Journey to Sakhalin

The Saline project was the first Russian labor-sharing commensurateness (AS) with contrasted corporations. A AS is a commercial contract between investor(s) who argon volition to make a huge, long term and high risk investments with the innkeeper res publica that has the natural recourses ( ordinarily cover and/or petrol) to exploit. The terms behind AAAS are usually deferent than regular commercial contracts, as they usually bypass some of the regulations that the phalanx country imposes on unknown Investments.The bargains to a fault last for the Lifetime of the project. to a lower place the terms of the AS, the investing company gets the larger share of venues at the beginning of the contract to recoup the represent of investment. As time goes by, the net revenues (revenues after the cost of operations) are shared between the investment companies and the host country, usually a 20/80 split. AAAS are controversial In Russia because they bypass some of the taxes and li censes that a foreign company would fork out to pay.Previous foreign companies had worked In Russia under the regular tax system, therefore It was argued that AAAS dont extend all businesses equally and create a sense of unfairness. Furthermore, AAAS apply except to Greenfield.. Greenfield are unexploited, undeveloped large pieces of lands with exploitable resources, and some circles felt that Russia should not cheaply bargain away these coveted lands. AAAS are agreements between the foreign direct investors (FED) and the federal Russian government thereby limiting the power of the mid-level establishment, traditionally and politically a powerful group In Russian Pollock.At the time of the agreement, the local Saline Government, led by regulator Igor Verification, was a key player in the decision, mainly because Verification was politically influential and in upgrade of the project. After the fall of the communist regime, Russian GAP fell by 50% and up to fractional of the popu lation was living below the poverty line. Oil and gas constituted the main export meshwork of Russia, whose borders encompassed the largest supply of gas In the world (30%). Attempts by Russia to privative state-owned energy firms had mixed results.The OLL Industry produced a progeny of vertically integrated firms such as Skidpan and Subnet, which formed the basics of a competitive environment. Conversely, prevarication of the gas industry produced a single, dominant company Gazpacho. At times, it appeared that he Russian Government acted on behalf of Gazpacho ascribable to the significantly higher impact this Industry had on the Russian economy, and because It was a 38% stakeholder In the company. As Gazpacho controlled 20% of the worlds gas production, tenure were gallants political Interests escalated Witt ten development of this industry in Russia.Thus far, Russians exports were mainly to Europe, as Russia had been unable to build pipelines to easternmost Asia and Japan. The energy sector constituted 20% of GAP, and Gazpacho alone was responsible for 8%. The growing economies of the Far East, combined with Russians need to exploit its oil and gas serves (both for economic reasons, as easy as for political influence) helped push Russia to seek Foreign Direct Investment (FED). Russia also required foreign expertise, as transportation of gas to Asia would require a Liquefied Natural Gas (LONG) facility something they did not have the technical ability to create.Foreign differentiatenerships accordingly offered the fastest and about efficient way of developing previously inaccessible resource field as well as exporting to untried markets. Previous administrative scandals (BP Amoco) showed Russia to be politically and financially risky, causing a decrease in FED. A AS agreement would prove a level-headed faith gesture from Russia that it was ready to enter the world economy, and to overcome the bureaucratic history and corruption that has s lotd away foreign companies. epidermis would not have invested $108 in the Saline II project exhibit 1 without a AS. Russia needed this first AS to attract future FED, and as such would potential be most generous with the terms of its first AS. Successful execution of a AS by Shell, could create future opportunities to exploit additional Greenfield development in Russia. Despite these advantages, there were several downsides. Protectionism by members of the Russian Dumb meant that this AS was rapidly becoming politicized and might face ongoing challenges..One term of the AS was that Saline Energy Investment Company (SIC) needed to use 70% Russian labor and goods for the part of the project measured as measured man- hours and volume of material however the oil industry in Russia was mainly functioning on ground and had very little experience with offshore activities as exampled by Russians inability to build and maintain a Liquefied Natural Gas (LONG) plant. The terms of this part of the agre ement were particularly vague, as it was roll defined what would be considered Russian content in the project.Additionally, enforcement of the AS would be difficult due to the geographical remoteness of the project. * Investments in Saline did not Just include the production facilities, but also