Benefit-Sharing Arrangements between Oil Companies and Indigenous People in Russian Northern Regions

Abstract

This research provides an insight into various modes of benefit-sharing agreements between oil and gas companies and indigenous people in Russia’s northern regions, e.g., paternalism, corporate social responsibility, and partnership. The paper examines factors that influence benefit-sharing arrangements, such as regional specifics, dependency on international investors, corporate policies, and the level of local community organization. It analyses which instruments of benefit-sharing are most favourable, and why, for indigenous communities. The authors conducted research in three regions of Russia (Nenets Autonomous Okrug; Khanty-Mansi Autonomous Okrug, and Sakhalin) by using qualitative methodology that involved semi-structured interviews, participant observation, and document analysis. Theoretically, the paper builds on the concept of benefit-sharing arrangements combined with the social equity framework. We assessed each case study in terms of procedural and distributive equity in benefit-sharing. The paper demonstrates that the procedural equity is the highest in the partnership mode of benefit-sharing on the island of Sakhalin where companies implement globally-accepted standards recognized by investment banks. The cases in Nenets Autonomous Okrug and Khanti Mansi Autonomous Okrug represent a reset of Soviet practices on a market basis, but whereas the distributional equity may be sufficient, the procedural equity is low as decisions are made by the company in concord with regional authorities.

1. Introduction

Most oil and gas deposits in Russia are situated in Arctic and subarctic regions that are populated by indigenous peoples. Oil and gas companies provide employment and account for a large portion of the tax revenue that contributes to the development of social infrastructure in remote northern regions. However, fast industrial development impacts the environment and indigenous people who live off their natural environment. Their traditional lifestyle is tied to reindeer grazing lands and hunting and fishing grounds [1] that are often situated on oil deposits. Oil development entails a decrease in reindeer farming areas, river pollution and changes to animal migration routes. For this reason, local residents view the appearance of the oil-industry as an invasion into their indigenous life. From the locals’ point of view, oil companies are “temporary minions” and “outsiders” who will “pump out all the oil and leave.” Company representatives, on the contrary, consider industrial activity as being fundamental for the welfare of the region. They stress that the oil and gas industry contributes to the budget, which enables the development of necessary infrastructure. Therefore, extractive industries in the Arctic, on the one hand, bring opportunities for development and, on the other, inflict severe costs on the local and indigenous communities. Thus, one of the issues is balancing out the interests of the indigenous people and the oil companies.

Relationships between extractive industries and local communities began to be actively discussed in the 1990s in the framework of the concept of social license to operate (SLO). A social license is an informal consent of the local community for the extraction of natural resources in a given territory. This concept emerged as a way to explain opportunities for sustainable development in the context of further globalization of business. With globalization emerged the growing dependence of companies on international financial institutions, which may deny loans to the companies in cases of conflicts with local residents and/or violations of indigenous peoples’ rights. Therefore, SLO can be considered as one of the tools to reduce risks and increase a company’s competitiveness in the international markets. The receipt of such a license is determined by the level of awareness of the local community about the company’s projects and investments in the development of a particular territory, the compensation to indigenous peoples for extraction of land, and the industrial impact caused to land [2,3,4]. The need for justice in relationships between extractive industries, local residents, and indigenous peoples has been further developed in the framework of the more specific, and narrowly-defined, benefit-sharing concept. Benefit-sharing represents an obligation of the industry to return part of the income generated through the resource extraction activity back to the community and indigenous peoples in a monetary or non-monetary form [5]. “Fair and equitable benefit-sharing” is a legal phenomenon to which several international conventions refer, e.g., on biodiversity, international human rights, law of the sea, and the human right to science [6,7]. Although ILO Convention 169 does not directly use benefit-sharing terminology, experts are widely exploring its principles [7]. This paper builds on the benefit-sharing concept and looks at equitable benefit-sharing arrangements as an important prerequisite for economic, environmental, and social sustainability of energy production in Northern Russia.

To set up just and equitable benefit-sharing arrangements in Northern Russia is a complicated task for the following reasons: the overall priority of economic goals over social issues; difficulties in regulating transnational corporate activities; pitfalls in legislation; poor predictability of industrial impacts on land, culture, and the traditional way of life of indigenous peoples; and local communities expressing unreasonably high expectations from companies. Benefit-sharing arrangements between companies, authorities, and indigenous people are different in different Arctic and subarctic regions. They depend on regional legislation, indigenous peoples’ rights and land use, regional path-dependent practices, company policies, and the global standards adopted by companies.

This article analyses the implementation of various modes of benefit-sharing in the areas of oil and gas extraction. However, what is most important in their making? Is it regional specifics, dependency on international actors, corporate policies, or the level of local community organization? What instruments of benefit-sharing are the most favourable in the Russian context and why? In order to answer these questions we use concepts that provide an insight into the main aspects of benefit-sharing, e.g., on different modes of benefit-sharing, such as paternalism, company-centred social responsibility (CCSR), and partnership [8,9,10,11], combined with the social equity framework as developed by McDermott and co-authors [12].

Using the aforementioned concepts, we analyse three empirical cases on the specifics of benefit-sharing in Northern Russia. Finally, we evaluate to what extent benefit-sharing arrangements that are determined in the empirical findings are just and equitable.

