Final_Paper - Shell

8/3/2019 Final_Paper - Shell

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MBA 691: Business Ethics

FadiRamadan 9717420Mosthapa Soulami ------- Padma Patnaik -------

Prathima Muralidhara 9588426Srikanth Sekar9541438

Shell in Nigeria

The Way Forward


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Table of Contents

INTRODUCTION .................................................................................................................................3

SYNOPSIS: ......................................................................................................................................3

PROBLEM STATEMENT: ..................................................................................................................3

ETHICAL FACTORS: .........................................................................................................................3

EXTERNAL ANALYSIS: .........................................................................................................................4

INTERNAL ANALYSIS ...........................................................................................................................6

ALTERNATE ANALYSIS: .......................................................................................................................8

RECOMMENDATION: ....................................................................................................................... 10

APPENDIXES: ................................................................................................................................... 12

Exhibit 1: ALTERNATIVE ANALYSIS ................................................................................................ 12

COMPARATIVE OPTION ANALYSIS ................................................................................................ 13

Exhibit 2: ETHICAL THEORIES: ....................................................................................................... 14

Exhibit 4: CIVIL LEARNING TOOL: .................................................................................................. 14

Exhibit 5: ...................................................................................................................................... 15


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INTRODUCTION

SYNOPSIS:

Due to the recent political unrest in Nigeria, Royal Dutch/Shell (RDS) has felt the increasing

pressure to re-evaluate their political and social role in order to mitigate the risks associated

with civil unrest. The Nigerian government has proved to be significantly corrupt, as their

constituents are unable to make their voices heard. In the long run this could result in the

continual sabotage of Shells resources, financial and environmental losses, the targeting of

RDSs employees and even the nationalization of the oil industry within Nigeria. Although RDS

has been significantly contributing to the Delta region and has been encouraging the Nigerian

to do the same, the level of corruption has been detrimental to their initiatives. Internationally,

the lack of action by the Nigerian government has resulted in negative attitudes towards RDS

Global.

PROBLEM STATEMENT:

In the wake of unstable political conditions, internal conflicts and mounting pressure on

Shell/Royal Dutch by human rights & environmental groups, what should be done in order to

maintain sustainable growth in the Delta Region of Nigeria without hindering their image

internationally?

ETHICAL FACTORS:

Although RDS is operating within an Authoritarian environment in which the government

opposes freedom of speech, democratic process and the political power is held by an arbitrary

few, as a multi-national corporation RDS has the duty to their stakeholders. The Ogoni people

have been faced with poverty, environmental devastation and health issues as a direct

externality of the expansion of the oil industry into the Niger Delta. Operations in Nigeria have

contaminated the land, water and air devastating agricultural production. Additionally,

deforestation has resulted in the loss of biodiversity within this region. Consequently, Ken Saro

Wiwa has expressed concern over the degradation of the Niger delta resulting in his execution

by the Nigerian government. RDS needs to assure that their each of their stakeholders (of the

Ogoni people) have the right to a standard of living adequate for the health and well being of

themselves and theirfamilies. 1

1Universal Declaration of Human Rights Article 25, Paragraph 1.


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EXTERNAL ANALYSIS:

Several environmental factors have been critical to RDSs socio-economic performance in

Nigeria. Most prominentlywas the military dictatorship in which peoples concerns have not

been considered, Ken Saro-Wiwa and other leaders have been executed proving a tyrannical

rule. Additionally, Nigeria is on the verge of civil unrest as the Ogoni people are demanding

political autonomy. The Delta region is facing high crime rates and unemployment; MOSOP has

become the voice of Ogoni people as increasing concern has mounted due to the lack of

development by the Government. The development allocation, 3% of oil revenues, has been

washed away by the corrupt bureaucracy. As a result of continuous neglect, the Delta has been

facing poverty and severe environmental and health issues. It can be observed that oil revenues

account for a significant portion of the country's GDP. Due to the poverty, the youth has a highsusceptibility to extremism and radical movements leading to the sabotage of oil pipelines. In

order to prevent acts of sabotage, the oil companies in Nigeria are responsible for their own

safety and are allowed to recruit private security to guard their interests.

With the mounting corruption levels and the lack of strong environmental regulations, the

industry has been considered as an ecological disaster by independent NGOs. However, there

was the international community has been able to exert pressure resulting in the regulation of

the oil industry as well as improvements of human rights. A good example was the overturning

of several death sentences against opposition leaders, liquefied natural gas standards brining

Nigeria closer to a sustainable growth phase. The international community is likely to play a

key role in the future development of Nigeria.

