5. Corporate governance

Company's Mission, Vision, Values and Principles

VISION: To be the premier energy source for Asia-Pacific.

MISSION: Sakhalin Energy is committed to being a premier energy supplier, recognised for its operational excellence, reliability, and safety. We conduct our business in an ethically, socially, and environmentally responsible manner.

Sakhalin Energy is guided by general business principles, with underlying core values of honesty and integrity, respect and care for people, individual accountability supported by teamwork, professionalism, and continuous improvement. These principles are exemplified by the company responsibilities to its shareholders, the Russian party, customers, company employees, and business partners—i.e. all parties that have business relations with the company, as well as to the community.

The general business principles cover, among other areas, economic features, competition, business integrity, political activities, health, safety, security, environment, local communities, as well as communication and engagement with stakeholders. The full text of the company’s General Business Principles is available on the Sakhalin Energy’s website (www.sakhalinenergy.com).

Corporate Governance System and Structure

Corporate governance is a process ensuring due diligence in organisation, management, and oversight within Sakhalin Energy. Corporate governance is accomplished by engaging the Sakhalin Energy’s senior management with its shareholders and the Russian party to determine the direction of the company’s activities, establish areas of responsibility, and assess performance.

The Sakhalin Energy Business Management System Manual describes the main principles and approach to managing the company.

Leadership and Commitment

Sakhalin Energy’s senior management is fully committed to the Business Management System. Compliance with senior management decisions is mandatory for all staff and contractors. The senior management plays a leading role in the constant improvement of business processes through their decisions and actions.

Policy and Strategic Objectives

The company’s policies and standards comply with Russian laws and regulations as well as with the requirements of its shareholders and lenders. Sakhalin Energy’s strategic objectives are inspiring and clear to everyone and are consistently incorporated into the policies, standards, processes, and plans adopted by the company.

Risk Management

When establishing objectives, the company identifies, assesses, and considers overall risks related to achieving these goals and identifies ways to manage risks, including decreasing, mitigating, or preventing them (see Section 5.6. Risk Management).

Organisation, Responsibilities, Resources, and Competency

The organisation and resources are adequate to meet the strategic objectives. Responsibilities at all levels are clearly described, communicated, and understood. The employees are prepared and trained in accordance with training plans coordinated with structured competency assessment systems.

Processes, Assets, and Standards

Processes and /assets are defined with clearly assigned responsibilities. Process/Asset standards and procedures incorporating controls and means of risk management are in place and understood at the appropriate organisational levels. Process owners ensure the proper implementation of control procedures through regular assurance and compliance activities adopted by the company.

Planning

All approved plans are optimised and fully resourced. Performance targets are set that will ensure progression towards the long-term objectives. The five-year plans, which are annually assessed and adjusted form the basis of planning. They are established through active and open discussions with the company personnel from all directorates at the annual 100 Workshops (see Section 6.3. Engagement with Personnel).

Contingency and emergency response plans are implemented and regularly evaluated.

The Journey Book, which is published annually, is used to inform all company employees about the company’s goals, strategy, targets, and measures to achieve them.

Implementation

Performance indicators are established and monitored, and results are reported. Corrective measures are taken as necessary, and policies, organisation, risks, plans, and processes are updated. All incidents with significant potential or actual consequences are thoroughly investigated and reported. Any lessons that are learned are disseminated throughout the company.

Assurance

Assurance is in place to ensure the management system is reasonably effective. It includes independent audits of processes and /assets. Audits are followed up in a timely manner. Management regularly reviews the suitability and effectiveness of the assurance framework.

Communication

Transparent and open communication is essential to ensure the company’s business objectives are met. Line managers engage with their staff, communicating business goals and priorities. The CED receives their feedback for information and possible follow-up. The CEO and other members of the CED reinforce this communication framework with regular staff engagement sessions (see Section 5.4. Corporate Culture and Section 6.3. Engagement with Personnel).

Corporate Governance Model

Руководство и обязательства

Corporate Governance System

Strategic planning is carried out through engaging the Sakhalin Energy’s senior management with the Russian party (representatives of the federal executive authorities and the Sakhalin Oblast Government) and company’s shareholders that determine policy directions, establish areas of responsibility, and assess the results achieved, including those in the area of sustainable development. Under the shareholding structure of Sakhalin Energy, which has not changed since 2007, Gazprom holds 50% plus one share, Shell holds 27.5% minus one share, Mitsui holds 12.5%, and Mitsubishi holds 10%. All the shareholders operate through their subsidiaries.

