This is the final term paper group presentation on Harvard Business School (HBS) Case study. Course: Strategic Management Developed by: Md. Adib Ibne Yousuf

1. Group 1
Journey to Sakhalin: Royal Dutch Shell
in Russia
Prepared by
Md. Adib Ibne Yousuf
Sultan Mhmud
Sadia Afrin Ratna
Nahid Ahmed Mridha
Najiah Tehami Purnota

2. Md. Adib Ibne Yousuf
M17232003

3. Case Summary

4. Sakhalin Island in Map

5. Sakhalin Island
 Island off the east coast of Russia
 Contains some of the richest fisheries on the
pacific rim
 One of the most diverse & pristine in terms of flora
& fauna
 Estimated 14billion barrels & 96 trillion cubic feet
natural gas
 Home to 25 marine mammal species

6. Russian Energy Market
• Major player in world energy market
• More proven natural gas reserve than any other
country
• Top 10 in proven oil reserves
• 2nd largest oil exporter
• Largest exporter of natural gas
• 3rd largest energy consumer
• Energy exports are a major driver of Russia’s
economic growth

7. Current Status of Russian Oil & Gas
Industry
 Energy was a critical component of Russian economy,
making up 20% of GDP, 55% of export revenues, and 40%
of fiscal revenues.
 Gas concentration was as high as 30% of total world’s
reserves
 While oil industry was concentrated, gas industry had
monopoly
 Russian industry has moved to take control of country’s
energy supplies
 According to Russian law Gas prices were regulated,
regardless of profitability.

8. Sakhalin 1 Project
• Natural Gas: 17.3 trillion cubic feet
• No LNG facility
• Gazprom (Russia) wants gas for domestic use
• Will buy at below market prices
• Can export under PSA
• East Asian customers only accept LNG
• China will accept gas but a pipeline needs to be
built
• Russia has denied permits

9. Sakhalin - II Project
Phase I Phase II
• Produced its first oil in
1999
• The consortium
developed part of the
PA field in order to
secure an early flow of
oil to generate capital
for Phase Two of the
project
• Has been far more
complicated and
expensive than Phase
One
• New offshore drilling
platforms at PA and
Lunskoye and
underwater pipelines
linking them to the
mainland

12. Sultan Mhmud
M17232005

13. PSA
• PSA (Production-Sharing Agreement): Contract
between the state and an investor
• Commenced in June 1994
• 70% local content, no VAT & 100% Cost recovery,
6% royalty to Russia
• Fixed profit rate
• Government retains the rights and ownership of
the oil and gas resources
• After the capital investment is recouped, profit is
shared between the government (Russian
federation and regional Sakhalin Oblast) and the
company

14. PSA Benefits to Russia
 Attract foreign firms to invest in risky, technically challenging,
and long-term project.
 Building billions of dollars’ worth of assets that, under the
terms of the PSA, are to belong to the Russian state
 Russia has turned to foreign investment twice this century to
boost sagging domestic oil production.
 Declining oil production poses a threat to other domestic
industries which relied on inexpensive fuel in Russia
 Foreign investors can provide the capital and cutting-edge
technology needed to revitalize the infrastructure and initiate
exploration

15. PSA Benefit to Foreign investors
 Foreign investors want access to Russia’s massive
oil reserves.
 A foothold in Russian oil production assured a
steady flow of oil
 Foreign investment in Russian oil could yield
political benefits.
 Exemption from value-added tax (VAT)
 100% cost recovery for PSA investors. Remaining
production to be allocated to SEIC AND the
Russian federal government

16. PSA Issues
 Since the Institutional environment was
uncertain the agreement though powerful could
be subjected to changes in Russia’s tax and
regulatory regimes.
 More worrisome, however, was the politicization
of the terms of the PSA
 Absence of a mechanism for the tax ministry to
refund VAT payments.
 Number of current and proposed laws that
directly conflict with investor rights guaranteed
in PSA

18. Nahid Ahmed Mridha
M17232014

19. Key PlayersKey Players
1. Sakhalin Energy Investment Company Ltd. (SEIC) - a joint
venture comprised of:
Mitsui Sakhalin Development Company Ltd. (Japan - 25.0%);
Royal Dutch Shell Sakhalin Holdings (USA - 55.0%); and
Subsidiary of Mitsubishi Oil Corporation (Japan - 20%).
2. Gazprom.
3. Vladimir Putin.

20. Role of Key Players
SEIC
1. SEIC marked the official launch of the second phase of
Sakhalin-2.
2. Build strong, positive relationships with the community and
other stakeholders.
3. Create conditions where emerging issues of concern are
brought to its attention and addressed in a timely manner

21. Role of Key Players
Gazprom
1. In 1997, signed an agreement with Shell company to develop
jointly the Zapoliarnoe gas field in Northern Siberian regions.
2. In 2015, Gazprom and Shell signed a Memorandum to construct
the third production train of the LNG plant within Sakhalin II, with
target capacity up to 5 million tons of LNG per year.

