Shell oil in nigeria case study answers

part one I N T E G R A T I N G C A S E 1

Shell Oil in Nigeria

Introduction Nigeria is a country that is slightly more than twice the size of California. In July of 2011, its population was estimated at just over 155 million people making it the 8th

most populated country in the world. It is Africa’s most populous country and is composed of more than 250 ethnic groups. The country has the second highest rate of HIV/AIDS deaths and is ranked number three with respect to total number of people living with HIV/AIDS in the country.

The country itself is full of rich natural resources such as natural gas, petroleum, tin, iron, coal, and limestone. Despite these rich resources, the country has been crippled by civil wars, military rule, religious tensions, and corruption. Even more devastating was the poor macroeconomic management that has left the country completely dependent upon its number one resource which is petroleum. Petroleum provides 95% of the foreign exchange earnings and close to 80% of its budgetary revenues. In 2010, Nigeria surpassed Iran to become the second largest oil producer behind Saudi Arabia. It shipped 2.464 million barrels of oil per day compared to Iran who shipped 2.248 million barrels per day.

The United States imports 17% of its petroleum from West Africa with Nigeria being the key supplier. That number is estimated to rise to over 25% in the year 2015. Despite the potential for oil to change the lives of this resource rich country, the majority of the Nigerians live on less than $1USD per day. The poor living condi- tions, low wages, and lack of quality of life improvement is attributed to the large amount of corruption by the citizens, politicians, and companies who exist within the country.

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A History of Corruption While petroleum drives the majority of the economy, it also drives the majority of the corruption. Nigeria has long been considered the most corrupt country in the world. Its citizens, government and corporations have been party to and involved in political corruption, bureaucratic corruption, electoral corruption, embezzle- ment, and bribery. In fact, it has been said the corruption is actually a viable enter- prise in the society with no way to trace these activities or prosecute those involved.

The companies operating in this region have long been blamed for allowing, par- ticipating, and even creating the corruption that has taken place. Not only have they failed to engage reformers but they have been accused of doing things like bribing officials, obscuring oil revenue figures, and failing to invest in the infrastructure and improvement of the people in the country. While the oil companies point to mil- lions of dollars of investment into the region, one look at the impoverished condi- tions common to the people of Nigeria and its difficult to say it was enough.

An estimated $200 billion in revenues is planned to go to African treasuries in the next 10 years as new oil fields are opened throughout this region. This oil will bring the largest influx of revenue in the continents history and more than 10 times the amount western donors give each year in aid. There is great concern about what countries like Nigeria will do with this money and the potential corruption that will take place.

Oil giant Royal Dutch Shell Group stands to benefit the most from these new oil fields as they are the largest producer of oil in the region. The company produces more than 1 million barrels of oil per day. With that said, there is much concern due to Shell’s storied past in this country.

Shell Operations in Nigeria The Royal Dutch Shell Group, more commonly referred to as Shell, is a group of more than 1,700 companies all over the world. 60% of the company is owned by Royal Dutch of the Netherlands and 40% is owned by Shell Transport and Trading Group of Great Britain. The full merger between these two companies was official in 1907. This conglomerate of companies includes companies such as Shell Petroleum of the USA, Shell Nigeria, and Shell Argentina. The company’s mission was to bulk ship and export oil revolutionizing the transport of this precious resource. Soon after the merger was complete, the company rapidly expanded across the world with both marketing offices and exploration and production facilities. Within twelve months, both of the struggling entities were transformed into successful ones.

In 1937, Shell entered the Nigeria making it the first energy company to enter the market in this country. By 1938 they were granted an exploration license that allowed them to prospect for oil in the region. It was not until January of 1956 that the company drilled its first well. Later that year, the company changed its name to Shell-BP Petroleum Development Company of Nigeria Limited (SPDC). Over the course of the next twenty years Shell entered into a number of agreements with the Nigerian government that gradually increased the government’s ownership of the company from 35% all the way up to 80% in 1979.