The Supervisory Board is the Sakhalin-2 project strategic management body established and operating in accordance with the Agreement on the Development of the Piltun-Astokhskoye and Lunskoye Oil and Gas Fields on the Basis of Production Sharing (PSA). The Supervisory Board supervises the fulfilment of the PSA terms and approves the company’s long-term development plans and budgets, annual work programmes and budgets, LNG sales agreements, procurement procedures, Russian national employment and training plans, etc. The Supervisory Board also reviews the company’s annual reports and appoints auditors. The Supervisory Board consists of 12 members: six representatives from the company and six representatives from the Russian party. Information on members of the Supervisory Board is available on the Sakhalin Energy’s website (www.sakhalinenergy.com).

Sakhalin Energy uses a three-stage corporate governance system, in which:

  • certain key decisions are made by shareholders;
  • the Board of Directors is responsible for overall company governance;
  • daily management and operation of the company is the prerogative of the Committee of Executive Directors (CED).

Corporate Governance Model

Модель корпоративного управления

The company governing bodies have the following tasks in the governance model.

The company governing bodies have the following tasks in the governance model.

Board of Directors (BoD)—appointed by company’s shareholders, it is responsible for the overall governance of the company and for key decisions regarding economic, environmental, and social activities as well as the strategy and business direction of the company.

The BoD members in 2016 included all the executive (7) and non-executive (8) directors of the company. Olivier Lazare, Vice-President of Russia at Shell, served as the Chairman of the Board in 2016.

The BoD activities are supported by the functions of several committees.

Commercial Committee—chaired by the company’s Commercial Director and consisting of the representatives from Sakhalin Energy and its shareholders who meet to discuss commercial issues and related proposals and strategies pertaining to PSA/shareholder issues, PSA amendments, Licence Security proposals, infrastructure sharing/cooperation issues, and business strategies relating to crude oil, LNG and natural gas, and other commercial issues.

Technical Committee—chaired by the company’s Technical Director and consisting of the representatives from the Sakhalin Energy’s Technical and Production Directorates and its shareholder companies that meet to discuss technical issues such as value assurance reviews, development proposals, well drilling and completion, development work programmes and related budget proposals, operational activities, contracting plan and strategy, tender board policy, project development schedules, HSE management, and engineering, procurement and construction plans.

Finance Advisory Committee—chaired by the Finance Director and consisting of the representatives from Sakhalin Energy and shareholder companies that meet to discuss financial issues. The standard agenda of a FAC meeting includes the following items: equity/project financing arrangements; assurance framework (including financial business); cost recovery issues; strategic risks, internal/external audits; work/service contracts, agreements and amendments; tax liabilities; insurance; treasury; accounting policy and supply chain management matters.

External Affairs Committee—an advisory committee to the BoD. The Committee is chaired by the Sakhalin Energy’s Head of the Government and Shareholders, External Affairs Division and consists of representatives from the company and its shareholders that meet to discuss external affairs, such as formulating and coordinating the company’s positions and communications with shareholders; monitoring and responding to press reports, releases, and inquiries; and coordinating issues associated with managing the company’s reputation.

Board Assurance Committee—consists of two representatives from each of the company’s shareholders, one of which is a Non-Executive Director. The meetings are attended by the company’s Chief Executive Officer, Finance Director, Legal Director, and any other executive directors who are responsible for the agenda items of a Committee meeting, the Audit Manager, and other individuals the Committee invites.

Board Remuneration Committee—an advisory committee to the BoD. This Committee reviews and makes recommendations with regard to annual performance against targets by executive directors as well as overall HR policies. The Committee includes two representatives (one of which should be a Non-Executive Director of the company) from each of the shareholders.

Committee of Executive Directors (CED)—headed by the company’s CEO. The CED, which consists of all the executive directors of the company, is responsible for the day-to-day management of the company. It designates, directs, and oversees the operations of Sakhalin Energy through business plans and strategies and by deciding how best to implement them. The CED members as of 31 December 2016 are shown below in the Committee of Executive Directors organisational chart.

The CED is supported by internal committees, including, but not limited to:

  • Tender Committees;
  • Management Development Committee;
  • Decision Review Committees;
  • Business Integrity Committee;
  • Business Assurance Committee;
  • HSES Management Committee;
  • Operational Excellence Committee.

