Journey to Sakhalin:

Royal Dutch/Shell in
Russia
ABI SHAI , AABHAS, KULJEET, PRI TAM, RI CHA, NI LABHA
AGENDA
1. History - political/geography/climatic conditions
2. Gazprom Interest in Sakhalin/Shell
3. Production Sharing Agreement (PSA) and its nuances
4. Shell move out was it easy
5. Key takeaways as a foreign investor



History
1. Emerging from the ruins of Soviet Economic system Dec 1991
Russian Govt and public hoped for a prosperous, capitalist economy, a democratic regime
1991-1998 GDP fell by half, Russians living below poverty line increased from 2% to 50%
May 2000 President Putins promise to rebuild autonomy, capacity and legitimacy of Russian state
2. Soviet union endowed with enormous oil and natural gas reserves
Energy critical component of Russian economy, 20% of GDP,55% of export and 40% of fiscal reserves
Gazprom single largest player in gas, accounting for 8% of the Russian Economy
3. Energy to dominate the future of Russia
Massive Capital to develop resources
Lack of know how
4. Transportation and Corporate governance scandals(BP Amco) were a deterrent
Geography
Climatic Conditions
FDI & PSA seen as a Saviour
1. June 22, 1994 Production Sharing agreement(PSA) signed and five firms
joined to form SEIC
2. Shell had the technological know how of Off shore drilling, Mitshubushi had
know how for LNG
3. The first PSA is the best deal you can get- Shell
Turbulences
1. Lack of Civil service Infrastructure to implement terms of PSA
2. Legal Stabilization - Continuously changing political environment
3. The law of land was different for Shell and Russia Bribery was
common in Russia but not for Shell
4. NGO and the Environment
5. Expectations by the locals
6. Oil seen as a major source of growth factor.






















Why Sakhalin/Shell became a target and
caught Russia's/Gazprom's
attention for acquisition?

1. Western Gray Whales breeding ground,
endangered species
Months of pressure from Russia's natural resources
ministry and its environmental regulator, which have
accused Shell of ecological violations in project work
on the remote Far Eastern island of Sakhalin.
2. Lawsuit of $50 billion against Shell
3. Political Environment government wanted to keep
foreigners from strategically important fields





Why was the Production Sharing Agreement (PSA)
as it existed not acceptable to the Russians?

1. Big Projects come with Big Expectations
2. Resistance to Change
Implementation Issues
How to total man-hours and material volumes are undefined
Lack of Proper civil service infrastructure No mechanism for tax ministry to refund VAT payments
3. Protectionist Stance
Protection of Domestic Players Cap on Foreign ownership
Anti Monopoly Law
4. Socialist Baggage
Transformation from State Controlled to Free Market underway
Gas Supply Law
Draft Trunk Pipeline Law




Could Shell afford to get out of Phase II and more generally,
get out
of Russia despite institutional and legal uncertainties? Why
and why not?

1. Make the rules or your rivals will- One of the largest projects in such an environment
2. Shell has already invested a lot of money not only for infrastructure but also for community
service
3. They have imparted the know how
4. Their sales for the next 30 years is already booked Huge Opportunity Cost
5. Sometimes a foothold in the country is the most important thing Strategic Move
6. Russia had a confirmed oil reserve of 60 billion barrels and 1700 trillion cubic feet of natural
gas. Shell is one of the first movers into this area to exploit these reserves and now
abandoning this project will be a huge loss of opportunity

If you were one of the foreign investors looking at
Russian oil and gas businesses, what would be your
key takeaways?

1. Business is not just about looking for demand in a market and catering to it
2. Strategy should take into account the legal and political environment of the
marketplace
3. Its not just your business that you need to be concerned about but also the
society and community at large. Keep those costs in mind
4. Energy business to which the GDP of a country is directly linked can become a
very sensitive issue and needs to be handled with due diligence
5. What works in one country may not work in another culture is important
6. Enter only when the country is ready to handle a FDI, first mover advantage
may not always work
THANK YOU !!!