Shell in nigeria

Brian Anderson faced a deeply disturbing situation. It was October 31, 1995—just over a year since he’d been named managing director of Royal Dutch/Shell’s Nigerian oil exploration and development operation. During the previous months, tensions between the Nigerian government and a group of activists for the Ogoni people—one of Nigeria’s 240 minority tribes—had finally come to a head.

Arrested and imprisoned on charges of inciting murder in May 1994, fourteen of the activists had been tried before a special military tribunal that was regarded by many as a hanging court. During the proceedings, Anderson had spoken out publicly about the defendants’ right to due process, medical treatment, and lawyers of their choosing. However, his words had had no noticeable effect on the decisionmakers in the government in Abuja, headed by General Sani Abacha, the country’s military dictator who in 1993 had usurped the power of a short-lived civilian government.

Among the imprisoned was Ken Saro-Wiwa, a vocal critic not only of the Nigerian government but also of Shell. A popular novel and screenplay writer, television producer, talented organizer, and environmentalist, Saro-Wiwa was—and had been since 1993—the leader of MOSOP (Movement for the Survival of Ogoni People).

According to Emeka Achebe, the external relations manager for Shell’s Nigeria operation at that time, the decision to try the Ogoni activists before a special military tribunal rather than a judge and civilian jury had two implications: first, the tribunal could impose the death sentence for being an accessory to murder—whereas the death sentence could not be imposed in a civilian case for the same offense.

Second, the verdict and sentence of the tribunal could not be appealed to a higher court—as a civilian decision could. To Achebe, the move seemed ominous: it appeared as if Abacha was determined to have Saro-Wiwa killed, and had put in motion the bureaucratic machine that would bring about the desired outcome.

No

The tribunal had voted to convict Ken Saro-Wiwa, along with eight of his co-defendants, on charges that in May 1994 they had incited the murder of four Ogoni chiefs representing a more moderate wing of MOSOP. After a short deliberation on the sentencing, the tribunal had returned with the death sentence for all nine.

Royal Dutch/Shell Company Background

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Royal Dutch was founded in 1890 by Aeilko Jans Zijlker, after he accidentally discovered pools of oil in the Dutch East Indies. The company was a potential takeover target for U.S.-based Standard Oil Corporation and Zijlker, feeling threatened, restricted the ownership of Royal Dutch shares to invitees. In 1907, Royal Dutch merged with U.K.-based Shell Transport and Trading Company, ________________________________________________________________________________________________________________

Post-doctoral Research Fellow Mihnea Moldoveanu prepared this case under the supervision of Professor Lynn Sharp Paine as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Research Associate Robert J. Crawford also contributed to the case.

Copyright © 1999, 2000, 2006, 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

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whose top managers also felt besieged by Standard Oil but were not willing to see their firm taken over by U.S. managers.

Under the terms of the merger agreement, Royal Dutch would handle all oil refining and production operations and Shell would transport, store, and market the resulting oil products. Royal Dutch, based in The Hague (Netherlands) and Shell Transport and Trading, based in London (U.K.) became separately traded holding companies owning 60% and 40% of the Royal Dutch/Shell Group’s operating subsidiaries.

Each holding company had its own chairman and operating officers, each of whom answered to a Committee of Managing Directors (CMD) drawn from the two companies’ boards of directors, and chaired by one of its members. The combined company became one of the most profitable and fastest growing large firms in the world, and emerged as the leader in its market after World War II.

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Until the mid-1930’s, the Group was led by Henri Deterding, a perceived “strong man” who built up a large bureaucracy to support the company’s central offices. Deterding reportedly supported the National Socialist party in Germany after its rise to power in 1933, and negotiated with Adolf Hitler to supply oil on credit. Such events—true or rumored—led to his forced retirement. After Deterding’s tenure, executive power on the CMD shifted from its chairman to the committee as a whole, and consensus became a necessary condition for executive action.

After 1959, at the suggestion of consultants from McKinsey & Company, the Group’s subsidiaries were given a larger range of freedom to operate, further diluting the executive power of the CMD’s Chairman. The intent of the change was to allow executives running the companies within the Group to make decisions with greater autonomy and speed. (See Exhibit 1 for Group structure.)