The company’s organisational structure ensures that functional tasks related to both assets and processes are completed.

 

Committee of Executive Directors

Комитет исполнительных директоров

 

Company’s Organisational Structure

Организационная структура компании

Corporate Culture

Respect, support, and promotion of human rights are core principles for Sakhalin Energy, and company employees are fundamental to its success. The basic qualities each company employee should strive for are professionalism, responsibility, initiative, integrity, self-development, improved efficiency, and strict observation of ethical principles and standards of conduct. Strengthening and developing corporate culture is an important component of achieving and improving operational excellence.

In order to ensure compliance with professional and business ethical standards, the company’s Code of Conduct explains the norms of behaviour which Sakhalin Energy expects from its employees and describes how these norms correlate with the company’s business principles and core values (see Section 5.5. Code of Conduct). Sakhalin Energy employees share the core values of the company, which are:

  • honesty and integrity;
  • respect and care for people;
  • apply professionalism and take individual accountability for performance;
  • continuous improvement and team work.

These values are reflected in Sakhalin Energy’s standards, policies, and procedures, such as:

  • Code of Conduct (incl. Statement of General Business Principles);
  • Sustainable Development Policy;
  • Human Rights Policy;
  • Whistle Blowing/Grievance Procedure;
  • Conflict of Interest Procedure;
  • Anti-Bribery and Corruption Procedure.

These documents ensure that Sakhalin Energy operates within the framework of applicable laws and in accordance with the ethical requirements set out in the Sakhalin Energy General Business Principles. The human rights principles control system requires the company’s senior management to provide employees with a safe and confidential setting for raising any concerns and reporting non-compliance. Sakhalin Energy employees, in their turn, are expected to report to the company any incidents of non-compliance with the General Business Principles.

Sakhalin Energy operates in a manner that is intended to complement the core values and provide a way of thinking and behaving that is in the best interests of the overall business. Leadership, accountability, and teamwork characterise this behaviour.

The company constantly works to reinforce engagement with staff and internal communications, using such methods as direct communication (all-staff communication sessions, internal meetings of all units, etc.), as well as various types of electronic and written communications and feedback (see Section 6.3. Engagement with Personnel).

The company has developed and applies the Conflict of Interest Procedure. Under the procedure, an annual conflict of interest declaration must be completed by all the employees. This provides an understanding of the ethical principles of the company’s activities and allows the company to assess potential conflicts and take measures to protect both Sakhalin Energy and its personnel from the risk of actual conflict between the employees’ private and professional interests.

 

Производственная эффективность

Code of Conduct

The Code of Conduct is the primary document that contains the General Business principles explains the fundamental rules and standards adopted by the company and necessary to meet the requirements of these principles. It regulates behaviour and spells out requirements and guidance, expressed as clearly, concisely, and consistently as possible in a single, company-wide document for all our employees. 

The Code of Conduct includes, but is not limited to, the following main rules:

  • Sakhalin Energy endeavours to comply with principles of respect, support, and promotion of human rights in all its activities.
  • Sakhalin Energy aims to operate in environmentally and socially responsible ways.
  • Sakhalin Energy does not tolerate bribery, insider dealing, market abuse, fraud, or money laundering.
  • Sakhalin Energy is committed to free, fair, and ethical business dealings.
  • Intellectual, physical, and financial /assets of Sakhalin Energy are valuable and must be preserved, protected, and properly managed.

The General Business Principles of the company are communicated to newcomers during the regular onboarding sessions.

All employees biannually complete online trainings dedicated to the Code of Conduct, Anti-Bribery and Corruption principles and Conflict of Interest Procedure.

During 2016, awareness sessions were conducted in area of business integrity and code of conduct for personnel (> 500 employees) subject to risks of fraud and corruption.

Risk Management

Sakhalin Energy believes that effective risk management plays an important role in achieving the company’s objectives.

The goal of risk management is to maximise opportunities or minimise the adverse impact of the identified risks, including the risks of losses or failure to achieve the goals, as well as the risks of adverse factors in various areas such as safety, production effectiveness, environment, social areas, observance of human rights, labour relations, occupational health and safety, counteracting bribery and corruption, compliance with applicable laws, etc.

At Sakhalin Energy, a risk is understood to be a potential situation in the future which may impact the achievement of goals. All risks are therefore divided into threats and opportunities. Risks reflect the degree of uncertainty affecting the intended course of action of the business. This uncertainty must be taken into account, monitored, and controlled, i.e. managed.

