Invest in the Shell-operated Sakhalin-2 oil and gas project
(75 marks, 15 marks each) Read the case and answer the questions that follow.
The World’s largest integrated oil and gas project is a $22 billion operation located in Yuzhno-Sakhalinsk, in the Siberian Arctic. Originally Royal Dutch Shell had the controlling interest in the venture through its Sakhalin Energy Investment Corp., which had a production-sharing agreement that gave it the right to recoup all of its costs plus a 17.5 percent rate of return before Russia would get a 10 percent share of the hydrocarbons coming from the ground, according to a deal signed in 1996, when oil was $22 a barrel.
Following 12 years of what Fortune magazine described as “a calamitous safety record, a failure to meet local expectations for new roads and schools, a fuel spill in Sakhalin’s third-largest city, and environmental concerns that caused anger and resentment toward Shell’s leadership, earning it a reputation for stubbornness and for consistently misreading political realities,” the Russian government gave Shell an offer it could not refuse—give control of the operation to Russian-owned Gazprom or risk a $50 billion lawsuit over the environmental violations.
In January 2007, the European Bank for Reconstruction and Development (EBRD) decided not to invest in the Shell-operated Sakhalin-2 oil and gas project after State-owned Gazprom agreed to become the majority owner, citing environmental concerns. According to St. Petersburg Times, “While the EBRD was under pressure to rule that the project did not meet its strict governmental and social criteria for lending, the decision to pull out was prompted by the new shareholder structure.”
(Source: Robert A.G. Monks and Nell Minow. (2016). Corporate Governance. New Delhi: Wiley India Pvt. Ltd)
(15 marks) Why do you think EBRD decided not to invest in the Shell-operated Sakhalin-2 oil and gas project after State-owned Gazprom agreed to become the majority owner of this project? Explain THREE reasons. Suggest THREE changes to be brought about in the Shell’s leadership style, which could have prevented the above mentioned debacle. Suggest THREE changes to be brought about in the risk control mechanism of Shell which could have prevented it from facing environmental violations. Do you think it was a right decision for Gazprom to become the major owner of Sakhalin-2 oil and gas project? Support your answer with THREE reasons. Fortune magazine had praised Shell for maintaining calamitous safety record. But twelve years later, Shell got involved in environmental violations. Explain THREE reasons why this unfortunate incident happened?
