Case study: Shell in Nigeria

Question 1

What specific political risk problems does Shell face in Nigeria? What are the underlying reasons for these problems?

The political risk problems in Nigeria stemmed from one of the main critical issues related to the social imbalance, inequality and discriminations of the minorities among the huge diversity of ethnic backgrounds in Nigeria. The severe intense ethnic conflict situation and circumstances in Nigeria was as such that it was highly challenging and extremely difficult to unite 250 different ethnic and linguistic groups in the country.

As Shell announced the mega oil and gas investment in Ogoniland, exploitation of the environment devastated by pollution caused by Shell's oil spills and gas flaring in the region subsequently led to extensive water pollution, acid rain, significant greenhouse gas emission and respiratory problems. This caused anger and protest by the Ogonis that resulted in violence and political unrest in the community. It was obvious that the Ogonis, who depended on farming and fishing, were robbed of their livelihood through the operations of Shell.

Shell maintained close relationship with the military government, managed by Sir Phillip Watts for the political benefits in the quest to exploit the riches from the land (Centre for Constitutional Rights). The military rule demanded huge amounts of royalty payment from the oil company for ‘protection'. Much of the instability in Nigeria stemmed from the economic effects of the severe civil wars, corruption and brutal dictatorship by military governments and economic exploitation. Shell increased violence in the Niger Delta through their reliance on Nigerian security forces, corruption by company's employees and environmental damage.

Environmental activist Kenule Saro-Wiwa who formed the Movement for the Survival of People, MOSOP, had extensively campaigned for political self determination of the great share of the oil revenue and the compensation on the losses from Shell activity as well as demanded restoration on the environmental in Ogoniland. MOSOP demonstrated in violence and began sabotaging Shell facilities in 1993.

Shell faced intense international pressure after the execution of Kenule Saro-Wiwa and eight others protest members, as well as torture, forced exile, detention, shooting and attacks on other peaceful protestors during the demonstration in Nigeria (Centre for Constitutional Rights). This resulted in international boycotts, e.g. the European Union froze the $295 million aid to Nigeria, World Bank froze the $100 million investment in gas plant in which Shell participated, UK customers boycott the use of Shell petroleum and others.

In addition, Shell's failure to properly maintain and upgrade its oil pipelines and other infrastructure, empty promises about clean-ups, corporate reform efforts, human rights violation as well as double standards approach in rich and poor countries like non compliance to environmental impact assessment, demolition of dwellers places without provision to re-house tens of thousands of inhabitants are part of the reasons why Shell and Shell employees faced the high violence and crime rate such as kidnapping of employee and family members, hijacking of the expensive equipment for ransom, sabotage of the pipeline and work-stopping occupation of facility by the protesters (Friends of the Earth, 2005).

Question 2

Given the high political risk in Nigeria, why doesn't Shell go somewhere else?

Nigeria Delta is the 9th largest source of natural gas in the world and has estimated oil reserve of 22.5 billion barrels (Friends of the Earth, April 2003). Shell began investing at Nigeria in 1937, and is the largest oil operation in Nigeria, producing half of the 2.5 million barrels Nigeria's exports daily (Foxcroft, 2004). Over USD12 billion in oil is pumped out every year, and most of it goes to the U.S (Damu and Bacon, 1996). Shell operations in Nigeria are significant and accounts for about 10% of the company's petroleum output (Christian Aid, Friends of the Earth, Platform and Stakeholder Democracy Network, June 2004).

Nigeria offers unlimited supply of crude oil unlike other oil producing countries, such as Saudi Arabia and other OPEC members, who impose a limit to daily supply of crude oil in the market. The unlimited supplies in Nigeria auger well for Shell's future global supplies and reserves of petroleum and enables Shell to maintain consistent returns on investment in Nigeria.

With oil representing 90% of Nigeria's export earnings and Shell being a major oil player through joint ventures with Nigeria's state oil company, Shell has a frightening amount of influence over the Nigerian military government (Christian Aid, Friends of the Earth, Platform and Stakeholder Democracy Network, June 2004). Oil companies pay countless sums of bribes to local governments to avoid action against them (Essential Action). It is therefore in the interest of Nigerian military regime to silence those who want to raise awareness of Shell's total disregard for people, exploitation of the land and destruction of the environment.

