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How have Nigeria's political, economic and cultural circumstances affected Shell's operations and strategies?
The political, economic and cultural factors play a very important role for any MNC (Multinational Company) in performing their business. This report will analyze Nigeria's political, economic and cultural circumstances and how these circumstances affect Royal Dutch Shell's operations and strategies. It has been a very difficult time for Shell to operate its functions in Nigeria. Due to, instable political structure, weak economy and violent culture Shell is not able to apply their systematic strategic planning. Later, in this content we will see that Shell tries to adapt to these hostile environments, applies CSR (Corporate social responsibility) and is able to make use of mismanagement and corruptions in Nigeria.
Nigeria has uneven distribution, corruption, fuel internal cultural conflicts, instability in political environment and weak economy; these factors make Nigeria one of the poorest countries in the world. Due to these reasons, there is lack of transparency and efficiency in deployment of available funds (Anon., 2003)
Shell's strategic policy and role of vision in turbulent environment - Nigeria:
On 23 March, 2003 shell was forced to withdraw its staff due to the violent elections season protests by Ijaw tribe in Nigeria. Ijaw forced Shell to sign a contract with them. For a temporary period, there were production cutbacks which accounted significant losses for Shell (Anon., 2003)
In 1993, Shell had to depart from its production in Ogoniland region. Violence broke out on Ogoni land and nearly half-million member of Ogoni claimed that Shell has a major role in that violence. Later, Shell was reluctant to resume their operations in Ogoniland as the local security forces were often insufficient to control the sabotages. Shell's claimed to lose 8% of its production every day. Nearly 85% of losses were from unauthorized tampering of its facilities. (Anon., 2003)
Source: Environmental Catch-22 in Nigeria, People and Environmental Annual Report 42 (March 2003) p.4
The increased volatility of business environment made systematic strategic planning difficult to operate for Shell (Grant, 2003). In 1993, Shell had poor financial performance relative to its competitors and decided to change their strategies (Skillern, 2004). On this occasion, a change needs to be reinforced against systematic strategic planning. Shell former head observed 'the real purpose of effective planning is not to make to plans but to change the mental model that decision makers carry in their heads' (De Geus, 1988: 73 cited in Grant, 2003, p.493). Shell was forced to establish new strategies and broaden its parameters in Nigeria for development of the enterprise with regard to a particular domain selection (Bourgeois, 1980 cited in Grant, 2003, p.493). Shell called for revision of business strategies more frequently in turbulent environment. Shell made planning process upon multiple scenario analysis. As Shell's future in turbulent environment was uncertain, shell increased emphasis on medium term planning rather than long term planning. Shell involved in discussion workshops for a successful interaction with Nigerian local communities. Shell did not hesitate to put pressures on their employees for more radical changes during turbulent environment (Grant, 2003).
CSR (Corporate Social Responsibility):
According to CSR, a corporation is accountable for any of the actions that affect people, community or the environment. CSR requires the companies to balance the benefits to be gained with the costs of achieving those benefits. The company should engage in activities designed to increase the profits so long as it stays within the limitations or rules of CSR.
(Source: Lecture Slides, University of Greenwich- CSR; accessed date: 15 April 2010)
To reduce continuous conflicts and to increase interaction with local Nigerian people, Shell declared to pay 'proactive' attention to community development in 2003. In other words, Shell applied CSR (Corporate Social Responsibility) policy more effectively to enter into Nigerian markets. Shell unwittingly had much expansive response on corporate social responsibility (Akpan, 2006).
Moreover, while engaging in community development projects, Shell seemed to have put negative impact on the communities. The author found that there were intercommunity tensions raised up due to usage of CSR terminologies. It was also found that by making use of CSR terminologies, such idioms have ethnographic consequences and give rise to stoking greed and opportunism, bringing different segments of communities into conflict and making a picture of divide and rule in the society (Akpan, 2006).
Shell and Community Development in Niger Delta:
Political instability, weak economy and violent culture in Nigeria made necessary for Shell to involve in Community development programs. Shell participated in Community Assistance (1960-1997) which forms the most basic level of CSR. From 1998- 2002 Shell participated in Community development and from 2003 Shell was actively involved in Sustainable community development program. The actual motive of Shell in Nigeria was to perform only Oil Business, but we can see that due to the uneven environment in Nigeria, Shell was forced to participate more into corporate responsibilities. Due to this reason, the Nigerian community became more dependent on Shell than Nigerian government. The level of dependency grew and later it became very difficult for Shell to continue its moral part of corporate responsibility towards Nigerian communities (Ite, 2006).