2. Theoretical Framework

The concept of benefit-sharing originated from the Convention on Biological Diversity (CBD) in 1992, and was developed further in the 2010 Nagoya Protocol, a supplementary agreement to the CBD, in relation to the use of biological resources [13]. In recent years benefit-sharing agreements have become an overreaching phenomenon, especially in the case of extractive industries [8,9,14,15]. As oil, itself, and the revenue it generates flow far beyond the extraction sites, indigenous people are eager to receive dividends from resources extracted from their lands and to receive compensation for damage to the surrounding environment and their traditional way of life. As we understand it, the term ‘benefit-sharing’ includes both monetary and non-monetary benefits that communities receive from companies.

Depending on the type of interaction among stakeholders, such as companies, governments, local communities, and indigenous peoples, formal and informal rules are emphasized, which results in different benefit-sharing arrangements. Benefits from oil extraction are shared with local communities in the form of taxes (formal benefits), as compensation determined by legislation (formal and/or semiformal benefits), as part of partnership agreements among the company, state and indigenous communities (semi-formal arrangements), as charitable giving and sponsorship (informal arrangements), and as trickle-down benefits, such as the construction of social infrastructure and the creation of local jobs [10].

According to the literature and our findings in Russia three ideal modes of benefit-sharing arrangements can be determined: (1) state and/or corporate paternalism [16]; (2) company-centred social responsibility (CCSR); and (3) partnership [17].

Firstly, the paternalistic mode is characterized by a hierarchical way of interaction, which implies a patron and clients. One of the actors is dominant in the decision-making process, and the other groups of actors seek to achieve the patron’s appreciation. Usually the formation of paternalistic relations is a result of poor or ineffective formal institutions. As a consequence, networks of relations emerge that bind various groups of actors with certain obligations towards each other. This system of obligations is based upon the desire of powerful actors, e.g., companies and governments, and the decision-making process is neither formal nor transparent. In the mode of state paternalism, the state determines the rules of interaction, and the main decisions are made by public officials, while indigenous peoples are poorly involved in the decision-making process [16,18]. The paternalistic mode of management originates from the Soviet period, when all areas of life were under the control of the government. State-run enterprises took responsibility for local towns and villages where they operated.

Although the paternalistic mode cannot exist in market conditions in its pure form, the local population still awaits fully-fledged support from enterprises and the government. In modern times this means that companies make key decisions about social investment based upon suggestions from the authorities. Local communities have minimal opportunities to participate in decision-making. In corporate paternalism, key decisions are made by company executives. Just like in the case of state paternalism, decisions are based not so much on formal rules as on personal preferences and informal ties between participants.

Secondly, the CCSR mode of benefit-sharing arrangements is driven by companies in a pragmatic way. Companies adopt a set of global standards towards local communities and indigenous peoples as required by investment banks and respond to national legislation, as well as requirements imposed by the nation states in sites of operation. The CCSR mode aims to raise investment attractiveness and productive efficiency of the company, which supports its image as a socially responsible actor [19,20]. Key decisions are made by the company executives in view of state legislation, corporate policies, international standards and investors’ demands. This mode is favoured by transnational corporations who care about their image as they can be affected by organized protests and actions of international NGOs, which may lead to depreciation of the company brand in the global markets. In order to avoid this, corporations try to develop transparent and standardized forms of interaction with local communities, indigenous peoples, state authorities, NGOs, and shareholders [21,22]. This allows the companies to cut their transaction costs. However, it is not always possible to implement standard mechanisms due to differences in regional rules and practices. Therefore, companies respond to both formal and informal demands of local stakeholders by setting up benefit-sharing arrangements.

Thirdly, the partnership mode suggests equal opportunities for dialogue and decision-making for all sides involved—the state authorities, the companies, and indigenous peoples. In Russia this mode takes the form of tripartite partnerships between the state, energy company and indigenous peoples, which set up rules and procedures for the distribution of benefits [23]. One of the aims of the partnership mode is to empower indigenous peoples by fostering their sustainable development and self-sufficiency. This mode is based on global standards that respect the rights of indigenous communities. Here, international organizations such as investment banks, NGOs and intergovernmental organizations act as enforcement agencies [24,25,26,27].

Benefit-sharing arrangements deeply implicate questions of equity [12,23,28,29] as the state, companies and indigenous people have different views on how the effects of oil development should be measured and on the quantity, quality and mechanisms of resource transfer to communities. To analyse these differences, we draw on McDermott et al. [12] who distinguish between procedural and distributive dimensions of equity. Procedural equity refers to participation in decision-making processes—for example, who is involved in the design of benefit-sharing arrangements, and to what extent can indigenous people participate in setting up the benefit-sharing arrangement. Distributive equity, in contrast, encompasses the distribution of costs and benefits that local and indigenous people receive from oil production. For the purposes of this analysis, we use this distinction between procedural and distributive equity to assess the actual, on-the-ground outcomes of benefit-sharing arrangements. That is, we differentiate between outcomes involving process-based change in the form of indigenous peoples’ participation in decision-making related to oil production, benefit-sharing, and distributive outcomes in the form of changes to the distribution of material benefits from oil extraction. In this paper each empirical case study is evaluated in terms of delivery of benefit-sharing arrangement, e.g., paternalism, CCSR, and partnership, as well as in terms of equity, e.g., procedural and distributive.

3. Materials and Methods

We based our research on qualitative methodology [30] by investigating three case studies of benefit-sharing arrangements implemented by oil companies in different Russian regions.

We collected data during several research expeditions to Nenets Autonomous Okrug (NAO) in 2011, 2016, and 2017; to Khanti-Mansiisk Autonomous Okrug (KMAO) in 2014; and to Sakhalin Island in 2013 and 2014. Our main research methods were document analysis, semi-structured interviews, and participant observation. We conducted interviews with the following actors:

• Company representatives;
• Regional and local government officials;
• Representative of local communities where the companies work; and
• NGO experts.