As it stands today, Shell operates two businesses related to the exploration, pro- duction, and transportation of oil and gas within Nigeria. The SPDC still exists and is the largest private sector oil and gas company in Nigeria. It is a joint venture between the government owned Nigerian National Petroleum Corporation (NNPC) which owns 55%, Shell which owns 30%, Elf Petroleum Nigeria Limited which owns 10%, and Agip which owns 5%. The other business operated by Shell in Nigeria is called Shell Nigeria Exploration and Production Company (SNEPCO)

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which was formed in 1993 to develop deep water drilling resources. It operates two deep water licenses and a production sharing contract with the NNPC.

The SPDC’s operations are spread over a 30,000 square kilometer area in the Niger Delta. Its network consists of 6,000 kilometers of flowlines and pipelines, 90 oil fields, 1,000 producing wells, 72 flowstations, 10 gas plants, and two major oil export terminals. This business unit is capable of producing up to one million bar- rels of oil per day on average. The SNEPCO is committed to the discovery of new resources and sources of oil and is charging towards the goal set by the Nigerian government of being able to have a capacity of four million barrels per day.

While Nigeria was once the shining star of Shell’s portfolio, it is now a large black cloud that hangs over the entire organization. Shell Nigeria has been accused of pol- lution, collusion, corruption, bribery, and false accounting. Every time the company settles a claim or accusation, another one pops right up. The following provides an account of the accusations and corruption that have scared this organization through- out its history.

Ken Saro-Wiwa Shell’s first problems began in the early 1990’s when criticism of human rights pol- icies and the destruction of the environment in Nigeria became a hot topic. Ken Saro-Wiwa was a leading environmentalist and author who happened to be a Nigerian native and part of the Ogoni tribe. He was one of the more determined and articulate critics of the government and of Shell Oil’s destruction of his home- land. He argued that neither party had appropriate regulations for protecting the Ogoni people’s land and did not return any of the immense wealth that was taken from their region.

Saro-Wiwa organized a group called the Movement for Survival of the Ogoni People and quickly grew to be the largest political organization in the region. This group began to protest and demonstrate for an end to destructive behaviors such as oil spills, gas flaring, and the destruction of property to make way for pipe- lines that Shell was building. They also began demanding they be given a share of the revenues from the land Shell was using. Shell denied these claims and stated the group was greatly exaggerating their claims.

Nigeria’s military began to respond to the groups claim through a strategy that has been referred to as a “scorched earth campaign against the Ogoni” which included burning villages and committing rapes and murders. Shell refused to get involved stating that the company does not get involved in politics. This led to Saro-Wiwa and eight other Ogoni members were arrested on charges that west- ern governments and human rights groups called trumped up. The Nigerian gov- ernment ultimately executed all nine with Saro-Wiwa’s body being burned with acid and buried in an unmarked grave.

This event ignited world-wide protests and criticism against Nigeria, the African oil industry, and Shell. Shell was sued in a New York court by Saro-Wiwa’s family and was accused of bribing soldiers who carried out human rights abuses in addi- tion to playing a role in the capture and execution of the nine. Shell eventually settled this case out of court for $15.5M.

Oil Spills Oil spills are quite prevalent in the Niger Delta and it is estimated that the equiva- lent of the Exxon Valdez spill has occurred every year for the past 50 years. There is no other place in the world that has been as battered by oil as this region. The

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Nigerian Government and international environmental groups sponsored a report in 2006 that concluded as many as 546 million gallons of oil have spilled into the region of the past five decades. This has led to the destruction of swamps, aquatic life, and the main food source for many of the tribes.

Shell is the major player with thousands of miles of pipes that have been laid through the swamps and fertile land. The majority of the spillage is attributed to poorly maintained and aging pipes however Shell maintains the position that the majority of the spills are due to oil thieves and sabotage. A spokesperson for Shell stated that the company does not discuss individual oil spills but only two percent of the total spills are due to equipment failure. Richard Steiner, a consultant on oil spills, concluded in a 2008 report that historically “the pipleline failure rate in Nigeria is many times that found elsewhere in the world”. He also noted that Shell has acknowledged almost every year a spill due to corroded pipes.