With regards to the competition, oil companies require heavy investment in terms of capital

cost, economies of scale, distribution channels, technology, regulation, geopolitical factors etc.,

thus, the competition is mainly between large firms such as RDS, Exxon, BP, Chevron, Agip and

Elf. The possibility of new entrants in this region was fairly low due to Nigerias government

allocating contracts to the oil companies. The rivalry between existing competitors was high

due to the established operational efficiencies in the Niger Delta. With the development of

renewable sources of energy still in infancy, the prospects of substitutes are low. This provides

an advantage over new entrants in the market, if any. In addition, due to the high volume of


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demand for oil and the ever increasing energy prices, individual consumers have minimal

bargaining power.

Although Nigeria is plagued by several socio-political issues, it is a strategically important

location. The significant political risk is intertwined with the long term profitability of the oil

industry in the region.


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INTERNAL ANALYSIS

RDS is one of the fastest growing and most profitable companies within its industry. Operating

in 130 countries with revenues reaching $103 billion in 1991, RDS has become the largest oilcompany in the world. RDS seems to be in the defensive mode at a time when environmental

laws are being consolidated (Exhibit 4).Its partial compliance to Nigerias environmental laws

is an indication that it is somewhere between defensive and compliance mode. RDSs

operations in the Delta are causing environmental degradation in the form of pollution due to

gas flaring and oil spills. Although RDS has been contributing to community development

through NGOs and other organisations to build schools and hospitals, these initiatives have not

been emphasised in a proper way.

The corruptpolitical system has not allowed the 3% of governments contribution to reach the

Delta, causing further frustration. Per RDS management, the Nigerian Government did not

always contribute to its periodic cash calls for various infrastructure projects and had often

postponed the payments to the joint ventures budget. As of 1995, the government owed SPDC

about $300 million in arrears. RDS has found itself in the midst of this controversy and due to

their massive operations in the Delta. Due to RDSs size, the Ogoni community have expected

RDS to intervene insuring the development of the Delta. Due to the political structure, RDS spolicy has been one of non-involvement in the political arena; yet the poor public relations of

RDS have resulted in a blow to its global image.

The arrest and subsequent execution of Saro-Wiwa raised numerous questions with regards to

the efforts put by RDS to stop the execution. RDS attributed its non-involvement to its core

principles of non-intervention in politics but pledged to continue to support the development

of the Niger Delta.

Based on Altmans Z score, RDS is on solid financial grounds (Exhibit 5). The debt to equity

ratio of 1:8 signifies that the firm has a substantial equity position and does not rely on debt

financing, giving them the ability to navigate through hard times. Furthermore, RDS has the

biggest operating share in the region of OGONI by owning 96 over 100 wells. As new


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opportunities are hard to come by in the industry, RDS must maintain its position in the

current markets and reinforce its relationships with the stakeholders to ensure long-term

sustainability. RDS approached many NGOs to assist them proactively to solve the crisis in the

Delta region. These actions mark a firm beginning to finding solutions keeping in perspective,

RDS decade long expertise on the regions mentality and community reactions.

In response to the environmental issues, SPDC increased its funding for community

development to $22 million in 1995. Additionally, $100 million a year was invested on a series

of projects to upgrade infrastructure and comply with the existing environmental laws. There

were also firm plans of putting in place a Liquefied Natural Gas Plant to reduce the harmful

effects on environment. However, the local community has not helped, 69.4% of oil spills were

acts of sabotage. Due to instances of sabotage, SPDC felt the need to hire private security to

protect its assets in Nigeria. By the year 1995, RDS felt helpless in correcting the situation in

Nigeria and squarely blamed the Government for the failures.

RDS has the necessary resources to play a major role in development of the region; however,

due to rampant corruption, a government which does not tolerate political interference,

increasing poverty and RDSs internal problems such as poor Public Relations, and the nature

of their business, RDS must step up its actions to protect its operations and their image

internationally.


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ALTERNATE ANALYSIS:

Alternative 1: STATUS QUO

Continue with the current strategy, not interfere in the local politics of Nigeria and let the

government handle community concerns. ProtectRDSs equipment and employees in the Niger

Delta through privately hired security.

Alternative 2: IMPROVE PUBLIC IMAGE & DIRECT DEVELOPMENT THROUGH

SUBSIDIARY.

Issue a sympathetic statement with regards to the Saro-Wiva incident. Involve the stakeholders

in long term development and regulatory standards. Create a Reconstruction and Development

subsidiary to develop the delta.


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Alternative 3: BUILD A COALITION TO ADDRESS CSR

Initiate a coalition of oil companies operating to form a collective stand with regards to the

Wiva incident and how to address the environmental and community development issues in

the Niger Delta.

Alternative 4: TERMINATE OPERATIONS IN THE NIGER DELTA

End RDSs involvement in the Delta, clean up RDSs potion of the environmental mess.