In order to understand the whole spectrum of benefit-sharing arrangements it was important to interview all stakeholders. For each group of actors, e.g., governments, local residents, indigenous peoples, companies, a separate interview guide has been developed.

This allowed capturing of informants’ expertise of the issues under investigation. The major issues raised in the interviews were related to the formal and informal rules that regulate relationships between companies, local residents, governments, and indigenous peoples, benefit-sharing and conflict resolution procedures.

We conducted a total of 130 semi-structured interviews (see Appendix A) lasting from 30 to 90 min. Interviews were recorded, transcribed, and coded. In addition, we analysed the following documents:

• Federal and local legislation regulating industrial activity;
• International standards of the World Bank, the European Bank for Reconstruction and
• Development, ISO 26,000, IFC etc.;
• Corporate standards, company policies and public reports with information on social investments; and
• Regional media materials.

We also performed participant observation during conferences, at training workshops, and in the villages affected by oil and gas extraction.

Using different sources of information, e.g., interviews, participant observation and document analysis allowed data triangulation.

Three empirical cases were selected according to the ideal types described in the theoretical framework:

(1)

Benefit-sharing arrangements by Lukoil Komi (Nenets Autonomous Okrug) that were previously assessed as paternalistic [16];

(2)

Benefit-sharing arrangements of Surgutneftegaz (Khanty-Mansi Autonomous Okrug) that falls predominantly into the CSR mode as it employs transparent and standardized forms of social agreements with local communities [31]; and

(3)

Benefit-sharing arrangements of “Sakhalin Energy” and “Exxon Neftegaz Limited” (Sakhalin) in the form of a tripartite partnership [32].

As we will see from the empirical part of this paper, modes of benefit-sharing described above do not exist in practice in their pure form, but in each case one can find prevalent traits of one mode or another.

4. Results

4.1. Regulatory Framework of Benefit-Sharing Agreements in Russia

There are three set of rules that influence the benefit-sharing agreements between companies, indigenous people and authorities—state legislation, international standards and corporate policies [33,34].

Russian federal legislation plays a crucial role in the making of benefit-sharing arrangements. According to the legislation, indigenous people are recognized as indigenous if they inhabit traditional territories of their ancestors, maintain their traditional lifestyle, their number is less than 50,000 people and they recognize themselves as independent ethnic communities [35]. Indigenous small-numbered populations of the north (ISPN) are included in a register approved by the Government of the Russian Federation. Indigenous people recognized by the state have certain rights to maintain their traditional way of life; Federal legislation allows them to designate territories of traditional use of natural resources (TTNR) [35,36,37,38,39]. The companies working in TTNR must coordinate their actions with indigenous people, obtain their consent for industrial activity, and compensate for damages [35]. There is no one TTRN designated on the federal level, but regional legislation in KMAO, Yamalo Nenets Autonomous Okrug and Yakutia has developed laws on TTRNs that provide compensation for indigenous peoples. In KMAO, where one of our case studies is located, around 500 TTRNs have been designated [31,32]. In the law on guarantees of rights of indigenous people [37]. The importance of ethnological expertise is highlighted, which assumes that an analysis is undertaken of the impacts of extractive industry on indigenous peoples’ habitat and subsistence [34].

The Land Code of the Russian Federation (2001) is another important document that regulates extraction for oil infrastructure from land designated for agriculture, forestry, or other activities. For example, if land designated for agriculture is leased by reindeer herding enterprises, oil and gas companies that have a lease to drill on the same land need to obtain consent from reindeer herding enterprises and receive compensation for loss of land [40]. The compensation may be calculated by using a federally-developed methodology [38]. Additinoally, there is a federal law on ecological expertise, which is mandatory when building industrial facilities. Public hearings are an opportunity for local people to participate in the project discussion and represent an important aspect of this expertise [41].

The second set of rules that influence the interaction between transnational corporations and indigenous people is represented by international standards promoted by international organizations and financial institutions, such as the United Nations (UN), the Arctic Council (AC), the International Financial Corporation (IFC), the World Bank (WB), the European Bank of Reconstruction and Development, the International Labour Organization (ILO), and the Extractive Industry Transparency Initiative (EITI) [42,43,44,45,46]. The rights of indigenous peoples are part of the UN Declaration “On Indigenous Peoples,” Convention C169 of the International Labour Organization as well as the World Bank operational directive 4.20. [42,44,45,46].

The international standards also aim to protect the interests and rights of indigenous people in order to preserve their traditional culture and lifestyle, land use, and natural resources. The principle of free prior and informed consent (FPIC) is declared in the UN Declaration [44]. According to this principle, companies are obliged to consult indigenous people and disclose all information related to possible industrial impacts on indigenous lands. Consultations with, and participation of, indigenous people in the decision-making process is obligatory [44,45,46]. If the indigenous peoples give their consent to industrial operations on their territory, they have a right to compensation for damage, which is assessed and calculated differently in different countries [44,45,46,47,48,49].

Despite the Russian Federation not ratifying the UN Declaration “On Indigenous People Rights”, its principles are used and taken into account by Russian legislation. Companies working in Russia orient themselves by using these standards when they develop corporate policies [10,17].

