Question: Pignatelli seems to be learning in the direction of hiring a consultant who might use part of the money for bribes. If Pignatellu does not pay the bribed directly, does this absolve him of responsability?

Closing Case Nicolo Pignatelli and Gulf Italia N icolo Pignatelli, president of Gulf Italia (a sub- sidiary of Gulf Oil), stared at the notice from the Italian government. "How could this be possible?" he thought. The government had given Pignatelli permission to build an oil refinery with a capacity of almost 6 million tons. He had just completed it at a cost of several hundred million dol- lars. Now the Italian government was telling him that he could only operate at slightly more than 50 percent capacity (3.9 million tons of the total 6 million ton capac- ity). On top of that, the notice from the government also said that not only would he need to get "production permission to go from 3.9 million to 6.0 million tons in actual I production, he would also need a separate "imple mentation permission to put into effect the "production permission. Pignatelli didn't know whether to be intimidated or infuriated. The government had given him permission to build 6 million ton facility. However, they were now allowing him to operate at only 3.9 million tons. Because of the plant's high fixed cost, it needed to operate near capacity to make money Operating at 3.9 million tons would lose millions of dollars and was out of the ques- tion. Shutting down the plant completely would also cost money. 700 Pignatelli was understandably upset-he had spent seven long years Implementing a strategy to take the company from one of the small fries in the Italian oil and gasoline industry to one of the major players. When Pignatelli took over, Gulf gas stations were located in northern Italy. To build a national presence, Pignatelli acquired 700 gasoline stations, primarily in central and southern Italy, from Marathon Oil. This purchase allowed Gulf to have gas stations throughout Italy. Gulf also had crude oil operations Middle East, which it perations in southern Italy Italy and in the nearby it could use to supply Italy. What Gulf lacked was the middle part of the oil to crude chain-a refinery. Without it, Pignatelli was dependent to competitors for a refined gasoline supply and had to take whatever wholesale prices they dictated. Pignatelli felt Gulf needed its own refinery to complete the chain from the wellhead to the gas pump and thereby control its own destiny. Building a refinery in Italy was a long and expensive task. Even after receiving permission to build the refinery in northern Italy, local community opposition resulted in five location changes before construction could finally start These location changes alone cost Gulf an additional $16 million. To ensure that the smoke and furnes would not contribute to city smog, Pignatelli spent extra money on a 450-foot smokestack (twice as tall as normal). Pignatelli also installed a special combustion chamber so that flare towers (used to burn off waste gas) and the loud noise and noxious furnes associated with them weren't neces- sary. He also added a state-of-the-art water purification system. Pignatelli demonstrated the quality of the system by personally drinking the waste water. These environmen- tal additions added several million dollars to the project. So that the refinery would be profitable, Pignatelli wanted to assure strong demand for the supply created by the refinery. In addition to the internal demand from Gulf gas stations, Pignatelli arranged a joint venture with Italy where Gulf's refinery was located but no refinery of Mobil Oil. Mobil had many service stations in northern its own. This would secure demand for the refinery's products, and the money Mobil was to invest for its equity share would reduce Gulf's financial burden in building the refinery. However, Mobil had the option of pulling out of the deal if Gulf's refinery could not operate at capacity because in that case, the refined gas would be too expensive for Mobil to buy. It had taken seven years for the refinery to be approved and built. Hundreds of millions of dollars were on the line. On top of this, Pignatelli personally had sold the expansion strategy (both the acquisition of the retail tives at Gulf's global headquarters. As a consequence, stations and the building of the refinery) to senior execu- his personal reputation was also on the line. Trying to obtain approval authorization to implement that approval might take operate at capacity and a separate he was being purposely set up by government officials. many more months, if not years. Pignatelli wondered if Four options occurred to Pignatelli: 1. He could play it straight and try to gain govern- ment authorization. 2. He could ask his more-influential partners (for exam- ple, Mobil) to pressure government officials to quickly grant the two needed permissions 3. He could pay a large sum of money ($1 million deposited to a Swiss bank account) to a "consult- ant" who had "debottlenecked" problems like this before and who promised Pignatelli that he could fix the situation quickly, 4. He could pay money "under the table" directly to government officials to obtain the permissions needed to run the refinery economically Pignatelli considered each option. Playing it straight would likely take several months and possibly years before gov time, the refinery would not operate, or would operate at ernment authorization could be obtained. In the mean- such a low capacity that it would lose millions of dollars. would influence government officials. He wondered about Pignatelli was not certain that pressure from his partners the effect of going to the media. Given the current cost of the project, the thousands of jobs that depended on an 53

