Case Study: Shell in Nigeria

Case Study: Shell in Nigeria

September 2006

Question 1

What specific political risk problems does Shell face in Nigeria? What are the underlying reasons for these problems?

The political risk problems in Nigeria stemmed from one of the main critical issues related to the social imbalance, inequality and discriminations of the minorities among the huge diversity of ethnic backgrounds in Nigeria. The severe intense ethnic conflict situation and circumstances in Nigeria was as such that it was highly challenging and extremely difficult to unite 250 different ethnic and linguistic groups in the country.

As Shell announced the mega oil and gas investment in Ogoniland, exploitation of the environment devastated by pollution caused by Shell's oil spills and gas flaring in the region subsequently led to extensive water pollution, acid rain, significant greenhouse gas emission and respiratory problems. This caused anger and protest by the Ogonis that resulted in violence and political unrest in the community. It was obvious that the Ogonis, who depended on farming and fishing, were robbed of their livelihood through the operations of Shell. Shell maintained close relationship with the military government, managed by Sir Phillip Watts for the political benefits in the quest to exploit the riches from the land (Centre for Constitutional Rights). The military rule demanded huge amounts of royalty payment from the oil company for 'protection'. Much of the instability in Nigeria stemmed from the economic effects of the severe civil wars, corruption and brutal dictatorship by military governments and economic exploitation. Shell increased violence in the Niger Delta through their reliance on Nigerian security forces, corruption by company's employees and environmental damage.

Environmental activist Kenule Saro-Wiwa who formed the Movement for the Survival of People, MOSOP, had extensively campaigned for political self determination of the great share of the oil revenue and the compensation on the losses from Shell activity as well as demanded restoration on the environmental in Ogoniland. MOSOP demonstrated in violence and began sabotaging Shell facilities in 1993. Shell faced intense international pressure after the execution of Kenule Saro-Wiwa and eight others protest members, as well as torture, forced exile, detention, shooting and attacks on other peaceful protestors during the demonstration in Nigeria (Centre for Constitutional Rights). This resulted in international boycotts, e.g. the European Union froze the $295 million aid to Nigeria, World Bank froze the $100 million investment in gas plant in which Shell participated, UK customers boycott the use of Shell petroleum and others.

In addition, Shell's failure to properly maintain and upgrade its oil pipelines and other infrastructure, empty promises about clean-ups, corporate reform efforts, human rights violation as well as double standards approach in rich and poor countries like non compliance to environmental impact assessment, demolition of dwellers places without provision to re-house tens of thousands of inhabitants are part of the reasons why Shell and Shell employees faced the high violence and crime rate such as kidnapping of employee and family members, hijacking of the expensive equipment for ransom, sabotage of the pipeline and work-stopping occupation of facility by the protesters (Friends of the Earth, 2005).

Question 2

Given the high political risk in Nigeria, why doesn't Shell go somewhere else?

Nigeria Delta is the 9th largest source of natural gas in the world and has estimated oil reserve of 22.5 billion barrels (Friends of the Earth, April 2003). Shell began investing at Nigeria in 1937, and is the largest oil operation in Nigeria, producing half of the 2.5 million barrels Nigeria's exports daily (Foxcroft, 2004). Over USD12 billion in oil is pumped out every year, and most of it goes to the U.S (Damu and Bacon, 1996). Shell operations in Nigeria are significant and accounts for about 10% of the company's petroleum output (Christian Aid, Friends of the Earth, Platform and Stakeholder Democracy Network, June 2004).

Nigeria offers unlimited supply of crude oil unlike other oil producing countries, such as Saudi Arabia and other OPEC members, who impose a limit to daily supply of crude oil in the market. The unlimited supplies in Nigeria auger well for Shell's future global supplies and reserves of petroleum and enables Shell to maintain consistent returns on investment in Nigeria.

With oil representing 90% of Nigeria's export earnings and Shell being a major oil player through joint ventures with Nigeria's state oil company, Shell has a frightening amount of influence over the Nigerian military government (Christian Aid, Friends of the Earth, Platform and Stakeholder Democracy Network, June 2004). Oil companies pay countless sums of bribes to local governments to avoid action against them (Essential Action). It is therefore in the interest of Nigerian military regime to silence those who want to raise awareness of Shell's total disregard for people, exploitation of the land and destruction of the environment. For example, Ken Saro-Wiwa and the Ogoni 8 were leaders of MOSOP, the Movement for Survival of the Ogoni People, who spoke out against Shell's environmental and human rights abuses. On November 10, 1995, they were executed after a trial that many heads of states worldwide condemned, for the stunning lack of evidence of accusations against them leading to their hasty execution (Essential Action). Two witnesses against the MOSOP leaders admitted to being bribed by Shell and the military to testify against Ken Saro-Wiwa (Essential). However, till today, Shell remains free of responsibility for these atrocities.

There is an extremely low cost of petroleum extraction offered by the Nigerian government outweighs the political risks involves in this industry. The government does not put pressure to oil company to develop the country's infrastructure and social services. The environmental pollution levels in Nigeria are 700 times higher than allowed in Europe (Human Rights Watch, 2003).

The unstable government and poor environmental ruling and policy allow easy government manipulation by Shell on environmental and safety issues. The government lobby cost is much lower than the cost for environmental cleaning measures. For example, associated gas, which is gas mixed up with the crude oil extracted from the earth's