Finally, the third set of rules is represented by corporate codes of conduct of companies, which declare respect in regard to the interests of indigenous peoples, their land, and their cultural heritage. Usually these codes are based on international standard requirements concerning indigenous peoples [17]. At the same time, corporate policies stress that social and ecological responsibility represents a risk management strategy for companies that aim to improve competitiveness on the market. Consequently, support provided to indigenous peoples must conform with the company’s strategic interests.

In different cases, all these rules are implemented to varying extents, which determines various practices of benefit-sharing arrangements.

4.2. Empirical Findings

4.2.1. Nenets Autonomous Okrug: OOO Lukoil-Komi

Regional Context: NAO

The Nenets Autonomous Okrug (NAO) is situated in Northwest Russia in the tundra and forest tundra zone, beyond the Arctic Circle, where there are harsh climatic conditions. The population comprises Russians, Nenets, and Komi people. The association “Yasavey” is the largest regional indigenous NGO which focuses on economic, social, legal, and cultural indigenous issues.

There are large oil and gas reserves in NAO. The development of oil deposits began in Soviet times with geological survey expeditions organized in the 1970s. Oil extraction started in the early 1990s. There are currently several large Russian and international oil and gas companies operating in NAO (Lukoil, Rosneft, Total, Rusvedpetro). Benefit-sharing on the okrug level is implemented through the negotiated socio-economic partnership agreements with the governor. The money contributes to the social infrastructure in NAO—the building of new, or repairing existing, sports halls, kindergartens, schools, medical centres, recreation centres, and so on. Regional authorities usually determine which social objects are necessary for the okrug. In addition to agreements at the gubernatorial level, oil companies provide support to the administration of the polar district (Zapoliarnii Raion). Many companies go beyond socio-economic agreements to voluntarily provide funds for cultural events, education, and other activities as part of broader social programmes. Socio-economic agreements supplemented by voluntary social support have contributed to the improvement of the quality of life in Narian-Mar and the surrounding villages. In general, before the fall of oil prices in 2015–2017, the region had high expectations that it would get economic support from oil and gas companies, which is expressed in the vernacular phrase “to milk the oil people”. In 2016, the NAO from a donor region had significant debts (to lending banks), and so the budget was reduced for state programmes that help indigenous people.

4.2.2. Interactions between Oil and Gas Companies and Indigenous Peoples in NAO

Since oil and gas companies came to NAO in the 1990s, reindeer herders and oil companies have disputed land use rights. Oil extraction resulted in a decrease of reindeer farming grounds and a decline in the number of reindeer. According to the Land Code, companies had to compensate the herders for expropriated lands. The amount of compensation became one of the stumbling blocks in negotiations.

Lukoil-Komi is one of the largest oil and gas companies in the region. Like other enterprises, the company concludes social-economic agreements with regional authorities. Under these agreements, it allocates funds for the construction and repair of important social infrastructure in villages, such as sports halls, schools, kindergartens, and art centres. The company also has special programmes for local community initiatives and provides competitions for grants for social and cultural projects. The most significant is the multi-year project called the “Red Tippy,” which brings doctors to remote reindeer herding places [11]. The company adopted the corporate Social Code, which declared that it is important to preserve the cultural heritage of indigenous peoples and assist them in receiving education, professional training, and improvements for their livelihoods.

The socio-economic agreements of all oil companies including Lukoil with the reindeer herding enterprises have always been direct and confidential. Even municipal authorities and local communities are not familiar with the amounts of money in these agreements. The agreements, themselves, are determined by the Land Code as the reindeer herding enterprises are leasers of the agricultural lands in NAO. Oil companies are obliged to obtain their consent and compensate them for expropriated and damaged lands.

In the early stages the amount of compensation was determined during negotiations. According to the interviews, the amount of funds that the reindeer herding enterprises received depended more on the negotiating skills of the leaders of the enterprises than on the amount of land taken to build the oil infrastructure. Goods were provided by the oil companies mostly in-kind and only rarely was money placed in bank accounts. In case money was placed in bank accounts, reindeer herding enterprises were obliged to deliver reports on their spending of the money that was allocated in the agreements. Since 2011–2012, the relationship between the company and reindeer herders has become more formalized and the compensation is calculated using a federal methodology with money being transferred directly to bank accounts. The compensation process has become more transparent, the number of conflicts has diminished, and the relationships have stabilized between oil companies and indigenous communities. The Association of Reindeer Herders assists enterprises in finding oil leaks; the amount of damage from oil leaks is also calculated using a federal methodology, and in cases where the oil company does not agree, the reindeer herding enterprises go through the courts to gain compensation.

4.2.3. Khanty-Mansi Autonomous Okrug: Surgutneftegaz

Regional Context: Khanty-Mansi Autonomous Okrug—Yugra

Khanty-Mansi Autonomous Okrug—Yugra (KMAO) has its administrative centre in the city of Khanty-Mansiysk. The okrug ranks third in economic and social development among Russian regions. The population of the okrug is estimated to be 1,626,755 people as of 2016, of which only 2% (30,000) comprises indigenous peoples—Khanty, Mansi, and Nenets. Many of them have preserved their traditional lifestyle. The welfare of the okrug is based on oil extraction. In 1960, the first oil deposit was discovered in the okrug, and it is now the place where 60% of all Russian oil is extracted. Russian companies Rosneft, Surgutneftegaz, and Lukoil are the largest oil companies operating in the region [50]. Like in NAO, these companies conclude annual social-economic cooperation agreements with the governor of KMAO and the municipalities. The amount and focus areas of support provided by the company to the region is determined following the discussion between the company executives and the regional authorities. This includes constructing new, or repairing existing, social infrastructure in towns and villages, such as schools, kindergartens, recreation centres, road construction, and so on. In addition, companies build a certain number of residential buildings with consent of the regional authorities. The companies also provide direct help for sports, educational, and medical institutions in the okrug, as well as for district and village municipalities. Like in many other regions of Russia, the companies align with the requests from regional authorities, and local residents often criticize the process of the allocation of money:

The proposal is prepared by the okrug in the first place, they say, ‘Let’s do this and that.’ The roads are dreadful, that’s why the governor signed the new agreement on the first of May. Under this agreement, most money will be allocated to road reconstruction in the city of Surgut, because there are elections going on, because there’s going to be public outrage.