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Royal Dutch/Shell was made up of people who had evolved a unique culture and a positive selfimage. Managers of the Group’s operating companies, numbering about 200 in 1995, had a reputation for operating “with an effortless air of their own superiority… believing that they work for the bestmanaged company in the world.”1 Monroe Spaght, chairman of Shell Oil in the U.S., suggested that the Greek ideal of arete, which conveyed the idea of “the fullest and finest exercise of one’s abilities in all activities recognized as good,” best captured the Group ethos.2 Shell managers were widely recognized among peers and clients for their technical competence. In 1994, Shell ranked third in the first Financial Times survey of Europe’s “most respected companies.”

No

The Group’s revenues reached $103 billion in 1991, making it the largest oil company in the world. At that time, Royal Dutch/Shell was operating in 130 countries and had some 101,000 employees. As the 1990s began to unfold, however, some felt that Shell’s financial performance was not all that it should be. The Group’s return on average capital employed fell to 7.9% in 1993, almost 1.5% below the average of its competitors. Despite an abundance of cash, Shell’s managers were finding it difficult to unearth new opportunities for growth. (See Exhibit 2 for summary financials.)

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In May 1994, the Group’s chairman Cor Herkströter assembled 50 executives to review Shell’s financial performance, which he felt was unacceptable. Herkströter concluded that Shell had become “bureaucratic, inward-looking, complacent, self-satisfied, arrogant… technocentric and insufficiently entrepreneurial.”3 The meeting set in motion a thorough-going review of every aspect of the company that eventually led the Group to embark on a major transformation effort.

In February and March of 1995, just as the Group’s senior executives were examining change proposals generated by the designated review teams, Shell found itself in the middle of a major environmental controversy. This was not the first time environmentalists had challenged Shell. Although the company had earned high rankings for environmentalism from some quarters, environmental groups had from time to time taken issue with certain of the company’s practices. One

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Royal Dutch/Shell in Nigeria (A)

example was Shell’s production, into the 1990’s, of hazardous pesticides (Aldrin, Dieldrin, and Endrin) that had been linked to human and environmental dangers in developing countries.

This time the controversy was over the disposal of the Brent Spar, a North Sea storage buoy that had been in operation since 1976. As reported in Stephen Howarth’s commissioned history of Shell, the company spent 30 months considering the best way to dispose of the spar and studying the environmental impact of each option. On the advice of independent scientists, Shell officials decided that the safest and environmentally best alternative was to tow the Brent Spar to the deep Atlantic and sink it in 6,000 feet of water.

Permission for this method of disposal was received from the British government. After consulting with the relevant ministers of various European governments and meeting no objections, Shell announced its plan to the press.4

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Within a short period of the announcement, the plan came under attack from Greenpeace, the worldwide environmental protection and advocacy group, on the grounds that potentially toxic chemicals supposedly still inside the spar would produce widespread contamination at sea. On April 30, a team from Greenpeace boarded the Brent Spar in a dramatic protest against its disposal by sinking. Television stations accepted the Greenpeace footage of theevent, broadcasting it without critical commentary throughout Europe.

The publicity provoked powerful emotions among the gasoline-buying public in northern Europe, particularly in Germany, where Shell stations were boycotted by angry automobile owners. Sales volumes at some German stations dropped by 50% during the week of the media coverage. More worrying were the bombing and shooting at some German stations. Some European governments that had a few months earlier approved Shell’s plans—actively or tacitly—responded to pressure from their electorates and began to urge Shell to seek other means for disposing of the Brent Spar.

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On June 20, Shell decided to abandon its plans for sinking the spar. Instead it was towed across the North Sea to shelter in a Norwegian fjord, with the permission of the Norwegian government. Greenpeace later admitted that some critical assumptions on its part had been mistaken—notably the assumption that the contents of the Brent Spar were largely toxic.

Royal Dutch/Shell in Nigeria

No

Shell’s involvement in Nigeria began under British colonial rule in 1937 when the company, in equal partnership with British Petroleum (BP), was given exclusive right to prospect for oil. In 1958, oil was discovered in the Niger Delta. The partnership between Shell and BP became a three-way joint venture in 1973 when the Nigerian government took a 35% stake.

Since that time, the equity held by the government-owned Nigerian National Petroleum Corporation (NNPC) had varied between 35% and 80%, and it had held a controlling interest since 1974. (See Exhibit 3: Equity Interests in the SPDC-Operated Joint Venture.) Shell’s share of the joint venture was held by the Shell Petroleum Development Company of Nigeria Limited (SPDC).

