Case: Journey to Sakhalin: Royal Dutch/Shell in Russia (a). Harvard Business School

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Case: Journey to Sakhalin: Royal Dutch/Shell in Russia (A). Harvard Business School MBAS 854 Case: Journey to Sakhalin: Royal Dutch/Shell in Russia (A). Harvard Business School MBAS 854 This memo will highlight the important differences between international oil and gas markets and how is Russia situated in those markets. It will later discuss the protection provided by Production Sharing Agreements and why they are controversial in Russia through the experience of SEIC. Finally, it will conclude that Royal Dutch Shell should invest in Sakhalin II and analyse ways to mitigate the risks of investment. The primary factors for the oil and gas industry internationally are the administrative, geographic and economic distance, between producers and locations (see appendix). From an administrative perspective, involvement of local authorities tends to be high. Integrated oil and gas is a large employer, vital to national security, controls of natural resources and has high sunk costs. However, developing countries mostly utilize their endowment to stimulate foreign direct investment (FDI), knowledge transfer and the local labour market, whereas developed nations tend to focus on national security and sustainable development. Consequentially, developing markets, such as Indonesia, tend to incentivise investment through Production-Sharing Agreements (PSA), while in contrast developed countries regulate operations and charge incremental royalties. Nevertheless, in both cases, agreements between the producer and local authorities are in most cases subject to unexpected changes independent of the market. In the USA, projects are subject to section 206 of the Federal Power Act, stimulating that contracts are subject to a “just and reasonable” clause to reflect changed circumstances and public interest. Furthermore, the International Monetary Fund recently demanded
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