Sakhalin Energy is guided by general business principles, with underlying core values of honesty and integrity, respect and care for people, professionalism and individual accountability, continuous improvement and teamwork. These principles are exemplified by the company’s responsibilities to its shareholders, the Russian party, customers, the company`s 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).
Vision: To be the premier energy source for Asia-Pacific.
Mission: Sakhalin Energy is committed to being a premier energy supplier, recognised for its safety, operational excellence, and reliability.
We conduct our business in an ethically, socially, and environmentally responsible manner.
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`s Business Management System Manual describes the main principles and approach to managing the company.
Corporate Governance System
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 continuous 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.
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 5.4. Risk Management).
Organisation, Responsibilities, Resources, and Competency
The organisation and resources of the company 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.
All plans approved are optimised and fully resourced. Performance targets are set that will ensure progression towards the long-term objectives. The five-year plans, that are assessed and adjusted annually, form the basis of planning. They are established through active and open discussions with representatives of all directorates at the special annual event named 100 Workshop (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`s employees about the company’s goals, strategy, targets, and measures to achieve them.
Performance indicators are established and monitored, and results are reported. Corrective measures are taken as necessary, and policies, organisational structure, risks, plans, and processes are updated. All incidents with significant potential or actual consequences are thoroughly investigated and reported. All lessons learned are disseminated throughout the company.
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.
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 5.5. Corporate Culture and Section 6.3. Engagement with Personnel).
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 programme and budget, 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`s governance;
- daily management and operation of the company is the prerogative of the Committee of Executive Directors (CED).
Corporate Governance Model
The company`s governing bodies have the following tasks in the governance model.
Board of Directors (BoD)—appointed by the 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 2018 included all the executive (7) and non-executive (8) directors of the company. Cederic Cremers, Shell Country Chair in Russia, served as the Chairman of the Board as of end of 2018.
The BoD is supported by several committees.
Commercial Committee—chaired by the company’s Commercial Director and consisting of 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 on crude oil, LNG and natural gas, and other commercial issues.
Technical Committee—chaired by the company’s Technical Director and consisting of representatives from the Sakhalin Energy’s Technical and Production Directorates and its shareholder companies who 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 plans and strategies, 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 representatives from Sakhalin Energy and shareholder companies who meet to discuss financial issues. The standard agenda of a FAC meeting includes 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.
External Affairs Committee—an advisory committee to the BoD. The Committee is chaired by the Sakhalin Energy’s Head of the Corporate Affairs Division and consists of representatives from the company and its shareholders who 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, any other executive directors responsible for the agenda items of a Committee meeting, the Audit Manager, and other individuals invited by the Committee.
Board Remuneration Committee—an advisory committee to the BoD. This Committee reviews and makes recommendations with regard to annual performance of 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.
The Committee of Executive Directors (CED) is responsible for the day-to-day management of the company.
Committee of Executive Directors—headed by the company’s CEO and consists of all the executive directors of the company. CED 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 2018 are shown below in the Committee of Executive Directors organisational chart.
Committee of Executive Directors
The CED is supported by internal committees, including, but not limited to:
- Management Development Committee;
- Decision Review Board;
- Business Integrity Committee;
- Business Assurance Committee;
- HSE Management Committee.
The company’s organisational structure ensures that functional tasks related to both assets and processes are completed.
Company's Organisational Structure
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, 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 future situation that may impact the achievement of goals. All risks are therefore divided into threats and opportunities. Risks reflect the degree of uncertainty in a particular course of action. This uncertainty must be taken into account, monitored, controlled and managed.
Risk Management Lifecycle
The process for managing risks at Sakhalin Energy involves identifying and assessing risks, planning and implementing responses, monitoring performance, and reassessing risks on an ongoing basis to ensure that areas for improvement are captured and that 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.
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 that may potentially affect various spheres of activity (see Section 3.5.2. Impact Assessment).
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 the Controls Framework chart).
Risks that are Believed by the Company to be Significant as well as Ways to Control Them
Continuous improvement (opportunity)
Many Sakhalin Energy’s processes and activities 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.
The company has developed a strategy to achieve maximum performance indicators, referred to as a continuous improvement initiative, which covers the range of value, cost and business process optimisation opportunities.
See Section 4.3.
Risk of adverse effect from current and potential sanctions
The EU, US, and a number of other countries have imposed sanctions that may affect the company’s business.
A cross-discipline sanctions working group has been established to monitor this risk and has developed mitigation plans.
Social and reputational risks
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. Russian Nationals Employment and Training Programme (PET) was renewed in 2018.
See Section 9.1.
Risk of occupational diseases
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.
See Section 9.3.
Risks with regards to negative impact on 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 risk and 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.
See Section 8.
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 maintenance, 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.
Personnel safety risks
These risks mainly include personnel safety risks during lifting operations, risks of falling objects, risks of falling from height or as a result of slipping or tripping, and electrical safety risks.
To reduce safety risks, relevant precautionary measures and controls are being implemented.
See Section 9.2.
Road traffic safety
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.
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 with the help from 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.
See Section 9.2.
“The Reputation of an honest business is a priceless asset for any organisation. Our success in no small measure is contingent on compliance with both legislative requirements and highest possible ethical standards.”
