2017.04 Global Standards and Benefit Sharing among Russian and Transnational Oil Companies on Sakhalin Island

By Svetlana Tulaeva and Maria Tysiachniouk 

Svetlana Tulaeva (University of Lapland and Russian Presidential Academy of National Economy and Public Administration) and Maria Tysiachniouk (Centre for Independent Social Research, St. Petersburg, Russia and Environmental Policy Group at Wageningen University, Netherlands)


This article compares benefit sharing arrangements set up between indigenous people and Russian and transnational oil companies. It demonstrates that Russian oil companies interact with indigenous communities in a paternalistic way, while transnational consortiums, operated by Sakhalin Energy and Exxon Neftegaz Limited, use the partnership mode of benefit sharing. Typically, both kinds of firms set up tripartite partnerships involving companies, indigenous peoples and the state. The paternalistic model of benefit sharing overall provides few opportunities for indigenous peoples to participate in the distribution of funds, and thereby offers little procedural equity. In terms of distributional equity, it is hard to compare Russian companies with their transnational counterparts as the different companies cover different aspects of indigenous peoples’ well being. Russian companies are involved mostly in building social infrastructure, while transnational firms support indigenous entrepreneurship and the revitalization of indigenous subsistence lifestyle, languages and cultures.

A Variety of Practices

Russian and international oil companies work on Sakhalin using a variety of instruments for coordinating with indigenous peoples. Currently there are two basic models for distributing benefits among the oil companies, native residents, and authorities: paternalistic and partnership [Tysiachniouk 2016].

For the paternalist model, a hierarchical form of relations is typical with the presence of a patron and various clients. The patron clearly dominates the process of decision making. The remaining groups try to secure what they can. This system is based on informal practices and the process of adopting decisions is not transparent. The role of the patron can be played by either the authorities or the oil company. Local communities in these cases typically have minimal opportunities to participate in the decision-making process.

In contrast, the partnership model of management offers equal opportunities for participating in dialogue and adopting decisions to the indigenous peoples, companies, and state institutions. Global standards play an important role because they determine the rules of interaction among the companies and local communities. Various international organizations, such as banks, non-governmental organizations, and intergovernmental organizations serve as guarantors for the rights of all players.

For this project, we analyzed which factors allow for the formation of the various models of distributing resources in the conditions of one or another region on the basis of the relationship between companies and indigenous peoples on Sakhalin. We will assess both modes in terms of procedural (participatory) and distributional equity in benefit sharing arrangements (McDermott et al. 2013) [see article by M. Tysiachniouk for definitions in this RAD issue].

The research was conducted in 2013 and 2015 and was based on a qualitative methodology, including interviews, document analysis, and observation. Interviews were conducted with company representatives, oblast and local public officials, indigenous residents, and NGO experts. A total of 60 interviews were conducted. We also examined federal and regional legislation addressing indigenous peoples, as well as corporate standards and reports concerning these issues. The research also incorporated observations of training seminars on the rights of indigenous peoples during the period when the researchers lived on Sakhalin.

Cooperation Among Companies and Local Societies

Three large oil and gas companies currently are working on Sakhalin Island:

  • Sakhalin Energy, the operator of the Sakhalin-2 consortium,
  • Exxon Neftegaz Limited, a subsidiary of Exxon- Mobil, which is the operator of the Sakhalin-1 consortium, and
  • Sakhalin Morneftegaz, a Rosneft subsidiary.

The paternalistic model is represented on Sakhalin by Rosneft, which has worked there since the 1960s. This company built much of the social infrastructure on the island. Generally, the company supports projects connected to the development of culture, sport and education. Decisions about social investments are made by the leadership of the company based on the results of discussions with representatives of the regional and raion authorities. According to one local official, “Well, with the Russian companies it was somehow always easier for us to cooperate—using telephone calls and meetings. We also work with other oil companies, but we write them official letters and there are no phone calls based on trust.”

Rosneft does not have a regular monitoring system for tracking public opinion and the desires of the local population. During the time when the company was building its industrial sites, it achieved these ends through public hearings and procedures for evaluating the impact on the natural environment required by legislation. Therefore, there is little participatory equity in the paternalistic mode of benefit sharing, while distributional equity may be sufficient since the oil companies are contributing to valuable social infrastructure.

The second model—partnership—is represented by the relations with the population adopted by the companies operating the Sakhalin-2 and Sakhalin-1 international consortiums: Sakhalin Energy and Exxon Neftegaz Limited. This model appeared on Sakhalin in the middle of the 2000s. The starting point was in 2005– 6, when the indigenous peoples began to protest the oil and gas companies. The people were unhappy that the companies did not take their interests into account in launching industrial operations. The actions of the indigenous groups had the support of the local NGO Sakhalin Environmental Watch and also 146 NGOs operating in 22 countries, notably, the World Wildlife Fund (WWF), Greenpeace, Rainforest Action Network, BANKTrack, and Friends of the Earth, as well as 80 Russian NGOs located all over Russia, which had been pressuring international financial institutions about green issues (Lee, 2005).

