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Ethical Corporation: Sakhalin: Shell’s Russian nightmare

Daniel Litvin
10 May 07

Extractive sector stakeholder engagement – the big lessons from derailed projects

Crises faced by Shell over the Sakhalin project in Russia and by Asia Energy in Bangladesh illustrate the strategic importance of understanding stakeholder views in all their complexity

Societal pressures have the potential to impact on shareholder value in all sorts of industries. But nowhere is this starker than in the extractive sector.

Consider briefly just two of the numerous crises faced by resource firms over the last year resulting from shifting stakeholder attitudes.

In December 2006, Shell lost control of its $22 billion oil and gas project on Russia’s Sakhalin island when, under pressure from the Russian government, it sold half of its 55% stake to Gazprom, the state gas company.

The government had been emboldened in its moves against Shell by the claims of officials and activists that the company had allegedly violated environmental rules locally.

Several months before, London-listed mining company Asia Energy, since renamed Global Coal Management, was facing a stakeholder-induced crisis of similar proportions despite being much smaller than Shell.

Communication breakdown

Asia Energy’s main project was to develop a large coalmine in Bangladesh, which would involve relocating 40,000 people. Local protests against the mine had escalated in August and Bangladeshi security forces had opened fire on demonstrators, killing a number of people.

Shortly after, unconfirmed reports surfaced that a Bangladesh government minister had announced cancellation of the company’s contract to develop the mine. This pushed the company’s shares into freefall.

Though the company was still seeking to proceed with the project in April 2007, with a question mark over government support, its shares remained well below its pre-crisis levels.

Both episodes are complex politically, and would be interesting to dissect in detail. But together they highlight three basic points relevant to senior management of resource companies.

Beyond reputation

Firstly, and most obviously, stakeholder pressures should be viewed as more than just a reputation concern. Even more strikingly than with human rights issues, they can wipe out significant shareholder value and make or break a project.

This is particularly the case when the stakeholder exerting the pressure is the host government. The recent resurgence of “resource nationalism” has meant governments are increasingly assertive in their dealing with foreign firms.

A broad context

Secondly, while it is government action that may ultimately inflict commercial damage on firms, broader social and sustainability issues often set the necessary context for these government responses.

In Shell’s case a key trigger, or at least excuse, for the Russian government’s moves, was the complaints over the company’s environmental management.

With Asia Energy, local protests over relocation and environmental impacts appeared to have provided a similar trigger for the threatened cancellation of its contract.

Usual solutions fail

Thirdly, and perhaps most disconcertingly for some companies, the standard suite of “corporate responsibility” and “sustainability” responses which have been developed in recent years partly in the hope of preventing such hostility from stakeholders appears not to have worked in these cases. Or at least seem to have been insufficient to hold back the storms that engulfed Shell and Asia Energy.

Whatever the substance behind the local environmental criticisms against Shell, for example, the oil firm has developed among the most advanced business responsibility and environmental programmes in the energy industry and, in this respect, appears to have adopted a relatively progressive approach in Sakhalin.

Asia Energy, meanwhile, says it has been following international sustainability best practice in Bangladesh – by preparing, for example, a resettlement plan and an indigenous people’s development plan in line with the Equator Principles and World Bank guidelines.

Such approaches do not appear to have helped protect Shell’s and Asia Energy’s businesses from backlash. This might also give pause for thought to the growing number of banks and financial institutions researching the sustainability performance of resource companies in which they invest.

The sort of metrics they are relying on – theoretically in order to help them pinpoint those companies better able to protect their assets from stakeholder backlash – are largely the type of CSR programmes and commitments that Shell and Asia Energy appear to have had.

Wider focus

This is not an argument for less attention to be paid to CSR and sustainability management. In fact, the Shell and Asia Energy cases may well highlight the importance for firms of focusing even harder on implementation of their commitments in this area – to avoid giving host country critics any legitimate grounds for attack.

However, what it does indicate is that CSR programmes are just part of the answer.

The lens or metric used by managers and investors to assess the stakeholder challenge need to be broader, and also more closely linked both to actual stakeholder perceptions and to core business activities.

For example, firms may need to develop a clear understanding as they start to work on projects of how perceptions of local sustainability issues might rebound on national politics and vice-versa.

In turn, an integrated understanding of both potential sustainability and political issues may need to be used to help shape not just CSR programmes themselves, but the way core business is conducted if broad stakeholder support is to be ensured. Examples could be the design of projects, the negotiations and terms agreed with governments, and decisions on how, when and whether to invest.

Arguably the only way Shell and Asia Energy might have reduced the risk of the troubles they experienced would have been through such adaptation of their overall strategic approach and at an earlier stage in their respective investments – albeit proving such a point would be difficult and require deeper research.

Certainly, developing a lens or metric which provided management with a view of the full range of stakeholder perspectives – and how these may shift and interact with each other over time – could prove to be a critically-useful tool for firms navigating this complex area.

This article originally appeared in Critical Resource Bulletin. Daniel Litvin is director of Critical Resource
[email protected]

Write to Daniel Litvin at [email protected],
or write to the Editor at [email protected].

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