For example, Ken Saro-Wiwa and the Ogoni 8 were leaders of MOSOP, the Movement for Survival of the Ogoni People, who spoke out against Shell's environmental and human rights abuses. On November 10, 1995, they were executed after a trial that many heads of states worldwide condemned, for the stunning lack of evidence of accusations against them leading to their hasty execution (Essential Action). Two witnesses against the MOSOP leaders admitted to being bribed by Shell and the military to testify against Ken Saro-Wiwa (Essential). However, till today, Shell remains free of responsibility for these atrocities.

There is an extremely low cost of petroleum extraction offered by the Nigerian government outweighs the political risks involves in this industry. The government does not put pressure to oil company to develop the country's infrastructure and social services. The environmental pollution levels in Nigeria are 700 times higher than allowed in Europe (Human Rights Watch, 2003).

The unstable government and poor environmental ruling and policy allow easy government manipulation by Shell on environmental and safety issues. The government lobby cost is much lower than the cost for environmental cleaning measures. 

For example, associated gas, which is gas mixed up with the crude oil extracted from the earth's crust is flared off instead of being re-injected into the subsoil (Environmental Rights Action, June 2005). Flaring of associated gas has been prohibited since 1984 except with Ministerial consent. However, the oil companies in Nigeria will opt for flaring, as the fine per barrel of gas flared that has to be paid to the government is by far cheaper than other alternatives (A U.S. Non-Governmental Delegation Trip Report, 25 January 2000).

Shell invested in Nigeria long before it developed a sophisticated system for evaluating country and political risks for international investment decisions. Given the significant amount of investment in oil producing equipment and infrastructure that Shell has put into Nigeria over the last 80 years, the access to unlimited oil supply, the low cost of production and the strong influence over the Government and its policies, Shell has compelling reasons to remain in Nigeria despite the political risks.

Question 3

What action can Shell take to quell criticism about its operations in Nigeria?

The single biggest criticism of Shell is that it fails to deliver on its promises.

Since 1958, Shell has extracted USD30 billion worth of oil and natural gas in Nigeria (Friends of the Earth, April 2003). Flaring of gas mixed up with the crude oil also began right from the start (Environmental Rights Action, June 2005). Gas flares release toxins that affect health and livelihoods of the Delta inhabitants and also causes significant climate changes (Environmental Rights Action, June 2005).

It is estimated that flaring of associated gas cost Nigeria USD2.5 billion annually while 66% of Nigerians live below the poverty line (Environmental Rights Action, June 2005). Between 1976 and 1991, Shell was responsible for 2,976 oil spills, an average of 4 spills a week (Friends of the Earth, April 2003). Shell has not adequately addressed the issue of oil spills and gas flares on the environment and the people of Nigeria.

The people living with Shell as its neighbor, environmental and human rights groups and other stakeholders have over the years demanded that Shell take responsibility for cleaning up of oil spills, reducing gas flaring and fair compensation for loss suffered by those affected. Shell pays lip service to respecting human rights and promoting sustainable development whilst continuing business as usual (Friends of the Earth, 2005). Shell should approach the problem in 2 ways, corporate accountability and corporate social responsibility.

Despite the advances in the environmental industry technologies and global concern for environmental preservation and protection of human health, Shell has not adequately upgraded its industry operation based on the advances in environmental industry technologies (Friends of the Earth, 2005). Instead, Shell focused on upgrading its defensive form of public relations to portray itself as a good corporate citizen (Friends of the Earth, 2004, 2005). Shell should set up an independent committee in the assessment of the negative environmental and social impact of its operation, policies, production and procedure. This should be done in the transparent way with full access by the communities involved.

Shell needs to support the establishment of a legal framework, at a national and international level, that allows affected communities to hold companies like Shell accountable for their negative impacts and to address their failures on social and environmental issues. This may include new statutory duties on company directors to take responsibility on the step to reduce the significant negative social and environmental impact of theirs operation, policies, production and procedure. These would require Shell directors to take the first step in turning Shell's corporate social responsibility into action.