Risk Management Lifecycle

Цикл управления рисками

 

The process for managing risks at Sakhalin Energy involves identifying and assessing risks, planning and implementing a response, monitoring performance, and reassessing risks on an ongoing basis to ensure that areas for improvement are captured that and such improvements are implemented (see the Risk Management Lifecycle chart). This process is regulated by the corporate Risk Management Procedure.

The risk assessment matrix is a vital tool for assessing risks which is applied to classify actual and potential consequences, determine risk significance, and guide appropriate risk management. The risks are assessed in terms of their probability and level of impact on the process to achieve goals.

Risk management is the responsibility of those who are accountable for achieving the objectives associated with these risks. All executive directors of the company shall apply proactive risk management as an integral part of their management activities. Risk control is exercised by the person responsible for the risk (risk coordinator), the company’s Business Assurance Committee which includes the company’s executive directors, and the Board Assurance Committee (see Controls Framework chart).

One of the most important components of an efficient risk management process is impact assessment. This process must be carried out prior to commencement of any operation which may potentially affect various spheres of activity (see Section 3.5.2. Impact Assessment).

Controls Framework

Система внутреннего контроля

 

Listed below are the risks which are believed by the company to be significant as well as ways to control them.

 
Risks Description/Controls Reference
Operational Excellence (opportunity) Many Sakhalin Energy’s processes can be improved to become more effective and/or more efficient, to enable the company to realise its vision of becoming the premier energy source for Asia-Pacific. Controls in place: In 2010, the company developed a strategy to achieve maximum performance indicators, referred to as the Operational Excellence Programme For details, see Section 4.3.
Economic risks
Cost management The main elements of cost management are making investment decisions that optimise scarce resources and challenging the costs to use resources more effectively. Transparency, awareness, and efficiency in managing costs and contracts all aid in achieving the goal of reducing long-term costs. The cost management strategy of the company is supported by the Journey Book, Business Plan, and Operational Excellence Programme For details, see Section 7.4
Current and potential sanctions The EU, US, and a number of other countries have imposed sanctions related to the situation in Ukraine that may affect the company’s business. A cross-discipline sanctions working group has been established to monitor this risk  
Cash flow management in the conditions of falling oil prices Significant and continuous drops in oil prices affect the company’s performance. The company monitors the market continuously in order to make informed decisions on cash flow management and dividends policy, on oil sales under the most favourable conditions on the market, as well as on the level of commitments for future expenditures  
Social and reputational risks
Staff retention, competence, and succession plan It is important for the company to retain the necessary level of trained and qualified personnel. Losing professionals and specialists, especially those in technical fields, can lead to insufficient trained personnel in the skill pool to fill critical positions and can lower the general qualification level of technical experts.
In order to mitigate the risk, the company strives to support the succession process, including at the level of managerial targets and goals. Programmes of managerial and leadership skills development are being implemented. The competitiveness of the employee value proposition is regularly assessed. The Traineeship Agreement is updated annually in cooperation with the shareholders. The Programme for Employing and Training Russian Nationals is being updated
For details, see Section 9.1
Risk of occupational diseases The company applies the following controls to reduce the risk of occupational diseases: personnel health risk assessment at the facilities, harmful factors production control, special workplace attestation, periodic medical and clinical examinations, control over compliance with work instructions during work, control over the use of PPE, and education on the prevention of occupational diseases. For details, see Section 9.3
Risk of not meeting the utilisation rate of 95% for associated petroleum gas In order to minimise the flaring of associated petroleum gas, the company is constantly taking steps to enhance equipment reliability, increase operating time, and minimise the number of unplanned shutdowns For details, see Section 8.1
Environmental risks
Risks with regards to the environment

The company uses the following controls to reduce the risk of negative impacts on the environment and the risk of contamination in line with the requirements of environmental legislation and international standards:

  • identifying all environmental aspects and performing an environmental impact assessment when planning business activities and implementing a project;
  • operating on the basis of permits and licenses obtained, within the limits for emissions and discharges and waste generation volumes specified by the standards;
  • developing and implementing comprehensive programmes for industrial environmental control, local environmental monitoring and biodiversity conservation in the areas of production /assets;
  • analysing the results of monitoring, assessing the efficiency of controls and developing and implementing environmental protection plans.