Impact of Nigeria's Economic crisis on Shell:
The economic crisis in Nigeria is responsible for heavy losses for Shell and discourages large capital investment. There are some constraints for Shell; these are Capital constraints- This is the amount of Capital contributed by the government. In case of Shell Oil Company the government has 80% equity capital participation. Production constraints are imposed on Shell by NNPC (Nigerian National Petroleum Corporation) through allocation of Nigeria's production quota, which generally depends on domestic demand and NNPC decisions. Human resource Constraints states that among 75% of management and professional cadres, 60% should be Nigerians. This ensures job security for the Nigerian workers. Profitability Constraints states that the total returns on profitable investments should be equal to the sum of investments on not for profit projects and cost of financing debts. Additions-to-reserve constraints ensures that Oil Company continues its business also guarantees that the company is not unduly compelled to operate on high cost fields. Environmental protection constraints states that at least a specified amount is expended by Shell to compensate with environmental hazards. Finally Government pricing policy (GPP) is one of system's constraints where the government has differential pricing for domestic and international crude oil. Due to all these Constraints, it became difficult for Shell to operate its functions effectively. As due to the economic failure, Nigerian government was more dependent on these constraints for maximizing their profits from multinational companies like Shell. Many times the government was not able to pay 80% of capital and the projects were abandoned or delayed. Due to this, shell has to bear huge losses. Moreover, due to the other constraints, shell was not flexible enough to take its own decisions and used to depend on the Nigerian government. And due to the lack of sufficient funds with the Nigerian government the entire process of SPDC (Shell Petroleum Development Company) used to collapse (Kalu, 1994). In addition to this, due to economic crisis there has been a 15% rise in community incidents. Shell reports to lose 6 million barrels of crude oil through 34 thefts. Around 35 million barrels were deferred through similar incidents and sabotages (Anon., 2003).
Political Instability in Nigeria and its impact on Shell:
Political instability reflects threats and opportunities resulting from the actual change in the political system. It may include war, revolution, instability in government policies which affect business communities including monetary reforms, price controls, barriers to earnings etc. (Frynas, 1998).
Due to political instability, there were no pipeline safety and environmental standards in Nigeria that it adheres to in United States and Europe. The host communities violently participate in the oil field's economic benefits. Many times, these protests take the form of sabotage. And the Nigerian government used to contend, by saying that it has no money to monitor environmental impacts and protect pipelines from saboteurs (Anon., 2003).
The three key issues of political instability in Nigeria to Shell are funding problems, local conflicts and delay in signing the NLNG (The Nigeria Liquefied Natural Gas) contract. Shell had a joint venture with NNPC (Nigerian National Petroleum Corporation). In this joint venture, NNPC had 55% stake and so it was responsible for putting 55% of its expenditure. NNPC does not always pay its share, due to this reason SPDC (Shell Petroleum Development Company) has to scale down its exploration and production works. In 1995, Shell owed $380 million in cash by NNPC, which affected payments to contractors and other salary bills. Shell, announced spending cuts in their operating budgets as a consequence of Nigerian government's unwillingness to come up with payments. In this way, funding problems affected Shell-NNPC joint venture. The political instability has delayed large projects such as NLNG (Nigeria Liquefied Natural Gas) and delay for shell means the loss of potential profits.
The Local disputes in Nigeria are another problem because of its onshore concessions. In 1997, Shell fall short of its 940,000 barrels/day target because of ongoing community conflicts. Shell operated around 96 oil wells, between 1958 and 1990 on Ogoni area. But, due to the continuous oppose from Ogoni community, Shell however by 1993, invested only about 0.000007% of its oil revenues from Ogoniland. In 1993, there was 1432 total project days lost due to community conflicts. In 1997, Shell reports the loss of 67 working days to community disturbances out of 117 days lost in Nigerian oil industry. In similar incidences, Shell was even forced to close several oil wells (1997). In 1989-94, 25% of spills in SPDC's operating area were the result of sabotage, while 69% spills in 1985-93 were the result of sabotage in Ogoni area. By 1996, Shell reported a total of 325 oil spills in Nigeria, an increase from 261 in 1995. The SPDC was affected the most during the oil workers strike, the normal output of one million barrels per day was been cut down to 450,000 barrels per day. In spite, of all such difficulties Shell used some strategies which helped to make Nigeria's political instability less significant to Shell (Frynas, 1998).