Shell must take measures to protect the environment through:

  • Eliminating gas flaring by putting in place facilities to use the gas found mixed up with the crude oil instead of flaring it off (Environmental Rights Action, June 2005).
  • Prevention and clean-up oil spills by upgrading the oil spill response system, accelerating remediation activities and better linking these to initial clean up, education and prevention measure, and reviewing and replacement of vulnerable infrastructure. Equipment and pipes are more than 30 years old and are failing due to excessive corrosion and rust, resulting in oil spills (Friends of the Earth, April 2003).
  • Improve environmental impact assessment and awareness
  • Waste management
  • Clean water production
  • Biodiversity
  • Responsible land use and compensation for lost land, income, resources and lives

Although Shell has instituted community development program in Nigeria delta region worth USD50 million a year, and involving 130 social workers, the government also needs to adequately address the development problems by providing infrastructure and social services. Oil production is Nigeria's main export, accounting for 90% of its export earnings. Shell Nigeria produces 35% of Nigeria's oil production, making it the company with the largest share of production and influence (Christian Aid, Friends of the Earth, Platform and Stakeholder Democracy Network, June 2004). It is therefore in a very strategic position to influence the government policies towards sustainable community development (Essential Action)

Thus, in order for Shell to quell criticism about its operations in Nigeria, it will need to deliver on its promises and start taking responsibility for the problems created by its oil production activities in Nigeria.

References

  • A U.S. Non-Governmental Delegation Trip Report. 25 January 2000. Oil for Nothing: Multinational Corporations, Environmental Destruction, Death and Impunity in the Niger Delta. http://www.essentialaction.org/shell/report/ (Accessed 23 September 2006).
  • Centre for Constitutional Rights. On Eve Of Royal Dutch/Shell's Annual General Meeting, Reports Confirm Double Standards On The Environment And Allegations Against Royal Dutch/Shell For Pattern Of Violence In Nigeria. http://www.ccr-ny.org/v2/reports/report.asp? ObjID=CLx2QjhMKl&Content=399 (Accessed 18 September 2006).
  • Christian Aid, Friends of the Earth, Platform and Stakeholder Democracy Network. June 2004. Shell In Nigeria: Oil And Gas Reserves Crisis And Political Risk: Shared Concerns For Investors And Producer-Communities, A Briefing For Shell Stakeholders. http://www.stakeholderdemocracy.org/pdf/shell04web.pdf (Accessed 18 September 2006).
  • Damu, Jean and David Bacon. 1996. Oil Rules Nigeria. http://www.thirdworldtraveler.com/Transnational_corps/OilRules_Nigeria.html (Accessed 23 September 2006).
  • Environmental Rights Action. June 2005. Gas flaring in Nigeria: A Human Rights, Environmental And Economic Monstrosity. http://www.climatelaw.org/gas.flaring/report/gas.flaring.in.nigeria.html (Accessed 18 September 2006).
  • Essential Action. Shell in Nigeria: What are the issues? http://www.essentialaction.org/shell/issues.html (Accessed 18 September 2006).
  • Foxcroft, T. 2004. Nigeria's oil crisis. http://www.news24.com/News24/Africa/Features/0,6119,2-11-37_ 1565082,00.html (Accessed 23 September 2006).
  • Friends of the Earth. 2004. Behind the Shine: The Other Shell Report 2003. http://www.shellfacts.com/ (Accessed 18 September 2006).
  • Friends of the Earth. April 2003. Failing the Challenge: The Other Shell Report 2002. http://www.shellfacts.com/ ( Accessed 18 September 2006).
  • Friends of the Earth. 2005. Lessons Not Learned: The Other Shell Report 2004. http://www.shellfacts.com/ (Accessed 18 September 2006).
  • Human Rights Watch. 2003. Oil Companies Complicit in Nigerian Abuses. http://hrw.org/english/docs/1999/02/23/nigeri804.htm (Accessed 23 September 2006).