Sakhalin Case Negotiation Process

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Negotiation Process
The Workshop case on Sakhalin II sheds a lot of light on the intricacies of operating in Russia as a foreign player. From the Russian side it highlights the shortfalls of the government-in-turmoil trying rather desperately to increase its GDP through foreign injection of funds. These shortfalls are primarily due to the unpredictable and complicated Russian politics and business environment with no clear centre of power. Without the centrally controlled decision making and power changing hands, it becomes difficult and costly for a foreign operator like Shell to navigate through the hierarchies for moving the project along. We understand well that Shell had its good reasons for being in Russia despite all the potential conflicts and Shell maintained an overall good approach through-out. Shell had the controlling stake in the Sakhalin II project and started to get large long term contracts early on. I believe Shell was well aware of the future cost escalations (whether it would come from all the corruption money or from things such as environmental issues and lawsuits). With that in mind, the original PSA was meant to help recover its costs before generating any substantial profits for Russia. Therefore, in negotiating that PSA- Shell had an upper hand and probably a built-in allowance for future conflicts. Shell probably did not expect Gazprom’s involvement as much and they should have considered Gazprom as a key (silent) counterparty to the PSA. And while keeping Gazprom in consideration, Shell needed to always remember the ‘tricky’ relationship between Gazprom and the government. As things turned out, all the environmental violations that Shell was blamed for was perhaps to get Gazprom a better offer in the asset-swap between Sakhalin II and other Russian projects. At the end of the case, it is not known of how liable Shell would be for the claimed environmental damages. We could assume that once Gazprom gets a large stake in this project-...
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