Impact on Shell to its role in Nigeria's Politics:
Shell's operations in Nigeria, regarding to concern of human rights, led to its involvement in the domestic politics in Nigeria. The public debate of Shell's role in Nigeria turned the Shell's symbol into a dubious alliance between military regimes and large corporations. Shell faced moral accusations concerning its responsibility for nature and people. There were calls of boycotting Shell from politicians, celebrities and social movement organizations in both Europe and Africa. Considering these factors, Shell had already terminated most of its operations in the disputed parts of Niger delta. As Shell adopted more transparent approach to corporate reporting towards its consumers, they unwittingly contributed to a high degree of commitment. But, the lack of trust in Nigerian politics before transition to democratic rule, made difficult for Shell to establish proper contact and interaction with local communities. Because of this reason, Shell was not able to deal the situation in Niger delta in a way that they would promote stable and cooperative relations with local stakeholders (Boele et al. 2001a, cited in Holzer, 2007, p.296). Operating in less developed and political instable environments implies the burden of increased public responsibility on transnational corporations (TNC) like Shell. Shell was effectively held responsible for the human rights troubles (Holzer, 2007). Shell faced tremendous criticism for not involving actively with human right activist and the leader of Ogoni people (Skillern, 2004). In addition to this, Shell was accused of focusing narrowly on the objectives of profitability and market share, and disregarding social and environmental issues. Shell was singled out, wrongly, as major culprit of unsustainable development in Nigeria (Ite, 2006).
Nigeria's Cultural impact on Shell:
Many of the youths in Nigerian delta are uneducated and the life for most of them in rural oil areas is full of misery. In mid-July 1999, 64 Shell staff and seven expatriates were held hostages by military youths. The youths allegedly seized SPDC Drilling Rig-1A, blocked all access roads and shut down all electricity generating sets. Again in late October 1998, some youths attacked Oruigbo village and held about 100 SPDC Westminster Dredging for about four hours. Youths turned increasingly violent to draw the attention of the public to their grievances and to those of their communities. It was seen that the oil communities were less hostile towards oil companies but, state's youth were aggressive towards Oil companies. This violent culture of Nigeria was overthrowing the traditional social order in some communities. There were increasing oil spillage and sabotages near SPDC (Shell Petroleum Development Company) areas. Due to which, there was the climax of persistent calls on oil companies to pay compensation for spoiling the environment and prevent the collapse of local social infrastructure. The violent culture of Nigeria made it difficult for Shell to negotiate compensation for land acquisition damages due to oil spillage. According to shell, around 28% of spills in Shell's area were due to sabotages (Ukeje, 2001). Many youths, environmental and human rights groups accused Shell and its subsidiary SPDC (Shell petroleum Development Company) of degrading the Ogoni environment. The merits of these accusations resulted 'Shell's reputation was severely tarnished'. A direct complicity to this was Shell gas stations in Europe were attacked (Wheeler, et al., 2002).
Shell publicly committed to take a more sensitive approach to their relation with communities. SPDC claimed to spend more than $ 20 million dollar each year on community development on Niger Delta, yet Shell Nigeria recorded 150 and 325 incidents- ranging from peaceful invasion to violence against staff and hostages. Shell sponsored development projects were associated with violence and death as late as 1999 (Wheeler, et al., 2002).
In 1996, Shell announced to take over the responsibility for the maintenance and supply of drugs in a general hospital. Three years later it was found that the conditions in that hospital were dreary. SPDC responded by saying that 'Shell staff is not welcomed by Ogoni community' and considering the violent culture of Nigeria, SPDC is reluctant to enter into Ogoniland (Wheeler, et al., 2002).
It can be seen that the uneven distribution, corruption, conflicts, political and economic instability in Nigeria have made tremendous losses for Shell. There has been no safety for pipelines, no scope for environmental standards in Nigeria which makes difficult for MNC (multinational company) like Shell to perform their business. Many times the community conflicts results in sabotage. Systematic strategic planning collapses in such uncertain environment. Shell adopted CSR (corporate social responsibility) in Nigeria, to maximize the extent of entering the Nigerian market. It proactively involved in Community development projects. Due to this, many Nigerian communities became more dependent on Shell rather than Nigerian government. Later, Shell found that it was difficult to perform business at high risks and lower marginal profits. Though, Shell was performing its duty towards CSR, it was wrongly accused of being a major culprit of unsustainable development in Nigeria.
NNPC (Nigerian National Petroleum Corporation) and SPDC (Shell Petroleum Development Company) are in joint-venture with each other. The NNPC is responsible for 55% of expenditure. But, it is seen that many times the NNPC does not contribute money, due to which the SPDC projects are either delayed, abandoned or SPDC has to scale down its production and exploration works. There are other few constraints like capital, production, human resource, environmental and reserve constraints which made difficult for Shell to manage its business operations and strategies with ease. We have also understood the violent culture of Nigeria; this violent culture is not suitable for Shell to survive. As many of the losses take place due to sabotage. Shell in Nigeria reveals that the management is an iterative and continuous evolving process better understood as a journey rather than a destination (Skillern, 2004). Shell is in process to understand the mismanagement and corruption in Nigeria. Conversely, the mismanagement and corruption in Nigeria can serve a big advantage for Shell because Shell may be able to increase their absorptive capacity (Frynas, 1998). In closing, it can be said that Shell is in continuous process to adapt itself in a violent and fragile environment like Nigeria.