[51]

Companies in KMAO conclude standard agreements with the reindeer herding family enterprises. These agreements contain a standard set of goods which are supposed to compensate for damage to the land. Companies do not differentiate between traditional family enterprises that are severely damaged by oil infrastructure and those that are only lightly damaged. As such, the compensation is equal for all. Equal distribution of goods to family enterprises allows companies to cut their transaction costs. The main goal of these agreements is to comply with legislation on TTNS, which states that indigenous peoples have to be compensated and their consent obtained. At the same time they are to minimize transaction costs when calculating damages to each household and reduce the risks for the company when interacting with local communities. Companies, such as Lukoil and Surgutneftegaz, which operate in both NAO and in KMAO, use different benefit-sharing arrangements in these regions. In NAO they use federal methodology, while in KMAO they use standard agreements.

Interaction between Surgutneftegaz and Indigenous Peoples

Surgutneftegaz is the second largest oil and gas extractor in KMAO after Rosneft. It is the only oil company registered in the region, and it is the region’s main tax generator; the company’s tax deductions comprise 40% of all tax revenue of the okrug. Surgutneftegaz views its social programmes and its support of local communities as a part of its corporate strategy which is aimed at efficiency improvement and risk management.

The company strives to balance out it goals with the interests of indigenous peoples, who practice substantial hunting and fishing, by distributing compensation in relation to industrial impact. As described above, the compensation is based on standard agreements devised by the company in cooperation with local authorities. The companies themselves initiated the development of those standard agreements in the form of recommendations, as it allowed them to cut their transaction costs when interacting with indigenous peoples:

We came together and demanded the finalization of a single form for everyone: ‘Come on, guys! What’s the problem?’ One demands this, another demands that. They held back for a long time: ‘How can we do it? It’s an agreement, there are two sides agreeing.’ Well, finally they settle for the standard form, but they refuse all responsibility and say, ‘Well, these are, like, our recommendations’.

[51]

If indigenous people have officially designated territories for traditional use of natural resources (TTNR), these agreements are made directly with households. Under these agreements, the company usually provides snowmobiles, outboard motors, chainsaws, fuel, and clothing. If local residents have no formally-designated TTRNs, the company transfers funds to the budget of the district administration, which distributes the received funds. For instance, in Beloyarsky District in KMAO there are only a few recognized TTNR and no opportunities to use legal instruments to pay compensation money to specific households. Here, state paternalism is strong. The company allots a certain sum to the local administration that then distributes it at its sole discretion. The amount of material aid and the procedure of distribution are non-transparent in this case. Indigenous people are upset with the way the administration distributes the money, as some part of the funds goes to other villages:

First, we put the blame on one village chief, they distributed it wrong. Now there’s another chief, and they still distribute it wrong. When you haven’t earned it yourself you may distribute all you want, but you will never distribute it right.

[52]

At the same time, company representatives claim that this form of interaction through the municipality is more comfortable:

Of course, it’s a hassle for Surgutneftegaz to conclude an agreement with every single tribal head. Specialists will also tell you that it is undoubtedly easier to work with the municipality. We conclude the agreement, put it in a single pair of hands, and it’s off our back, because it’s more difficult to negotiate with everyone.

[52]

Another reason for discontent is that indigenous people have to pay a 13% tax on the support they are getting from the company. This is due to the fact that compensation money is declared as a source of income for Surgutneftegaz in the tax documents, rather than being presented as production costs and damage compensation. As a result, local people have to pay a significant amount of tax money for all material goods (fuel, construction materials, and so on).

Finally, some indigenous communities consider their traditional way of life on their land as being more important than acquiring questionable compensations from oil companies. Therefore, benefit-sharing agreements are not a universal problem-solving instrument:

“Many people can be bought, but many do not want to be. What are we going to leave for our next generation? They would later say, ‘Our grandfathers sold everything, everything.’”.

[53]

The company holds public hearings and consultations with local residents where they can voice their concerns and suggestions. However, these hearings are formal in character and do not always allow the negotiation of the plans of the company with the local people:

They told about the achievements of the administration, the helicopter is getting ready to leave already, people didn’t even have time to say A or B. They say, ‘Sorry, our helicopter is leaving already.’ That’s the way these gatherings go.

[54]

If the conflict with indigenous people cannot be solved, a mitigation committee at the level of the okrug is called to session. It determines if the oil company can work on a certain territory, and if they can, what limitations will apply.

