Drowning in oil?
In early 2007 the ramifications of the Russian government's December 21st deal with Shell over the Sakhalin II oil project were becoming clear. Shell had lost half of its 55% share of the $20 billion project, as a result of a suspension of the project due to environmental breaches. The government-owned oil company Gazprom had taken a majority stake.
In the Western media these actions were portrayed as part of a move against private ownership of Russia's oil and gas industry which had started with the destruction of Yukos and continued with the state regaining control of Gazprom, which then acquired Sibneft. The state-owned share of total oil production has increased from 16% in 2000 to almost 40%. The suggestion was that the Russian Ministry of Natural Resources' concerns about ecological impacts of Sakhalin II project did not reflect a new environmental concern, but were a tactical use of such concerns to achieve the state's political and economic goals-a move back to resource nationalism.22
Clearly, there are legitimate concerns about the environmental impacts of the project, particularly concerning the whale population. The project has been the focus of a campaign by NGOs such as WWF, the International Fund for Animal Welfare (IFAW), Friends of the Earth (FOE) and regional and Russian groups, which has delayed the agreement of loans by the European Bank for Reconstruction and Development (EBRD) and the UK's Export Credit Guarantee Department (ECDG). It was this delay that meant Shell did not have the level of involvement of the UK government (through the ECDG) and other Western governments (via the EBRD) that might have put more pressure on the Kremlin to maintain its existing agreements with Shell. Consequently, 'the world has watched', according to US Deputy Secretary of Energy Clayton Sell, in March, 'as the Russian government has taken greater and greater control over Russia's energy resources, while private entities have been marginalized'.23
'The outcome of the "Sakhalin Episode" marks a clear change in the "rules of the game" in terms of the role of foreign investors in the Russian oil and gas industry', concludes analyst Dr Michael Bradshaw of Leicester University.24 A wider look around the world at resource nationalism in other countries such as Venezuela suggests that, despite record profits, the future of 'Big Oil' multinationals will not be easy.
In the last ten years, the confrontation between Shell and Greenpeace over the disposal of the Brent Spar oil platform in the north Atlantic has come to be regarded as a turning point in corporate citizenship, when business leaders woke up to the power of civil society and public calls for them to be more responsible. In time, the confrontation with NGOs over Sakhalin should come to be regarded as an even more seminal moment in the history of the corporation and its relations with society. By delaying loans and guarantees from government-backed agencies and giving the Russian government a reason to suspend the project, environmental campaigning has cost the company thousands of times more money in assets and lost future earnings than Brent Spar, and poses a greater challenge to the very core of Shell's business. This challenge is twofold.
First, it involves the asymmetrical pressures from civil society. Currently, international oil companies (IOCs) face far higher pressure from a critical media, an active civil society and informed communities in their home countries than many of the nationally owned or promoted oil companies in Russia, China, Malaysia and Brazil, among others. Consequently, they are pushed to adopt higher standards, and are more quickly criticised when failing to meet them, with real financial implications. This poses a strategic challenge for IOCs, which could mean operating community and government relations in entirely new ways in host countries. For example, IOCs may find it beneficial to support the development of an effective civil society and critical media in countries with oil reserves, and work towards improved international regulations on social and environmental issues, including international mechanisms for enforcement. As a matter of long-term survival, IOCs might also sensibly support an international convention on corporate accountability.
The second part of the challenge involves examining the future opportunities for energy generation. In light of resource nationalism, Shell and some other IOCs have begun to focus on the niche of projects that require the most sophisticated technology, to secure oil from difficult regions such as the Arctic or unconventional sources such as Canadian oil sands and liquefied coal. The problems with this are obvious. Getting oil from sand or coal consumes huge amounts of energy, and thus greatly increases pollution, while despoiling pristine environments such as the Arctic, which will generate huge outcry, not just from NGOs but from the public at large.
In the short term Shell and others may be able to pursue this strategy because of high oil prices and security concerns in the US and Canada about energy independence. But, in the long term, oil price fluctuations, the growing cost of carbon and growing awareness that the changing climate is itself a security threat will likely derail it.
In a BBC debate, Solar Century director Jeremy Leggett asked Shell's CEO Jeroen van der Veer whether it is possible for the company to go into the Arctic and Canadian oil sands and for the world's atmosphere to stay below the 450 parts per million of carbon identified as a crucial threshold to avoid a catastrophic acceleration in global warming by the IPCC. When pushed, van der Veer replied that 'we are not responsible for deciding the energy mix of the world'.25 This is reminiscent of the stance Shell took in the mid 1990s on involvement in public matters, before the Brent Spar and Ken Saro-Wiwa episodes led them to accept their influence and express an intention to use it responsibly. Clearly, everyone is responsible for deciding the energy mix of the world, with some more influential than others. Companies such as Shell have major influence in political processes and the economics that frame political discourse. CEOs in such companies with sufficient awareness and courage must face these difficult conundrums to find a long-term viable strategy.
James Leaton, a key figure in the coalition of NGOs working on Sakhalin Island, thinks there is a way forward. He told JCC that 'Oil companies are about project management, technology and marketing, to supply liquid hydrocarbons for transport fuels. Unless they start putting these skills and resources to more sustainable options, companies like Shell, who are investing in more carbon-intensive fuels, will be stranded in a carbon-constrained world.'
For Shell and other oil companies to explore new directions more vigorously is a tough challenge, requiring significant refocusing, retraining and restructuring. It would necessarily involve levels of risk taking, innovation and flexibility that might not be generally associated with the mind-set of large bureaucratic organisations. In addition, for such a reorientation to work, IOCs would require an appropriate regulatory environment and the right signals and cooperation from consumers, investors, staff and suppliers. Whether they take up this challenge will determine whether the IOCs help us drown in oil or begin to genuinely build an ark of alternatives.
The Sakhalin episode was not an outright victory for campaigners. The environmental record of Gazprom is hardly excellent, and in January the EBRD announced it was no longer considering the current financing package for Sakhalin II. 'With the departure of the EBRD, the NGOs have lost an opportunity to leverage compliance on environmental and social issues', noted Dr Bradshaw. Organisations concerned with the operations of the oil industry, and the extractives industry as a whole, will need to develop new ways of applying pressure on companies from emerging economies, many of which are nationally owned. Consequently, in the search for new levers, their attention may shift further to the private project finance markets and to intergovernmental agreements. It would make sense for the IOCs to work with NGOs on such efforts to mainstream attention on social and environmental issues by private project financiers, and to promote more enforceable international standards. In the BBC debate, Leggett suggested Shell's shareholders wouldn't let van der Veer respond to the real implications of climate change. Many of those shareholders are institutions that invest in other companies. Engaging shareholders to facilitate understanding of their longer-term interests and the implications for needed social change and regulatory innovations, in all financial centres, is a key task for contemporary corporate citizenship.