The Times: What next for . . .
April 20, 2004
Analysts regard Shell, the world’s third largest oil group, as an unlikely takeover target. Operating in more than 145 countries and with a market value of £90 billion, the group is simply too big a proposition for all but the biggest predators — and US competition authorities would block any move by ExxonMobil or BP, the most likely bid contenders. Shares in Shell have bounced 13 per cent since the group first admitted that it had overstated oil reserves in January. The stock slipped just 3p to 389¾p yesterday, suggesting that the market believes that all the bad news is already out.
Sir Philip Watts, Shell’s former chairman, and Walter van de Vijver, its former head of exploration, face an uncertain future. Yesterday’s report will be read with interest by the Financial Services Authority, the US Justice Department and the Securities & Exchange Commission. The FSA refuses to comment, but it is known that the regulator is conducting an investigation into Shell. The US authorities, which are also carrying out inquiries, have asked Shell not to release the full text of the report in order to give them time to root through the evidence, raising the prospect of criminal charges.
There is now a management vacuum at Shell, a company once regarded as a training ground for Britain’s brightest and best. Lord Oxburgh and his colleagues on the Royal Dutch and Shell Transport boards must find credible candidates to fill the void — and quickly. However, Shell’s dual Anglo-Dutch boards have proved to be poor headhunters, displaying a lack of judgment in appointing Sir Philip, Mr Van der Vijver and Judith Boynton to key roles. Shareholders will no doubt seek changes, including the exclusion of former Shell executives from the nominations process.
The figure of 4.9 billion barrels may sound like a significant amount of oil and gas, but analysts insist its removal from the world’s “booked reserves” is not enough to send the oil price soaring. They point out that the oil price is controlled by the 11 member countries of Opec and Russia. About 60 per cent of the reserves that Shell was forced to downgrade were expected to come from Oman, Nigeria, Brunei and the Gorgon gasfield offshore Western Australia. Andrew Pearson, at Wood Mackenzie, says: “If Oman doesn’t meet its targets, Saudi Arabia or Iraq or Kuwait (all Opec members) can step in and supply the market.”
The SEC, the US financial watchdog, is conducting an investigation into the way oil and gas companies account for their reserves. The inquiry began as an investigation into technical problems in reporting oil and gas reserves in the Gulf of Mexico. The specific lapses at Shell have also exposed weaknesses in SEC regulation and it has extended its inquiry to other oil majors. The SEC has admitted that defining the concept, which blends geological knowhow with financial and technical expertise, is not an exact science but industry experts are calling for reforms to SEC rules.