Roman Dashkov, Chief Executive Officer, Sakhalin Energy
Values, principles, rules, codes, traditions and practices add up to the company’s corporate culture, making it unique and guiding it to the destination that has been set. Sakhalin Energy’s corporate culture, which rests on trust and our permanent values—honesty, integrity, respect, professionalism, individual responsibility and team work—contributes to our reputation and business success.
Sakhalin Energy operates in strict compliance with the Russian Federation legislation and corporate General Business Principles, including the following:
- we promote the development and best use of the talents of our employees;
- we conduct business as a responsible corporate member of society, support fundamental human rights and give proper regard to health, safety, security and the environment;
- we contribute to sustainable development, integrating economic, environmental and social considerations into business decision-making (the principles of environmental and social responsibility);
- we do not tolerate corruption, corporate fraud, embezzlement, money laundering or any other abuse of the company's assets;
- we seek to work freely and fairly, in compliance with the business ethics standards;
- we seek to maintain mutually beneficial relationships with business partners, contractors and vendors.
The General Business Principles of the company are communicated to newcomers during the regular onboarding sessions.
All employees complete biannually online trainings dedicated to the Code of Conduct, Anti-Bribery and Corruption principles and Conflict of Interest Procedure.
In 2018, to strengthen the culture of zero tolerance to corruption and fraud, 800 line managers actively participated in face-to-face training sessions. This format served as a platform for discussing changes in the anti-corruption legislation and their impact on the business environment and the company.
The company’s top management is involved in the development of corporate culture based on mutual trust and respect: the company trusting its employees, the shareholders trusting the company, etc. This makes negligence and any malpractice unacceptable.
To strengthen and enhance the corporate culture that helps maintain Sakhalin Energy’s values, reputation and high international status, the following documents have been developed:
- Ethics & Compliance (E&C) corporate website. The E&C website is used for uploading ethics & compliance information and updates (Stories, Facts and Events section) and offers information on the Ethics & Compliance Programme, encouraging employees to raise their concerns and ask questions to receive advice and recommendations (via Whistle Blowing and Contracts links).
- Ethics & Compliance Programme. This Programme has been developed based on Russian and applicable international legislation, as well as best international practices. The E&C Programme execution is coordinated by the Ethics & Compliance Manager.
In 2018, Sakhalin Energy was awarded a diploma in the Business Ethics and Internal Communications category under the RF Ministry of Energy-sponsored contest for excellence in corporate social responsibility.
The Code of Conduct is an integral part of Sakhalin Energy’s corporate governance and culture, defining essential rules, standards and guides for corporate behaviour, including the rules of conduct for employees aimed at achieving Sakhalin Energy’s goals in line with its stated values and principles.
Sakhalin Energy’s Code of Conduct applies directly to each employee and covers various aspects, including respect for human rights, provision of equal opportunities for all, compliance with HSE requirements and conflict of interest management principles, as well as obtaining approvals for business gifts and provision of appropriate reporting.
Each process is described in detail in the respective procedure and policy of the company:
- Code of Conduct, including the Statement of General Business Principles;
- Sustainable Development Policy;
- Human Rights Policy;
- Whistle Blowing / Grievance Procedure;
- Conflict of Interest Procedure;
- Anti-Bribery and Corruption Procedure.
All corporate policies and procedures have been developed in line with the existing laws and regulations, as well as the General Business Principles of the company. 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.
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, conflict of interest declaration must be completed by all the employees on an annual basis.
The Procedure allows the company to prevent and 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.
Effective development of Sakhalin Energy is based on zero tolerance to corruption and fraud, and one and the same mandatory code of conduct mandatory for all the company’s employees, irrespective of their job grade or employment record.
- The company follows Russian and applicable international anti-corruption and anti-fraud regulations, corporate General Business Principles and Code of Conduct, as well as internal policies and procedures.
- Sakhalin Energy does not tolerate corporate fraud, bribery, corruption, embezzlement, money laundering or any other abuse of its assets.
- The company promotes its General Business Principles to business partners, contractors and vendors.
The company has succeeded in its efforts to prevent and combat corruption and keeps making these efforts more efficient. This includes development of appropriate policies and procedures and implementation of business assurance processes to prevent any unlawful activities.
The primary company’s document dealing with 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 the company`s 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.
The company informs both internal and external parties about channels for reporting violations of anti-bribery and corruption legislation.
For that, various mechanisms have been put in place including posting relevant information on the company’s internal and external websites, in the company’s offices and at production assets. For example, the company's website has a link to a digital template for reporting fraud, corruption or embezzlement.
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 Ethics and Compliance 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 consults 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.
The following is made 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 that specify the company’s anti-bribery and corruption requirements.
- Employees of the Ethics, Corporate Governance and Assurance Subdivision shall assess, as part of methodological support of the company`s contracting and procurement process and with a view to observing the due diligence principle in relation to potential and existing contractors, the compliance of the proposed changes to the standard contract terms with the principles of business ethics, applicable anti-corruption legislation, company`s requirements, and best international practices.
- The Supply Chain Manager shall ensure that standard company’s 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.