contributions to the local administration. SIC was responsible for the upgrade (or construction) of the island infrastructure as well as other wish-lists of improvements. The SIC also had to provide local community sponsorships of facilities, scholarships and grants as well as maintaining good relationships with environmental activists. Saline Island is a pristine environment.In order to be successful, social and public relations have to be a priority, which could prove to be challenging since the business of exploiting oil and gas is usually untamed to the environment as well as the economic and social landscape of local communities. Care in negotiations had to be achieved in order to spon sor projects that would keep the local residents happy and friendly, and yet keep a tight control on spending for these projects and not inflame environmentalists. * Navigation of local politics was also a challenge.In the first stages of a project like this, good relations with local government employees are sometimes more important than relations with politicians higher up in ten unlearning as most approvals are cone locally. As ten project progressed, Ethereal authorities became more important as Putting attempted to reinstitution central authority. Another obstacle was the level-headed system. Difficulties and delays in obtaining approvals for the Technical and Economic stop for Construction (TCO) as well as a lack of stabilization in the Russian legal system endangered the project as it would not proceed as scheduled without them.Without changes to the legal system, blazon of the Sagas agreements that conflicted with current Russian laws could not be enforced and increased t he risks associated with the investment. Despite these obstacles Shell should invest in Saline. There are very few Greenfield available with the production capacity of Saline. Exploitation of non-developed lands allows for the building of forward-looking technology instead of maintaining old equipment. This is more efficient and therefore more profitable. The initial costs are lower as there is no need to dismantle old facilities to build new ones.It allows Shell to gain a foothold in Russia which has a large reserves of oil and gas. When at wide-cut capacity, Saline could produce up to 5% of the world LONG needs making this a full of life strategic investment for Russia. Russia needs to rebuild its economy and is now ready to offer better deals then it would in the future. It does not have the technology to build offshore platforms and LONG producing capabilities. It needs these facilities to access new markets and the location of Saline in the Arctic has great potential in thes e regards.The Saline II AS agreement has terms that will be difficult to match in the future and has the advantage of lessen the influence of the Russian oligarchy in the business dealings. Russia would not Jeopardize its standing as a 68 country and is motivated to have successful foreign investments. Of course one company to watch is Gazpacho. It is a major player in Russian politics and may feel threatened to have the East Asian market closed to them. Shell should be open to the idea of having Gazpacho be part of the Consortium.To moderate the risk, Shell should try to attract more investors to distribute the risk, at least at the beginning maculation costs are high, then buy the shares back once production brings in stable revenues. They should comprise the given requirements very carefully and ensure that they keep maintain heir end of the bargain by hiring the requisite local contractors and labor force. Shell should behave as a good neighbor as much as possible by making sure that the environment is being taken care of.Natural resource industries require large capital investments and are politically difficult to navigate. They have such a significant geopolitical impact that the Coos of these companies do not make agreements with the heads of other companies, but rather with heads of state. Their decisions do not just affect the shareholders of the company, but also the access of energy by their win country as well. If the political climate changes with a new government hostile to the home country of the company, no commercial contract can be legally enforced.A company could lose all of its investments in the host country should they be removed from the operations while the plants and equipment remain. Depending on the level of hostility and the impact the resources of a country have on the global energy supply, escalation may involve military force to potent indispensable resources. Usually the countries with the companies that have the most techn ical expertise do to own the lands that contain the resources and the countries with the resources do not have the technical expertise to exploit them.It creates a mutual (although wary) Interdependence. An 011 company cannot easily grant to another site Ana move Its platforms, refineries and pipelines, while the host country cannot operate the equipment without the technical knowledge of the companies (which is the companys only leverage). Both sides need to do a a diplomatic dance, constantly negotiating give and takes on the ontogenesis of these resources. Exhibit 1 Saline 2 project