignified retirement on a livable planet. Every tonne of carbon counts.
It is possible that OTPP is grappling with this dilemma internally and trying to determine how to manage an asset that is fundamentally misaligned with its members’ retirement security in a safe climate future. Enabling the extraction of all of the oil and gas underneath Heritage lands is incompatible with Canadian and global climate coals. Divesting Heritage Royalty could simply lead to another company buying the asset and enabling continued fossil fuel production. Leaving the oil and gas in the ground could directly compromise future returns for pension plan members. It is possible that there are valuable non-fossil minerals underneath Heritage’s lands that are critical for the energy transition and electrification of the Canadian and global economy. But OTPP has said nothing about this potential and seems focused on “finding your next drilling location.”
To ensure Heritage Royalty aligns with Canadian and global climate targets, honours OTPP’s climate strategy and respects Indigenous rights, OTPP should:
Calculate and disclose the scope 1, 2 and 3 emissions associated with the developed and undeveloped oil and gas underneath Heritage Royalty’s lands;
Calculate and disclose how much of the oil and gas underneath Heritage Royalty’s lands can be extracted and burned while remaining aligned with Canadian and global climate commitments;
Publicly commit to stop making new investments in companies and assets whose business model is dependent on fossil fuel production;
Develop and disclose a plan to wind down the production of oil and gas underneath Heritage Royalty’s lands in line with Canadian and global climate commitments, while protecting the pensions of working and retired Ontario teachers;
Ensure Heritage Royalty has the free, prior and informed consent of affected Indigenous communities and First Nations whose land was stolen by the company’s predecessors.
Ontario teachers deserve transparency from their pension managers about the Heritage Royalty carbon bomb.
What is OTPP’s plan for Heritage Royalty? How is Heritage Royalty aligned with OTPP’s net-zero commitment and climate strategy? Has Heritage been a profitable company? If so, how can Heritage remain profitable without undermining Canada’s climate targets and OTPP’s net-zero commitment?