Risks are managed in accordance with the general requirements of the Company’s Risk Management Standard and the special Atmospheric Air Protection Standard, Water Use Standard, Waste Management Standard, Soil Use Standard, Marine Environment Protection Standard and Biodiversity Standard

For details, see Section 8
Safety risks
Process safety

Process Safety is the management of hazards that can cause major accidents that release potentially dangerous materials or energy such as a fire or explosion or both. Potential sources of major accidents are: hydrocarbon releases from production installations or wells, onshore and offshore /assets and pipelines which could result in a fire or explosion; loss of structural integrity of offshore installations; marine hazards such as a ship colliding with an installation or another vessel; aviation hazards such as a helicopter crash; major road traffic accidents; contamination of food or water affecting personnel at the /assets; loss of power to remote locations during the winter; dropped objects; and transferring personnel between offshore installations and vessels.
The Process Safety Control System consists of three elements:

  • Design Integrity—designing and building the company’s /assets so that risks are as low as reasonably practicable (ALARP);
  • Technical Integrity—applying technical control measures through effective amaintenance, inspection, repair, and quality assurance;
  • Operating Integrity—applying technical control measures and managing critical work processes by using work permits, monitoring technical processes manually, overseeing changes in processes, etc.

Senior management must take a leading role in ensuring process integrity in order for this system to be successful. Leaders should have the ability to pick up on weak signals and create an atmosphere in which people can halt unsafe work and speak up when they feel something is not right.
The process safety risks have been assessed at each company’s asset based on Russian Federation legislation and international practice

For more details, see Sections 
4 and 9.2
Personnel safety risks Traffic decreased during the operations phase, but the risk levels remain high over the entire service life of the /assets. Traffic volumes are still high, often in difficult weather and road conditions. For details, see Section 9.2
Road traffic Safety The most common violation among contractor drivers is speeding. To manage risks and prevent violations of road traffic rules, the company monitors speed limit violations using IVMS and Traffic Safety Team inspectors, conducts training sessions and discussions with drivers, and performs strict journey management. Other precautionary measures and controls are also being implemented For details, see Section 9.2

Anti-Bribery and Corruption

In order to counteract bribery and corruption, the company:

  • does not tolerate bribery, insider dealing, market abuse, fraud, or money laundering (facilitation payments are considered bribes and are not allowed);
  • complies with all Russian and applicable international laws and regulatory acts;
  • adheres to the principle of integrity and legality in all company’s activities.

Sakhalin Energy assists its employees, business partners, contractors, and suppliers in fulfilling requirements for counteracting bribery and corruption. The primary company’s document regulating the issues of counteracting bribery and corruption is the Anti-Bribery and Corruption Procedure (hereinafter referred to as the Procedure).

Risks associated with non-compliance with this Procedure come from the company failing to follow anti-bribery and corruption legal requirements or failing to comply with ethical business standards. These risks may lead to reputational damage, financial losses (through fines), and criminal liability associated with company employees as well as with the activities of its agents, contractors, and intermediaries. The Procedure includes a list of categories of employees who are considered to be high-risk for violating anti-bribery and corruption laws and must attend individual training on the requirements of this Procedure.

All newly hired staff must be briefed about the requirements set forth in the Procedure as part of their induction. The Finance Controller in collaboration with the Budget and Reporting Manager is required to ensure that Sakhalin Energy employees are made aware of this Procedure (including through training sessions) and that all employees comply with the Anti-Bribery and Corruption Procedure.

Furthermore, the company’s Legal Directorate will consult employees on anti-bribery and corruption legal issues and the legal risks associated with non-compliance.

The Anti-Bribery and Corruption Procedure establishes an overall set of controls for compliance with the anti-bribery and corruption laws, including:

  • meeting anti-bribery and corruption requirements;
  • identifying violations;
  • reporting to the Business Assurance Committee;
  • utilising potential risk indicators, or the so-called “red flags” (e.g. risks associated with demands for payment for services not covered by a contract, lack of transparency in invoice supporting documents, etc.);
  • utilising pre-contractual due diligence, mandatory contract provisions, etc.

In order to integrate anti-bribery and corruption requirements into the company’s supply chain management processes and to implement further controls:

  • The Legal Directorate shall monitor any changes in standard contract clauses which specify the company’s anti-bribery and corruption requirements.
  • The Supply Chain Manager shall ensure that standard company contracts contain such clauses and that controls established by this Procedure are effectively integrated into the company’s supply chain management processes.

The Business Assurance Committee shall review monitoring results for compliance with anti-bribery and corruption requirements.