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RECOMMENDATION:

IMPROVE PUBLIC IMAGE & DIRECT DEVELOPMENT THROUGH SUBSIDIARY.

The recommendation chosen satisfies the most number of stakeholders. Analyzing the situation

through some ethical theories (Exhibit 3), we see that being in a business like oil extraction,

RDS needs to choose a path that allows the company to continue profitably doing business

while minimizing negative externalities.

This recommendation presents an opportunity to diversify RDSs business, become more

responsible and increase long term growth opportunities. It definitely does not make financial

sense for RDS to remove themselves within this industry. It would be essential for RDS to

remain ahead of the curve with regards to industry standards within the Niger Delta region as

the regulations would eventually catch up to global best practices. By addressing

environmental issues related to gas flaring, oil spills and liquefied natural gas projects RDS

would have made significant improvements to their current practices.

The corrupt climate in Nigeria as well as the inability for the government to insure that aid

effectively reaches the Delta, poses both a threat and an opportunity for RDS. By starting a

subsidiary Shell Reconstruction and Development, RDS can insure that their CSR budget directly

reaches the involved stakeholders. The subsidiary would initially invest the $25 million (while

RDS should step up CSR to $50 million, 45 to subsidiary 5 though NGOs.) This investment

would be used for reconstruction of the basic things such as water and sewage systems,

electricity, roads; and then move on to housing, schools and hospitals. This would allow RDS to

insure the development of the Delta while creating a long term track record for the subsidiary.

The direct development of the subsidiary would solve RDSs public image as RDS would be seen

as a development firm rather than purely an oil producer.

The main reason for the formation of MOSOP was the underdevelopment of the delta, unfair

treatment of the delta by the military government (which failed to direct the 3% of oil revenues

to the people of Niger Delta). By tackling grass root level issues, actually building the town and

providing basic amenities to the people of the Niger Delta, RDS will not only be addressing the

present cause of all the unrest, but also be taking forward the vision of people like Ken Saro-

Wiva. Shells trust winning endeavour will undoubtedly ensure a long and profitable


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relationship with Nigeria. In the long term, the subsidiary should solicit government contracts

for reconstruction and development. By doing so, RDS would be able to grow their new

business profitably and take this business international in the coming years.

An important factor of RDSs declining reputation globally, is its improper handling of theirpublic image. Many ofRDSs efforts and contributions towards community development have

not been projected appropriately to the international community. RDS should immediately

come up with a proactive approach to these problems, so that it can separate its actions from

those of the Nigerian government, to avoid being projected as an accomplice in the military

governments actions.


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APPENDIXES:

Exhibit 1:ALTERNATIVE ANALYSISPlease note: We have included these in the paper for your reading

convenience; however we consider them to be part of our appendix.

Alternative 1:

Alternative 2:

Alternative 3:


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Alternative 4:

COMPARATIVE OPTION ANALYSIS

Looking at the Comparative option analysis grid, the recommendation for RDS would be to

implement the best alternative, which would be IMPROVE PUBLIC IMAGE & DIRECT

DEVELOPMENT THROUGH SUBSIDIARY.


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Exhibit 2:ETHICAL THEORIES:

ETHICAL THEORIES:

UTILITARIANISM

Shell should implement actions that create the greatest good to the largestnumber. Shell will have to stop its oil extracting business altogether, as this will result in the

greatest good to the environment and the affected people of the Niger Delta. However, this will

mean a great hit to Nigerias economy, meaning even lesser financial aid to the poverty ridden

people of Niger Delta.

LIBERTARIANISM Shell should implement actions that do not impose on personal liberty.

People in the Niger Delta have the liberty of a clean and pollution free environment; however

they also have the liberty for a good living with no scarcity of basic needs of a human being.

Shell cannot impose on the liberty of the Nigerian government in its political actions.

KANTS THEORY Make decisions as if they were being established as Universal law. This

would again mean that Shell should shut down all operations that cause damage to the

environment, and the people who live in that community.

RAWLS THEORY Shell should implement actions that are to the greatest benefit of the least

advantaged. The least advantaged here would be the people of the Niger Delta, and the

environment that is getting damaged. This would mean that Shell should stop operations that

are causing the damage. However, the other aspect is the economy of Nigeria, which is

extremely dependent on oil, which would result in further deterioration if the oil business is

shut down.

Exhibit 4: CIVIL LEARNING TOOL:

`

RBCs Current Position RBCs Position in Future

after the proposed

Reccomendation


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Exhibit 5: ALTMAN`S Z SCORE INTERPRETATION OF SHELL`S FINANCIAL

SITUATION

Documents

Final_Paper - Shell