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In 1979, the Nigerian government appropriated BP’s 20% share of the joint venture. The government’s action was interpreted by many as a response to the then-U.K. government’s policies toward southern Africa. In 1988, the Nigerian government gave minority stakes in the joint venture to Elf and Agip, two European oil companies. In 1995, NNPC owned 55% of the SPDC-operated joint venture, whereas Shell owned 30%, Elf—10% and Agip—5%.

While each party was responsible for selling its own share of the oil produced by the venture, the division of the venture’s profits did not mirror its equity structure. Instead, according to a formula established in 1991, so long as oil prices remained in the range of $12.50-$23.00 per barrel, the private 3

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partners’ share of revenues was insensitive to oil price fluctuations. (See Exhibit 4: Who Gets What— SPDC Joint Venture.) The government took the balance of the revenue on each barrel of oil through the equity held by NNPC and through royalties and direct taxation of the oil revenues of the participating oil companies. Nigeria’s “take” of Nigerian oil revenues was at that time the highest of any government in the world. (See Exhibit 5: General State Take Comparison.)

Shell was not the only oil company to partner with the Nigerian government for the exploration and development of Nigerian oil resources. As part of its overall plan, the Nigerian government also set up joint ventures with other multinational oil companies, including U.S. oil firms Chevron, Mobil, and Texaco in the late 1960s and early 1970s. These were still in operation in 1995.

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Investments in the joint venture proceeded according to a “cash call” system. By the terms of the agreement, SPDC, as operator of the joint venture, would propose an investment program, typically for a five-year period, outlining plans for oil exploration and development, as well as associated environmental remediation and community development activities. Representatives of the venture partners, including the Nigerian government, would debate and negotiate the terms of the proposed plan until some agreement was reached.

Each partner was then responsible for contributing funds in proportion to its respective equity stake. Based on its forecasts of anticipated monthly expenditures, Shell issued periodic “cash calls” to the partners according to the schedule that they had jointly ratified. Shell’s managers noted, however, that the Nigerian government was not always a timely contributor, but had sometimes postponed payments or reduced the size of the joint venture’s budget. In mid-1995, the Nigerian government was some $300 million in arrears.

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By the mid-1990s, the SPDC-operated venture controlled about 60% of Nigeria’s known oil reserves and employed some 5000 people, of whom 270 were non-Nigerians. The venture was producing about 930,000 barrels of oil a day from 94 oil fields over a network of 6,200 km of flowlines and pipelines. About 280 sq. km of the 31,000 sq. km of acreage allocated to the venture was used for production facilities, office and living accommodations, well-sites, pipelines, and roads—a land take of .3% of the Niger Delta.

According to Shell, SPDC operations represented about 12% of Shell’s worldwide crude oil production and about 7% of its crude oil production profits. For 1994, Shell’s net income from SPDC was roughly $235 million. Shell itself used a very small amount of the crude oil produced in Nigeria. Instead SPDC’s share was sold to other end-users.

No

Nigerian Oil and Nigerian WealthIn the wake of the discovery of high-quality oil in the Niger Delta and the growth of its oil producers, Nigeria had become the world’s tenth-largest producer of oil, and its seventh-largest oil exporter. (See Exhibit 6: Nigeria Crude Oil Production.) In 1996, oil revenues generated $10 billion for the Nigerian government, and accounted for over 90% of the country’s foreign exchange. (See Exhibit 6: Nigerian Oil Revenues.)

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After the 1972-1973 oil price shock—when the government significantly increased its stake in the joint venture—the fate of Nigeria’s economy became closely intertwined with the evolution of its oil industry. With the prospect of ever-increasing oil prices, the government paid little attention to using oil revenues to grow and diversify the non-oil economy. Non-oil sources of revenue, in particular a thriving agricultural sector, were unable to compete as independent centers of economic and political activity.

From its position as an exporter of such foodstuffs as palm oil and yams, Nigeria became a net importer of high-value food products. Moreover, distortions generated by the oil economy— windfall revenues that raised the value of the Nigerian currency—slowly strangled other export sectors whose prices rose with the currency, thus further increasing Nigeria’s dependence on oil.

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While the central government tried to strengthen and maintain its control over the economy, the various states of Nigeria vied with the central government and with one another to get their share of the oil revenues. Regional state governments proliferated in number from 4 to 30 (36 by 1999), each insisting on its own infrastructure, university, and other trappings of governmental authority.

