Wall Street Journal: Shell Again Cuts Reserves Estimate
Accounting Concerns Widen
As SEC Filings Are Delayed;
Dutch Inquiry Is Under Way
By CHIP CUMMINS
Staff Reporter of THE WALL STREET JOURNAL
March 19, 2004; Page A3
LONDON -- Royal Dutch/Shell Group cut its estimate of reserves for the second time in three months and pushed back its year-end filings with the Securities and Exchange Commission, adding to the cloud over the energy giant and the way it accounted for its oil and natural-gas holdings.
The cut was small compared with its January disclosure that it would slash its tally of reserves by 20%. But the move, and questions raised by a hastily called presentation by the company's new chairman to explain it, drove down shares of Shell's two parent companies. In late trading, Royal Dutch Petroleum Co. of The Hague, Netherlands, fell 3.3% to €38.23 ($46.78). London-based Shell Transport & Trading Co. was down 3% to 361 pence ($6.56).
Shell also said it was the subject of a potential insider-trading probe by Dutch financial regulators, though it is unclear whether the inquiry was more than routine. (Read Shell's statement.)
Jeroen van der Veer, Shell's new chairman, raised fresh questions about whether current senior managers, including himself, knew about serious reserve problems well before Shell's surprise move in January to slash its tally of energy reserves. Asked about reports that senior Shell executives were warned as early as 2002 of potential overbookings of reserves -- oil and gas that a company expects to extract commercially -- Mr. van der Veer denied he knew of problems.
"The question is, did I know about incorrect bookings? The answer to that is no," he said. But he also said that internal documents circulated among top executives, including himself, pointed to "exposures," or possible reserves that didn't match SEC definitions.
Mr. van der Veer declined to specify what those exposures were or when they were reported, and he didn't specify whether he had read those reports himself. He also said the exposures were never as big as the 20% reserve reduction that Shell eventually disclosed in early January, though he didn't describe the magnitude of the exposures.
Mr. van der Veer, through a Shell spokesman, declined an interview to clarify his comments. The spokesman declined to elaborate on the comments.
The company said yesterday it would cut 250 million barrels of oil equivalent from its tally, and said it no longer would re-book, as it had planned, some 220 million barrels it cut in January. In early January, Shell slashed its "proved" reserves -- its estimate of the oil and natural gas it expects to extract -- by 3.9 billion barrels of oil equivalent, or 20%. At the end of 2002, Shell had about 19.5 billion barrels of oil equivalent.
Shell said it acted after further concerns arose about its reserves as it was completing its 2003 year-end accounts, which had been expected to be submitted to the SEC in filings due out on Friday. As a result, the company delayed the filings and the publication of its annual report until May. It also hired Ryder Scott Co., an independent reserve consultant, to conduct further reviews of Shell's oil and natural-gas fields.
The new revisions include natural-gas reserves associated with a large project at Ormen Lange, offshore northern Norway. Shell said in February that it prematurely booked Ormen Lange reserves but planned to include them again in the company's 2003 figures. Malcolm Brinded, Shell's new head of exploration and production, said yesterday that much of the reserves related to Ormen Lange were still out of line with current SEC guidelines and, therefore, wouldn't be booked after all. The company attributed the change to its reliance on three-dimensional seismic technology in evaluating the property instead of drilled wells.
"The bottom line is the uncertainty remains, and the challenges are huge," said Peter Nicol, an analyst at ABN-Amro in London, who has had a "sell" recommendation on Shell's two shares since June 2003.
Shell's boards ousted Mr. van der Veer's predecessor, Philip Watts, and Walter van de Vijver, Shell's top exploration-and-production executive, earlier this month after directors were briefed on the initial finding of an internal review of the overbooking. Internal correspondence, described to The Wall Street Journal by people familiar with the situation, indicate Sir Philip and Mr. van de Vijver were aware of potential overbookings as early as 2002.
Shell's decision not to re-book 220 million barrels of oil equivalent for 2003 will cut Shell's annual reserve-replacement ratio -- an important indicator of an energy company's performance -- to 82% from 98%. That indicates the company isn't doing nearly as well as investors had thought in replacing the reserves it depletes by pumping its oil and gas. The reduction also boosts Shell's costs of finding and developing oil and natural gas for the year to $6.40 (€5.23) a barrel from $5.50 a barrel, according to Wood Mackenzie, an Edinburgh energy consultant.
Shell also said it was the subject of an insider-trading investigation by the Autoriteit Financiele Markten, or AFM, the Dutch financial regulator. Other regulators -- including the SEC, Britain's top financial watchdog and Euronext, the European stock exchange -- are also investigating. The Dutch regulator often conducts insider-trading probes based on unusual news or events, and Shell officials characterized the investigation as routine. An AFM spokesman confirmed the inquiry but declined to say when it began or if individuals are being targeted.
The Justice Department has also initiated a inquiry into Shell's reserve overstatement, according to a person familiar with the investigation. Mr. van der Veer said that Shell hadn't been contacted by the Justice Department.
Shell said that it was removing reserve bookings as a component of executive-performance reviews that are used to calculate bonuses. U.S. investigators are investigating the relationship between Shell's reserve bookings and its executive bonuses. Shell also said it would retrain hundreds of its engineers and technical staff responsible for booking reserves to ensure they were compliant with SEC guidelines.
The reserve cuts indirectly affect Shell's bottom line through accounting for depreciation. In February, the company said its original reserve cut would result in an after-tax depreciation charge of $86 million. The new cuts will add charges of $20 million, and Shell said an additional $10 million in write-offs had been identified as a result of the reserve downgrades.
The charges are insignificant next to Shell's net income last year of $12.7 billion, but the company also said that it would make unspecified amendments to parts of its 2002 annual report and related SEC filings.
The changes, which Shell said were recommended by SEC staff currently investigating the reserve downgrades, will affect a section in the SEC filings where companies typically make important disclosures to investors about their finances. "Some disclosures will be increased," Shell said in a statement, without elaborating.
Shell detailed a number of changes to its financial-reporting procedures, increasing the role of the company's non-executive audit committee and streamlining financial-reporting procedures. The company has introduced moderate changes to its corporate structure, which has been widely criticized as unwieldy because of its dual holding companies. But Mr. van der Veer repeated that Shell will stick to a timetable stretching until early 2005 for reviewing its structure.
Alexei Barrionuevo in Brussels contributed to this article.