4.2.4. Sakhalin: Sakhalin Energy and Exxon Neftegaz Limited

Regional Context: Sakhalin

The island of Sakhalin is situated in the Russian Far East and surrounded by the Sea of Okhotsk and the Sea of Japan. Sakhalin is populated by several indigenous peoples, such as Nivkhs, Uilta, Ainu, and Evenks. The largest ethnic group on Sakhalin are Nivkhs, who engage in traditional fishing and hunting. The Regional Council of Authorized Representatives is the main indigenous organization, and Kykh-kykh (Swan) is a main Nivkh cultural NGO [55]. Oil and gas development of Sakhalin began in the Soviet period, but two international consortiums, Sakhalin 1 and Sakhalin 2, started commercial oil development in the 1990s. Sakhalin 2 launched in 1994, with Sakhalin Energy being its operator, which started exploration in 1996. Originally, its main shareholder was British Petroleum, who later sold its shares to Shell. Gazprom, Shell, Mitsui, and Mitsubishi are currently the main shareholders in this project. Exploration by Sakhalin 1 started in 1995, with Exxon Neftegaz Limited being its operator. Exxon Mobil, the Indian state oil company ONGC Videsh Ltd., and the Russian company Rosneft hold shares in this project. Consortium operators concluded tripartite partnership agreements between the company, the state, and indigenous peoples.

Interaction between Oil and Gas Companies and Local Communities on Sakhalin

The companies Sakhalin Energy and Exxon Neftegaz Limited established partnerships with indigenous peoples from the very start of their operations. However, they only formalized them in the mid- to late-2000s. In 2005–2006 an indigenous peoples’ social movement against oil and gas companies emerged due to the negative impacts of construction projects. The local environmental NGO “Ekologicheskaya vakhta Sakhalina” (Sakhalin Environmental Watch) supported the indigenous movement, as did 146 NGOs operating in 22 countries (including WWF, Greenpeace, Reinforest Action Network, BANK Track, and Friends of the Earth) and 80 Russian NGOs located all over Russia. This NGO network pressured financial institutions on environmental issues and included indigenous issues in their grievances as well.

International banks, from which Sakhalin Energy had loaned money, subjected pressure on the company by asking it to resolve the conflict and respect the rights of indigenous people. As a result, both companies changed their strategies of interaction with local communities [47,48,49].

In order to fulfil the requirements of international organizations, Sakhalin Energy, as part of the tripartite partnership between the company, the state, and indigenous people, represented by the Council of Authorized Representatives, initiated the Sakhalin Indigenous Minorities Development Plan (SIMDP) as recommended by the World Bank [47,48,49,50].

The following international standards were incorporated in the SIMDP: Convention 169 Concerning Indigenous and Tribal Peoples in Independent Countries; the United Nations Declaration on the Rights of Indigenous Peoples; the International Finance Corporation (IFC) Performance Standards on Environmental and Social Sustainability; and the World Bank Operational Policy and Bank Procedure on Indigenous Peoples [47,48,49,50]. The corporate standards of Shell significantly influenced the plan, which adopted the majority of existing global standards and did not become involved in developing either environmental or social policy for the consortium. Sakhalin Energy applied the seventh principle of the UN Declaration on the Rights of Indigenous Peoples by operationalizing the Free Prior and Informed Consent (FPIC) principle, which presumes that indigenous peoples participate in decision-making in regard to oil development on their territory [56,57,58]. The company suggested using this principle in the process of distribution of funds allocated in SIMDP and, therefore, indigenous peoples received an opportunity to decide how their social-cultural development will take place. Indigenous peoples are well informed, they participate in oil developments through the complaints procedure, but they do not have a right to veto.

The SIMDP supports two main foci: the Social Development Fund and the Traditional Economic Activities Support Programme. The first focus is associated with financing healthcare, cultural, and educational projects. The second focus is associated with providing financial aid for specific households that allows them to buy equipment (motors, machines, boats, cars). Company representatives and public officials participate in the development and management of SIMDP, and distribution of funds is the responsibility of the indigenous peoples [56].

On the one hand, the opportunity to manage funds empowers indigenous peoples, but on the other hand it brings about conflicts within the local community. The SIMDP has been implemented in all territories populated by indigenous peoples; even in places where Sakhalin-2 does not operate. International and local experts carry out an annual third-party evaluation procedures. The tripartite partnership mode that Sakhalin Energy employs in benefit-sharing is considered one of the most successful in the world by the UN [57,58].

Exxon Neftegaz Limited concluded a similar type of tripartite partnership agreement with the state and indigenous peoples, which were represented by the Consultative Committee.

Applicants’ projects are discussed collectively by three representatives of the company, one representative of the Sakhalin oblast government and three members of the Council of Authorized Representatives. Exxon’s range of support for social programmes is narrower than that of Sakhalin Energy. Exxon Neftegaz Limited only supports the areas of its operation (Nogliki and Okha). Additionally, the company provides financial support for fewer focus areas, which are education, culture, and healthcare. Exxon Neftega Limited only provides grants for organizations (schools, libraries, recreation centres, tribes, and so on). There are no grants for specific family enterprises to support traditional economic activities.

Both companies devised efficient systems of interaction with local communities. Sakhalin Energy designed a procedure for local people allowing them to submit their complaints. There are information centres in various localities, and there are community liaison officers in the towns of Nogliki and Val. Exxon has a network of coordinators—company representatives who interact with the residents at the local level. They are responsible for holding meetings with local people and providing regular reports on the events held in the towns and villages. Both companies organize meetings and consultations with indigenous peoples and monitor all implemented projects.

As we can see, both companies actively implement international standards related to indigenous peoples’ rights and are guided by the demands of international loan suppliers. These companies introduced a new format of benefit-sharing agreements where local residents take part in the decision-making process. Much attention is paid to training workshops for local people, promoting the initiatives coming from local communities, and creating new grassroots management structures.