The groups placed the most pressure on Sakhalin Energy, because it had borrowed money from international banks. According to the standards of the international financial institutions, the company must take the interests of the local communities into account and resolve any emerging conflicts during the construction process. Sakhalin Energy developed a “Sakhalin Indigenous Minorities Development Plan.” The goal of the plan was to strengthen the image of the company as a socially responsible concern, establishing partnership relations with the indigenous peoples and supporting their sustainable development.

As one representative of the company explained, “At that time it was even hard to explain to people what the word ‘partnership’ means. It means that we are going to join with you, you have your resources, we have ours, we will unite them and work together for the same goals. At that time, many considered that the company was rich and that it could give, that it should give, and the others would simply take. In fact, the situation was different. Everyone has resources. The most important thing is to understand what these resources are.”

At the base of this model of cooperation with the local population lay the international standards of the UN and the World Bank. Also influential were the corporate standards of international corporations, which were shareholders in the Sakhalin-2 project, such as Shell. In practice, the company operationalized Principle #7, free prior and informed consent from the UN declaration on the defense of indigenous peoples. The principle of informed consent assumed the participation of representatives of the indigenous peoples in the decision- making process as it affected the area where they lived. In this case, the company applied the principle in distributing corporate funds for social projects and recruiting representatives of the indigenous peoples to participate in the decision-making process.

The main partner for developing and realizing this plan was the Regional Council of Authorized Representatives of the Indigenous Peoples of Sakhalin. Also involved in developing the plan were the Sakhalin Oblast authorities and experts. They set up a management structure, which included an advisory board, executive committee, and two program committees. The committees focused on two basic issues: social programs and supporting traditional resource use. The first direction focused on financing health, culture, and education projects. The second was connected with providing financial support to indigenous family enterprises and giving them the opportunity to buy necessary equipment, such as motors, machine tools, boats, and other equipment. Representatives of the company and the authorities cooperated in managing the plan. But the main management role was played by representatives of the indigenous people. On one hand, the opportunity for local residents to determine the priorities in distributing the funds for social projects made it possible to include the local residents in discussing issues that were important to them, let them initiate local projects and initiatives, and made sure that their interests and needs were taken into account. On the other hand, the chance to influence the distribution of these funds led to internal conflicts among the local communities. The support efforts were realized in all parts of Sakhalin, even in areas that were not physically near the activities of the company. Twice a year international experts evaluated the implementation of the plan.

Exxon Neftegaz Limited developed a somewhat different system for distributing funds. Like Sakhalin Energy, Exxon set up a trilateral agreement with representatives of the oblast authorities and the indigenous peoples as well as a consultative committee. The company makes the main decisions on distributing the funds for social projects, but there are collegial discussions of the possible projects. Three representatives of the company, a representative of the Sakhalin Oblast government, and three members of the regional council take part in these discussions. Exxon’s zone of support for social programs for the indigenous peoples is smaller than the area that Sakhalin Energy addresses. Exxon supports only those raions in which it is actively working (Nogliki and Okha). Exxon spends its money on education, culture, and healthcare. It does not provide grants to support traditional economic activities by family entrepreneurs.

Overall, Sakhalin Energy supports more general social programs than Exxon Neftegaz Limited. This strategy reflects Sakhalin Energy’s greater dependence on international creditors. As a result of these ties, Sakhalin Energy generates greater procedural and distributional equity then Exxon Oil and Gas Limited.


Our research allows us to define the basic components of the two models. The paternalistic model is represented in the activities of Rosneft–Sakhalin Morneftegaz and is characterized by the following features. First, the company conducts the main relationship for addressing questions related to the development of industrial projects, social investments, and the resolution of ecological problems with representatives of the authorities. Local residents practically do not participate in discussing the activity of the company as it affects their immediate environment. Representatives of the community who are concerned about the impacts of the company on the environment do not have the opportunity to complain directly to the company. Instead, they work with the NGO Sakhalin Environmental Watch, which plays the role of a social monitoring agency on Sakhalin.

Second, there are no clear and transparent procedures for decision-making in relation to the development and implementation of social programs. A significant part of the decisions are adopted as a result of semi-formal negotiations with representatives of the authorities.

Third, priority in the implementation of social programs goes to the construction or repair of buildings designated for public uses, such as sports facilities and schools, and conducting sports and cultural events.