As a consequence of the focus on oil, Nigeria’s per-capita gross domestic product (GDP) closely tracked its oil revenue during the period 1970-1990. (See Exhibit 6: Oil Revenue in the Nigerian Economy.) In turn, oil revenues closely tracked Nigerian oil prices, leaving the Nigerian GDP figure very vulnerable to fluctuations in world oil prices. (See Exhibit 6: Nigerian Oil Prices.)

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Nigeria: Socio-Political Background

In 1995, Nigeria was Africa’s most populous nation, with about 100 million people living in a geographical area the size of Texas. Over 50% of the population, growing at 3% annually, were under 15 years of age. The populace comprised some 240 ethnic groups, of which the Ibo in the East, the Hausa-Fulani in the North, and the Yoruba in the West were the largest, together representing about two-thirds of the total. About 50% of the population was Muslim; about 40%, Christian.

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The country was plagued with crime and unemployment. One Shell official talked about the need for a police escort from the Lagos airport to the center of Lagos, to protect against armed robberies. He also noted the dearth of health care and elementary schools in some areas, and the high level of unemployment among Nigerian youth. Of particular concern was the high susceptibility of the country’s young and poor to extremism and radical movements that played on their emotions. Nigeria’s government and system of public officials was perceived as the most corrupt in the world in 1996, according to Transparency International, a Berlin-based watchdog group concerned with corruption. (See Exhibit 7 for some standard economic indicators for Nigeria.)

To protect their people and facilities from crime, companies operating in Nigeria were obliged to rely on special members of the country’s regular police force known as “supernumerary police.” Shell and other companies that employed supernumeraries could impose their own rules of engagement for dealing with conflicts and were able to dismiss any police they deemed unsatisfactory. Companies were responsible for paying, training, and equipping the police assigned to their facilities, including providing them with arms as necessary.

No

Nigeria had been a British colony, originally set up as the Crown Colony of Lagos in 1861. The geographical boundaries that defined Nigeria in 1995 had been drawn in 1914, encompassing in some cases ethnic groups that had been violently antagonistic toward one another throughout history. In 1960, Britain’s government recognized Nigeria as an independent country, but British rule had left lasting impressions on the Nigerian society, including a tradition of democratic institutions and one of the freest presses in Africa. Nigeria remained part of the British Commonwealth through 1995, and Abacha was planning to send a representative to the Commonwealth Conference in Auckland, New Zealand, scheduled to begin November 8, 1995.

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After British decolonization in 1960, Nigeria’s prospects seemed bright. Sitting atop enormous oil reserves and mineral deposits, it also had a well-developed agricultural sector and held promise as a model of development for Africa. However, tensions among the country’s ethnic groups increased and erupted violently in 1966 when an Ibo major led a failed coup against the civilian prime minister. The prime minister was killed during the coup, as were many senior northern (Hausa-Fulani) politicians. An Ibo general assumed the presidency, but this led to resentment against the Ibo which in turn led to a second revolt and another military government. The subsequent Ibo-led rebellion

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resulted in the Biafran civil war, and members of several minority tribes in the Niger Delta joined the Ibo. The war ended only in 1970 with the violent putdown of the rebellion and with a death toll of one million people. Apart from some brief periods of civilian rule, Nigeria was subsequently led by military governments—many of them headed by Hausa-Fulanis, either directly or behind the scenes.

When General Sani Abacha seized power in November 1993, he abolished most of Nigeria’s remaining democratic institutions, reduced the powers of state governments, and jailed the winner of the 1993 presidential election, Moshood Abiola. Abacha’s leadership met with at least one direct challenge. When leaders of the unsuccessful coup were sentenced to death by a military tribunal, Abacha commuted the sentence in an uncharacteristic bow to international opinion.

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Ogoniland and the Niger Delta

The Ogoni people—about 500,000 in number—were one of 20 minority tribes occupying the Niger Delta. (See Exhibit 8: Map of Nigeria.) They inhabited a 404-square-mile stretch of land and represented about 7% of the Delta’s population. Dependent on the natural resources of the Delta for their welfare, the Ogoni lived principally from farming and fishing. As in other parts of Nigeria, poverty was ubiquitous. The region had few hospitals, few jobs, and high rates of infant mortality.

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The Niger Delta was the geographical home of Nigeria’s oil exploration and development efforts, and the source of most of the country’s oil in the mid-1990s. (See Exhibit 9: Location of the Six Majors in the Niger Delta Region.) According to Shell’s Emeka Achebe, the importance of the Delta dated back to the days of the slave trade in the eighteenth century, when the tribes in the region functioned as buffers between the hinterland and the white slave buyers. Later, with the trade in palm oil, the tribal chiefs again used their privileged middle-man position to increase their power and autonomy.