5. Discussion and Conclusions

The research findings demonstrated various benefit-sharing agreements in Northern Russian regions. The regional specifics turned out to be very important in the making of benefit-sharing arrangements in NAO and KMAO. Land designation (agricultural, traditional nature use, public) was essential. In contrast, in the case of Sakhalin international consortiums in their approach to benefit-sharing were guided by their own corporate policies, as well as the standards of international financial institutions. Therefore, Sakhalin Island represents a special case in which transnational actors played a crucial role in designing benefit-sharing arrangements.

This paper explored different instruments of benefit-sharing and analysed which of them were favourable for indigenous peoples in terms of procedural and distributive equity. Elements of the ideal types, described in the theoretical framework, found in investigated cases include: (1) partnership; (2) CCSR; and (3) paternalism (both state and corporate). Cases differed from each other in regard to procedural and distributive equity.

In NAO and KMAO we observed the mixture of paternalism with CCSR in benefit-sharing arrangements. One characteristic of both paternalism and CCSR is the lack of formal procedures for interaction at the level of the region. During the construction phase of large oil infrastructure, public hearings, and environmental impact assessment are organized in cities with little participation of indigenous people. The main decisions of these are made in the course of semi-formal negotiations between the company and the authorities, where the two sides agree on the form and amount of social investment in communities. The social aid is mainly focused around creating social infrastructure, purchasing certain goods, and providing transport. Projects associated with construction or the repair of the social infrastructure (sports halls, schools, and so on), as well as cultural or sports events, are a priority. Here, the development of indigenous peoples’ initiatives and entrepreneurship receives no attention. Finally, there is no well-developed regulatory system for monitoring public opinion and requests from the indigenous residents.

In the cases of NAO and KMAO we see path-dependent [59] practices of benefit-sharing. At the level of the region in both NAO and KMAO, the common practice is socio-economic partnership agreements between companies and the governor. Regional authorities, with small input from indigenous communities, act as the main partners in the discussion of social investment and industrial activity. The key roles on the distribution of funds are played by regional authorities and companies, which reproduce Soviet and post-Soviet experiences. This resulted in a narrower circle of actors participating in benefit-sharing arrangements, and also in a less formal manner of decision-making. Therefore, the benefit-sharing arrangements at the regional level fall into the paternalistic category with low procedural equity. In contrast, the distributional equity may be quite high as communities receive much-needed social infrastructure, roads, schools, and sports facilities.

If we look at Lukoil-Komi and Surgutneftegaz in NAO and KMAO, there are elements of paternalism and CSR in their interactions with indigenous peoples. On the one hand, these companies align themselves with the international standards of CSR, have good ratings within Russian oil companies [60], and have corresponding corporate policies and care about their image on the global markets. On the other hand, our research demonstrates that CCSR practices closely echo the Soviet experience. They are characterized by the companies’ “parental” management of the indigenous communities and their tendency to make all decisions by themselves without much consultation. This is especially apparent in the KMAO Beloyarski district where TTRN are not designated, and the municipality-distributed funds are allocated by the company as a benefit to the indigenous people. In regard to lands designated for reindeer herding in both NAO and KMAO, the major drivers for direct benefit-sharing arrangements between companies and indigenous peoples are determined by legislation. In NAO companies are obliged to compensate for extracted and/or damaged agricultural land designated and leased by reindeer herding enterprises. In KMAO, companies are obliged to compensate for building infrastructure and damaging the TTRN lands. In the case indigenous people refuse to sign the agreement, lands according to the legislation [61,62] cannot be taken by oil infrastructure. However, even in such circumstances paternalism has been determined. This can be seen especially in Lukoil Komi socio-economic agreements with reindeer herding enterprises in NAO before 2012, when money given as compensation for the extracted lands was channelled in a form of a partnership agreement, and the company monitored the spending of it very closely. Since 2012, the relationship between Lukoil Komi and reindeer herding enterprises has become much less paternalistic, falling into the CCSR category, as most of the socio-economic agreements with the reindeer herding enterprises have been substituted by compensation for damage and/or lost income. In NAO since 2012 we have observed the move from informal negotiations between companies and indigenous enterprises to the more standardized procedure of decision-making on compensation. In cases where land is damaged, decisions on compensation are made by courts. The distributional equity in this case greatly increased along with the amount of compensation. In KMAO, state-company negotiations, which involved little consultation with indigenous peoples elected to the State Duma, determined standardized compensation that a reindeer herding family enterprise receives in case of oil development on TTRN. There is a lack of formal instruments to measure the amount of compensation, which makes distributive equity low. Therefore, in NAO and KMAO participatory equity is low, and the distributive equity is extremely low in cases in KMAO where indigenous family enterprises receive equal compensation for severely- and lightly-damaged lands.

In the case of Sakhalin, as was mentioned earlier, transnational actors brought to Russia international standards that are reflected in benefit-sharing arrangements. All these standards emphasize meaningful consultation and engagement with indigenous peoples in negotiations dealing with land use and benefits.

As a result, wide forums of negotiation were created to discuss how benefit-sharing agreements need to be set up. The procedural aspects of these agreements had special emphasis placed on them. This contributed to the design and implementation of wider democratic procedures, which ensured high participatory equity. The representatives of indigenous peoples gained decision-making power in negotiations with the company executives and regional authorities.