Closing Case Nicolo Pignatelli and Gulf Italia icolo Pignatelly president of Gus thasa is subSidiary of Gulf O.0, stared at the notice from the italan government "How could this be possible?" he thought The government had given pignatell permission to buld an oil refinery with a capacity of almost 6 million tons. He had just completed if at a cost of several hundred million dol. lan. Now the la!lan govemment was teving him that he could only operate at flightly more than 50 percent capacty 199 milion tons of the tot 6 million ton capac. ity On top of that, the notice from the governinent also sald that not only would he need to get "production permission" to 90 from 39 million to 6.0 milion tors in actual production, he would also need a separate "implementation permission" to put into etfect the "production permission." Agnatelli didn't know whether to be intmidated of infurated. The government had given him permission to build a 6 mitton tan facily. Howevet, they were now alowing him to operate at only 3.9 milion tons because. of the plants high ford cost, it needed to operate near copacity to make money Operating at 3.9 miltion tons would lose mitions of dollars and was out of the question. Shutting down the plant completely would also cost money Pignatell was understandably upset the had spent seven long years implemeating a strategy to take the company from one of the small fries in the italian oil and gasoline industry to one of the major player. When Pignatein took over, Gulf gas stations were located in northern italy to build a national presence, Pignateil acquifed 700 gasoline stations, primany in central and southern Italy, from Marathon Oil This putchuse allowed Guif to have gas stations throughout faly Gulf also had crude ou operations in southern Italy and in the nearby Middle East, which it could use to supply crude of to taly. What Guf lacked was the middle part of the chain-a refinery. Without it, Pignatelil was deperident on competitors for a refined gasoline supply and had to take whatever wholesale prices they dictated Pignate? iert Gulf needed its own refinery to complete the chain from the wellhead to the gas nump and thereby control its own destiny buiding a refinery in thaly was a long and expenswe task. Even after receving permission to buld the relanery in northem lialy, local community opposition resulted in five location changes before construction could finally start These location changes alone cost Guf an addioonalis 16 milion to ensure that the stroke and fumbs would not contrbute to city smog. Pignatile spent extra money on a 450-foot smokestack twice as udl as nomal pigriatll also installed a special combuston chamber 20 that flate towers (used to bum oft waste gas) and the loud nove and nodous furnes asociated why them werent necessary He also added a state-ci.thesant water ponfication system. Pignateil demonatrated the qualify of the syitem by personaly deinking the waste water, These envinonmen. 4al additions added several milion dolan to the project. So that the refinery would be profitable, Pignateli wanted to assure strong demand for the woply created by the refinery. In addition to the internal dernand from Gulf gas stations, Pignuteli arfanged a joint venture wath Mobil Oll. Mobil had mahy service stations in northern thy where Guif's refinery was located but no refinery of its own. This would secure dernand for the ritinerys pioducts, and the money Mobil was to imvest for its equity share would reduce Gulis financial burden in building the refinery Howerer, Mobil had the option of pullng out of the dealif Gulls refinery could not operate at capacity because in that case, the tedined gas would be too experehive for Mobil to bay It had taken seven years for the refinery to be approved and bult. Hundreds of inilions of dollars were on the line. On top of this: Pignatelli personally had sold the expansion strategy footh the acquistion of the retal stations and the building of the refinery) to senior executives at Guils global headquarturn As a coniequence, ho personal reputation was afie on the ine. Tring to obtain approval to operate at capacty and a sephrate duthorization to implement that approual might take many more months if not vears. Ponvtril wondered if he was being purposely set ip by government offelats four options occurred to pignatelir 1. He could plar it straight and try to gain government authoration 2. He could ask his moreinfliental partness for ecom: ple, Mobin to phssure government officials to quidily graint the two needed permasines 3. He could pay a large sutn of money is 1 mallian deposited to a Swiss baink actowing to a rcorveltant" Who had "debothenecked" problems tie the belore and who promised fighatelil that be coulid fix the stuation quickly 4. He could pay money tunder. the table" arrecty ta. povernment officials to obtain be periniasicis needed to nun the refinery economexy Wely take several mornhs arid powbly yess before gov emmeot authorizabon could be cotarnd in the ineantime, the refinery worid not cperate; cr woved coperate af would infuence gowinmert officals pe wondered about the effect of going to the medid Gtien the curert cost of 50