22. Role of Key Players
Vladimir Putin
1. Re-establish central policy authority in
Moscow.
2. Ordered a significant northward shift of the
planned East Asian oil pipeline earlier this year,
to avoid the sensitive Lake Baikal watershed.

24. • SWOT
• PEST
• Porter Five
• Financial
• Strategic Group Mapping

25. SWOT Analysis
1. Competitive
edge in terms
of technology
2. Shell has
invested $ 1
billion in
solar and
wind energy
3. Shell signed a
joint venture
with Cosan
(S.A)
Company
1. Lack of
association with
bio fuels, which
are growing in
demand
2. Lack of
substantial
countering of the
social pressures
and the media
exposures on part
of Shell
1. Bio-fuel and low-
carbon emission
fuels sector is
growing and is
highly encouraged
by the government
2. Promoting a better
health and safe
environment in the
plants
1.Government and
interest groups are
taken strong actions
against heavy
carbon.
2. This is
potentially
dangerous for the
company’s image
and acceptance.
Strength Weakness Opportunities Threats

26. PESTAnalysis
Political factors
• Risk of military
invasion
• Level of
corruption
• Intellectual
property
protection
• Taxation
Economic
Factors
• Education level
in the economy
• Labor costs and
productivity in
the economy
• Business cycle
stage
• Discretionary
income
Social factors
• Cultural
• Attitudes
• Educational
level
• Skill level
people
• Leisure interest
Technology
factors
• Recent
technology
development
• Product
offering
• Impact on the
cost structure
• Impact on
value chain

27. Porter Five Forces Analysis
Level of Competition
There is a high level of competition in the industry but among few players. Shell’s major
competitor is British Petroleum. British Petroleum’s strategy has also been focused on
acquisitions, partnerships and alliances to build up a larger framework to meet growing demand.
Threat of Substitutes
The threat of substitute products has risen, such as from bio fuels. Many companies are now
investing in bio fuel technologies to respond to social, environmental and political pressures
Threat of New Entrants
Threat of new entrants is low, as it requires a heavy capital investment to set up plants and use
advance technology for extraction domestically and internationally to meet the demands.
Bargaining Power of Suppliers
Bargaining power of suppliers is low. There are few suppliers in the industry.
Bargaining Power of Customers
Bargaining power of customers is low as there are not many fuel companies available in the
industry which offers conventional, alternative and bio mass fuels.

28. Sadia Afrin Ratna
M17232010

33. Strategic Group Mapping

34. Issue: Legal Problems
 The issue is transportation, which is the biggest single stumbling
block for FDI in the Russian energy sector
 Managing the substantial political risk of investment in Russia was
crucial.
 Foreign investment in Russian oil firms had been limited, while in
natural gas was practically nonexistent
 PSAs were seen as very useful for large, long-term, greenfield
investment projects to safeguard FDI
 In May 2003, the requirements for new PSAs, making them all but
impossible to acquire.

35. Financial Risks
 Cost overruns may cause profit to shrink
 Currency Exchange fluctuation impact business severely
 Risk not to have a domestically partner
 Tax rates fluctuate greatly without PSA
 Foreign companies have limited ability to operate or gain
mineral rights
 Lack of infrastructure

36. Political Problems
 Ineffective linkage between Local and central
government
 Fight over power control between federal and central
government
 Lack of civil service infrastructure to implement the
terms of the PSA
 Bureaucracy was a major hurdle, as the technical and
economic
 Substantiation for construction consisted of over 50
different approvals by local and federal Russian
regulatory agencies.

37. Najiah Tehami Hasan
M17232026

38. Technical Problem
 Unfavorable Terrain: Violent winter storms,
potholed streets, and makeshift stalls.
 Construction of pipeline crossing 1,100 rivers
and active seismic lines.
 Unexploded ordnance and war dead.

39. Environmental & Legal-Social
Environmental:
 technological pristine natural
environment
 Tough weather conditions
Legal – social:
 PSA contradiction with Russian law
 Tough regulation of local content

40. Technological & NGO resistance
 Technological
 No infrastructure
 Construction of world-class LNG plant
 Political and NGO Resistance
 Approvals and regulatory compliances.
 Technical and economic substantiation for
construction (TEOC).
 Corruption and Bribery
 NGO’s opposed SEIC’s development plan.

41. Sakhalin II Recent News

42. Recommendations
• Recommendation Strive for a sophisticated
and well-drafted PSA law would remove
significant barriers to foreign investment
• Foreign companies should get confidence of
both state and central government for steady
cash flow and production
• Environmental impact survey should be
included in business risk
• Political confidence is necessary for business
in emerging markets