It was here that the British expeditionary forces met strong resistance in the mid-nineteenth century. Although the Delta’s commercial importance waned in the twentieth century after the federal government captured the palm oil business, the local tribes did not forget their previously powerful “middle kingdoms.” With the discovery of crude oil riches in the late twentieth century, the Delta’s tribal leaders sought to restore the region’s importance and their own rightful position.

No

In 1995, Ogoniland housed about 100 oil wells—96 belonging to Shell and a small number to Chevron. A petrochemical plant, a fertilizer plant, and two refineries—all belonging to the Nigerian government—were also located in the region. Though Ogoniland’s contribution to Nigeria’s total output of crude oil had fallen to about 1.5% by 1993, at its peak twenty years earlier, it accounted for about 5%. According to Shell’s figures, Shell had received 4% of the $5.2 billion in total gross revenues generated from oil production in the Ogoni region; the Nigerian government had received 79%, other oil companies 2%, and 15% had gone to capital and operating costs.

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A percentage of the Nigerian government’s oil revenues was supposedly returned to the Delta for community development. Under a scheme set up in 1983, the amount was 1.5%. Later, under pressure from oil companies, it was increased to 3%. The system, however, never worked.

The organization established by the government to administer development projects in the Delta claimed that the government did not pay in full, and the government claimed that the money was lost to local corruption and poor investments. The net result was a littering of incomplete projects and poverty that appeared to worsen year by year. As far as Shell managers in Nigeria and London were concerned, the people of the Delta were justified in feeling they were not getting a fair reward from the oil being recovered from the region.

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Over the years, the joint venture had invested in a variety of community development projects, principally focused on agriculture, health, and education in the Delta. These included running agricultural self-help programs, providing free seeds and cuttings, providing scholarships, building schools and hospitals, and donating salary supplements for teachers, doctors, and nurses. According to Shell, the venture’s investments averaged about $4 million annually in the late 80’s, some $13 million in the early 90’s, and $22 million in 1995.

Faced with the deteriorating situation in the Delta and with increasing demands for more contributions, Shell had begun talking to several nongovernmental organizations (NGO’s) in 1994 about new approaches to fostering development and accountability in the region. It remained unclear to Shell managers, however, what role a commercial enterprise such as Shell should properly play in community development.

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Environmentalism and the Delta

SPDC’s operations in the Niger Delta came under scrutiny in the early and mid-1990s for the environmental impact that they were having on the human and ecological development of the region. Environmental groups such as Greenpeace claimed that the Niger Delta was “an ecological disaster” and attributed the damage principally to Shell’s operations.

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The main environmental problems allegedly related to Shell’s activities were due to isolated but frequent oil spills, the drainage of contaminated water into the waterways, and emissions from the flaring of natural gas at the pumping sites. Environmentalists claimed that oil spills and effluents from the oil-water separation process destroyed plant and animal life, and that emissions from the “flaring” or burning off of natural gas were a leading contributor to global warming.

They also argued that flaring caused acid rain which, in turn, destroyed plant life, killed off fish in the waterways, and released carcinogenic particles into the atmosphere. The environmentalists’ reports cited Shell’s figures of 111 oil spills between 1975 and 1984. One journalist who traveled under cover in the Delta in 1995 painted a bleak picture. In a Harper’s Magazine article published in 1996, Joshua Hammer wrote:

No

[O]il fields mottle the landscape, their rigs ceaselessly pumping crude and natural gas from deep underground. The gas burns incessantly in giant geysers of flame and smoke, and at night the flares that ring the city of Port Harcourt and fishing villages deep within the mangrove swamps cast a hellish glow. As the smoke from the flares rises above the palm trees, methane and carbon dioxide separate from the greasy soot. The gases rise but the grime descends, coating the trees, the mud-daubed huts and the people within.5

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To Hammer, the linkage between Shell’s activities and the plight of the Ogoni was obvious. “Here was a place and a people utterly subservient to the production of oil,” he wrote. ”High pressure pipes snaked amid plots of yam and cassavas, past mud-brick huts, even through people’s yards; I watched as one woman climbed over a tangle of pipes to get to her front door.”6 Hammer’s article contrasted the Ogoni’s endemic poverty and lack of access to schools and hospitals with Shell’s profitable o