Royal Dutch Shell Group .com

The Daily Telegraph: The revolution that shook Shell's politburo




For years investors had wanted the ancient regime at the oil giant swept away. Then their chance came, writes Christopher Hope 


It seems that capitalism can learn something from the old Soviet Union, after all, or at least capitalism as practised by the world's third-biggest oil group. Shell's removal of its chairman Sir Philip Watts was swift, brutal and executed with little fuss.


A five paragraph announcement at lunchtime last Wednesday revealed that the chairman of the committee of managing directors had quit. For good measure, Walter van der Vijver, the head of exploration and production, was out too. By teatime, the pair's photographs and biographies had been removed from Shell's corporate website.


It took another two days before anyone would submit to grilling from the press, and even then Watts' successor, Jeroen van der Veer, could not bring himself to utter their names.


Reading from a prepared text, Van der Veer would say only: "It has been a very difficult week for Shell. We have two colleagues who have resigned. I would like to express my thanks for their contribution in the many years that they worked for the company."


And that was it. No mention of Watts' 35 years of service, since he joined as a seismologist in 1969. The oily waters had simply closed over his head. In the past, Shell might have got away with this briefest of announcements, since it has made dull the corporate financial colour, but not this time. The group is in turmoil because it is unable to hazard an answer to the most basic question for a big oil company: how much oil and gas has it got?


The first indications of problems had come in December when reports on oil reserves in Nigeria and the Middle East were delivered to the board. They made startling reading, revealing that Shell had vastly over-estimated its "proven" reserves - oil and gas that it could be certain of extracting.


A new study was commissioned to see whether this blunder was confined to just these two areas. By early January, it was clear that it wasn't: Shell had over-estimated its proven reserves by 20pc, or 3.9billion barrels. A problem that had remained hidden in Shell's bureaucratic structure for more than 10 years was suddenly gushing into view.


Watts later described the air of panic: "As soon as it came to my attention it was a matter of all hands on deck. I wrote the words 'Get the facts and do the right thing'." The right thing was immediate disclosure to the world's stock markets and so, on January 9, a date which Sir Philip said would be "seared into my memory", the world was told. Unfortunately, Watts was not the one to do the telling, and as Shell shares plunged 10pc in a day, the extent of his blunder quickly became apparent.


The silence from Shell's South Bank lubyanka lasted four weeks, during which time Watts failed to turn up for a conference in Davos and was late for another in Oxford. One newspaper started up a regular "Where's Watty?" campaign, after the children's books "Where's Wally?".


A legal firm in New York even started to organise a class action for investors who had bought shares when the assets had been overstated. The big shareholders saw their chance. For years, they had put up with the company's antiquated corporate structure and the reserves fiasco would be the key to unlock it. The business is 60-40 owned by Royal Dutch Petroleum in the Netherlands and Shell Transport & Trading here.


By the time Watts presented the final results on February 5, his position was precarious. Walking on to an empty stage, he cut a lonely figure: "I was looking forward to today because these results are really quite good. But they are overshadowed by issues about reserves."


Trying to retrieve the position, he added: "We were hindered in what we could say for understandable legal reasons. But the fact of the matter is that knowing what I know now, it was a mistake not to be there and I regret that and I am sorry that I was not there. That is an unqualified apology. I got it wrong. That is the reality that I face."


Sir Philip was asked repeatedly if he would resign. He said: "I came to my own personal decision that I should not do that, with some heart-searching. This thing has happened on my watch. I have the will and determination to see us through this difficult patch."


A presentation on the reserves by Van der Vijver revealed that unproven barrels had been added for every year since at least 1993. One of the biggest additions - of the Gorgon gas field in Australia - was in 1997, just after Watts had taken over as head of exploration and production.


He explained: "With the wisdom of hindsight, we would not have booked Gorgon. That is the reality that we face today - plus some embarrassment."


He was truly sorry but the damage was done and less than a month later, he was gone. In that time he told the big shareholders of his plan to formalise the role of "the conference", a regular meeting of the top boards of each company, and streamline it into a unitary structure.


Perhaps this was too much for his stodgy Dutch colleagues and, unable to deliver on his plan, he had no choice but to go. The shock - as one insider put it - was "seismic". Shell just doesn't sack executives, and neither had a termination payment clause in their contracts.


But why had they gone? The company will say only that the pair "had lost the confidence" of their boards, apparently following an investigation (which is yet to be completed) of the reserves affair by Shell's audit committee. The company has pledged that its findings will be made public.


Meanwhile, it must face an investigation by the Securities and Exchange Commission without the two people most able to explain what happened. Shell disclosed yesterday that it is also facing questions from Euronext, the bourse in Amsterdam, as well as the Dutch Shareholders' Association. To cap it all, there is the longer term irritation of the class action brought by US investors which could drag on for years. There are, though, the first stirrings of change to the company's corporate structure, with the appointment of Lord Oxburgh of Liverpool, Shell's senior non-executive director, as "interim chairman" of Shell Transport.


Oxburgh, who turns 70 next year, is likely to be replaced by a chairman from outside the company in the next 18 months. This will not be enough for some shareholders, who want a unitary board structure along the lines of Unilever, another Anglo-Dutch business, but the split-structure severely limits the powers of shareholders to push the Dutch. Van der Veer, who also sits on the Unilever boards, has indicated that no decision would be taken before May at the earliest.


He said: "The present governance structure has brought the company to where it is over the past 100 years. But you have to think if this is an appropriate governance structure for the future."


The next public grilling for Shell's politburo will come at the annual meeting on April 23. The shrill protests of environmental campaigners will be drowned out by angry investors. Well, it makes a change.;$sessionid$DT1BZNKLXBHHRQFIQMFSFGGAVCBQ0IV0?xml=/money/2004/03/06/cckrem06.xml&menuId=242&sSheet=/money/2004/03/06/ixcity.html&menuId=242&_requestid=3531

Click here to return to Royal Dutch Shell Group .com