Fourth, the company has few special programs oriented toward indigenous people. Finally, there is no regular system of monitoring and outreach to the population about the activities of the company.

By contrast, the partnership model, employed by Sakhalin Energy and Exxon Neftegaz Limited has the following characteristics. First is the participation of the indigenous residents in the distribution of funds for social projects of the companies working on Sakhalin. Sakhalin Energy had fully delegated to representatives of the indigenous people the right to choose which social projects get implemented. Exxon Neftegaz Limited gave the representatives of the local communities an advisory vote. In both companies, they use a transparent and formalized procedure for adopting decisions. The distribution of grants is conducted with well-defined and transparent rules and the results are announced to all residents. Independent international experts carry out consistent monitoring of the awarded grants.

Second, there is regular cooperation with the local residents on the social and ecological aspects of the companies’ activities. Both companies actively inform the population about their extraction efforts and monitor the mood of the population. This outreach is carried out by corporate information centers, during annual meetings with the population, by a system of seeking complaints from the population, and a network of coordinators closely connected with the local communities. In situations when local residents are concerned about the impact of the company activities on their environment, the firms organize additional research in which the residents themselves can participate. Thus, in addressing the question of whether the seismic exploration activities have had an impact on the behavior of nearby fish stocks, indigenous representatives served as observers during exploration works of the company.

Third, the companies’ social programs work to support local initiatives rather than providing generic social infrastructure buildings. The companies try to stimulate the local residents to realize their own projects. Examples include grants which the companies have made to support dog breeding, purchasing processing equipment, and the revival of national languages.

Finally, the realization of the partnership model includes a large number of trainings and seminars for local residents aimed at helping them to develop their own initiatives. The main goal of these seminars is to teach residents to develop partnership relations with companies, take the initiative, and to dream up and implement their own projects.

However, these beneficial practices do not guarantee that the partnership model automatically improves the territory’s social development. In several cases there have been unanticipated consequences from the implementation of these strategies. For example, when Sakhalin Energy delegated the ability to distribute grants among entrepreneurs to indigenous representatives, there was conflict within the indigenous community over who was most deserving of the funds.

Another example is the question of the extent to which the implementation of such corporate social programs is effective. The partnership model gives preference to expanding local initiatives and encouraging entrepreneurship among the local population. Such programs are considered preferable because they are less likely to contribute to the emergence of attitudes of dependency among local residents or push people to organize themselves. At the same time, not all training programs seeking to develop local initiatives turn out to be effective. In several cases, corporate funds invested in the construction of social infrastructure turned out to be a more reliable investment strategy. Therefore, it is hard to compare distributional equity in benefit sharing arrangements between Russian and transnational companies.

According to the results of our research, we can identify several key factors affecting the formation of either partner or paternalistic models of cooperation with indigenous peoples. First is the level of influence of international investors and standards. The higher the company’s dependence on international financial institutions, the more likely it is oriented toward international standards protecting the rights of indigenous peoples. Therefore, many multinational corporations seek to create special programs for indigenous peoples, demonstrating in this way their attention to international rules. In implementing the international standards at the local level, the companies themselves experience changes. Thus, the principle of free prior and informed consent from the UN Declaration of the rights for indigenous peoples requires discussion and agreement with representatives of the indigenous people about all extraction activities which affects their lives. At the same time, Sakhalin Energy narrowed the sphere of work for this principle and connected it only with the participation of indigenous peoples in the distribution of corporate funds for social projects.

The second important factor in the formation of partnership relations is the level of dependence on the state authorities. As a rule, Russian companies are more dependent on the Russian authorities than the international companies. This level of dependence affects the strategies which the companies choose in realizing their social programs in the regions. The Russian companies prefer to follow the demands or desires of the regional authorities, while the international companies cooperate directly with the population. In part, this situation reflects the Soviet tradition under which industrial companies were dependent on state policy and also the more recent experience in the 1990s when businesses typically resolved their problems through informal ties to the authorities. Following the collapse of the Soviet Union and the construction of new businesses in the 1990s, business people typically came to believe that the key factor of success for companies was good relations with the authorities.

The third factor is the readiness of the population to take the initiative with its own projects and defend its positions. The efforts of the indigenous people on Sakhalin in 2005 forced Sakhalin Energy and Exxon Neftegaz Limited to develop new, more effective instruments of cooperation. These included the creation of the Regional Council of Authorized Representatives of the Indigenous Peoples of Sakhalin, which took on the basic function of a mediator of relations between the indigenous peoples and the oil and gas companies. In each case, the developed and mutually formalized rules were adapted to the local context and led to the creation of specific practices for distributing benefits.


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