Sakhalin is a peculiar case where the consortium operators build relations with indigenous communities based on corporate ethics and international standards protecting indigenous rights. In this case, it is important for the companies to establish dialogue with the stakeholders and address the conflicts with indigenous people as it enhances their image as socially responsible actors [48,49]. Unresolved conflicts with indigenous people can block the companies from receiving loans from international financial institutions and inhibit their positioning on the global markets. Indeed, in the case of Sakhalin Energy the loans from international financial institutions pushed the company towards active implementation of international standards of benefit-sharing with indigenous people and triggered the development of more extensive social programmes.

The peculiar feature of the tripartite model is that the companies eagerly involve indigenous people in making decisions about their own development. Sakhalin Energy is granting indigenous representatives power to allocate and distribute funds without assistance from the company or the state. In addition, Exxon Neftegaz Limited engaged indigenous people in the monitoring of their activities. Indigenous representatives worked as inspectors during the Sakhalin-1 seismic exploration.

It is important that the process of decision-making regarding indigenous peoples’ interests is defined by transparent and formalized procedures. Both companies enabled a procedure of filing complaints with the company. This is especially true regarding procedures of distribution of funds. The information about the results of grant competitions, the amount of money granted, and the beneficiaries are fully disclosed by the community. The main foci of social investment are associated with supporting and developing local initiatives, not with creating ready-made social infrastructure or providing goods. The companies encourage local residents to propose and implement their own projects. For instance, companies approve grants for dog breeding, purchasing equipment, revival of the national language, and so on. The companies pay much attention to educational training and workshops for locals. The main goal of such workshops is to teach indigenous people to build relations with the companies, to put forward their initiatives, and to devise and implement their own projects. It is apparent that the companies regularly report on their activities and monitor public opinion. Both companies actively inform local people about their current projects and control the public mood through information centres, annual meetings with the public, the complaint filing system, and the network of coordinators that are closely tied with local communities. This allows conflict resolution at the initial stage. Finally, Sakhalin Energy implements independent third-party assessment of the efficiency of social investment.

As we can see from the case description, the procedural equity implemented by both consortiums in benefit-sharing arrangements is very high. The distributive equity is higher in the case of Sahhalin Energy as the company distributed grants to all indigenous people in Sakhalin, whereas Exxon Neftegaz Limited only distributed grants to indigenous peoples living in places where the company operates.

The common ground between all examined cases is the idea that benefit-sharing agreements are used as a strategy to improve company efficiency, to enhance its image in the eyes of investors and authorities, and to reduce risks. Successful benefit-sharing practices can help companies to ensure long-term SLO and can significantly enhance sustainability in resource-dependent communities [5].

However, the practices of benefit-sharing agreements and interaction with stakeholders differ in the investigated case studies. The major difference is that, in NAO and KMAO, benefit-sharing arrangements are mostly compensatory. This kind of benefit-sharing may enhance corporate efficiency for the short-term, but does not guarantee long-term SLO and does not eliminate risks of conflicts, especially in cases when compensations are small and/or are not calculated properly. Sakhalin oil consortium operators develop mechanisms for fostering development and adaptation of indigenous peoples to the market economy. In the case of Sakhalin, we see that the procedural equity is much higher than in other cases. The decisions on benefit-sharing are made together with the indigenous people and the responsibility is shared. Hence, there is no doubt that such company strategies enhance long-term SLO. The cases of Lukoil Komi and Surgutneftegaz represent a reset of Soviet practices on the market basis; the distributional equity may be sufficient, but the procedural equity is low as the decisions are made by the company in concord with regional authorities.

However, this does not mean that the tripartite partnership model is unequivocally better for effective benefit-sharing among indigenous communities. The partnership mode assumes that the communities are ready to play by the transparent rules, as well as the companies. Additionally, this presupposes that the community can take responsibility for its decisions. This is not always true. For instance, in the case of Sakhalin, the company delegated power to indigenous representatives to distribute grants between households. This entailed conflicts within the very indigenous community regarding the choice of beneficiaries.

Another example is efficient implementation of social programmes by companies. In the partnership mode, local initiatives and entrepreneurship workshops are prioritized. Such programmes seem to be preferable as they are less likely to foster a welfare mentality and because they encourage local residents to self-organize. Usually this is expressed in the slogan “give a fishing rod instead of a fish.” However, not all training programmes prove to be efficient. In a variety of cases, investing corporate funds in the construction of significant facilities turns out to be a more trusted instrument of social investment.

Another hurdle on the way to the partnership mode is the question of which groups in the society legitimate the work of the company. From the perspective of international practice, the society represents the main player, however, in Russia this right belongs to the state authorities. This is partly due to the Soviet tradition of industrial companies being dependent on the state policy and partly due to the perestroika experience of solving problems through informal agreements with the authorities.

In general, the chosen strategy of interaction is determined by the established constellation of actors. The level of pressure by the regional governments upon companies, the dependence of companies on international lenders, the level of empowerment of indigenous peoples, the peculiar features of corporate policies, and the level of competition between the companies in the region prove to be important for determining the mode of benefit-sharing between companies and indigenous peoples.

We need to admit that among the three modes of benefit-sharing arrangements between companies and indigenous peoples none appears to be effective in terms of both procedural and distributive equity. However, some modes turned out to be more advantageous in terms of meeting community needs and fostering sustainable development in remote Arctic and sub-Arctic regions. In many cases, NAO and KMAO benefit-sharing does not go beyond compensations for loss and top-down paternalist interventions from the side of the company and/or the state. The partnership mode seems to bring more desirable results, but it also has shortcomings. While based on the overall principles, such as distributional and procedural justice, the successful benefit-sharing models in the Arctic energy sector should be locally embedded to meet specific community needs.