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The Wall Street Journal: Shell Cuts Reserves Again; Finance Chief Steps Down




April 19, 2004 5:56 a.m.; Page A3


LONDON -- Royal Dutch/Shell Group cut its tally of energy reserves for the third time this year and said that Judy Boynton, its embattled chief financial officer, would step aside in the wake of a reserves-accounting debacle.


The moves come amid the release of explosive correspondence between Shell senior executives, including briefing material circulated to the company's top management team, and e-mail and private notes sent between former Chairman Philip Watts and Shell's former head of exploration and production, Walter van de Vijver. In an increasingly acrimonious exchange, the two discuss the growing problems in Shell's crucial exploration and production business and the growing difference between what company executives knew internally and what Shell was disclosing to the investing public.


The correspondence is part of a report by U.S. law firm Davis Polk & Wardwell, under the direction of Shell's audit committee. The two men "were alert to the difference between the information concerning reserves that had been transmitted to the public and the information known to some members of management," according to an excerpt of the report released by the company.


Shell has ousted the CFO and plans to speed up its corporate governance review. That's good news. But the oil giant really needs a more thorough-going reform of its dual-headed introverted culture if it is to close the valuation gap with the likes of BP.


The reserves downgrade announced Monday brings Shell's total reserves cuts to 4.35 billion barrels of oil equivalent, or about 22% of the company's previously stated holdings as of the end of 2002. Shell -- the world's third-largest publicly traded oil company by market capitalization -- said it will also reduce the amount of reserves that it had originally planned to book in 2003 by about a half billion barrels of oil equivalent.


The final balances for Shell's 2002 and 2003 reserves tally will be 15 billion barrels and 14.5 billion barrels of oil equivalent, respectively. The latest revisions bring the company's reserve replacement ratio for 2003 to around 60% and its reserve life at the end of 2003 to 10.2 years, the company said.


Ms. Boynton will remain a Shell employee as an adviser to Jeroen van der Veer, Shell's chairman, the company said. Tim Morrison, Shell's controller, will assume duties as acting chief financial officer with immediate effect. 


In a 20-page statement released before European markets opened, Shell didn't disclose any other shuffles among senior executives. The company released a summary of findings and recommended remedial action from an internal report into the reserves issues.


In a joint statement, Aad Jacobs and Lord Oxburgh, chairmen of Shell's two parents, said the report "revealed disturbing deficiencies in our past reserves-reporting practices and the manner in which Shell dealt with those issues. We have accepted these difficult findings in full and have taken vigorous action."


Shell said it will restate its financial numbers for 2002 and revise its 2003 results announced in February. The company said the financial impact of the reserves downgrade will be just over $100 million a year over the four-year period between 2000 and 2003. In February, Shell estimated its 2003 net income at $12.7 billion.


The company also said it would accelerate its timetable for reviewing and implementing potentially large-scale structural changes to Shell's complicated dual-board make-up. Shell's two parent companies, Royal Dutch Petroleum Co. of The Hague, Netherlands, and London-based Shell Transport & Trading Co., split ownership of the oil giant's operations 60%-40%, respectively.


In the wake of the reserves downgrades -- first disclosed in January -- many large investors have called for a structural overhaul at Shell, claiming the dual nature is opaque and anachronistic. Senior Shell executives had repeatedly defended the structure, however, and said it didn't play a role in the reserves debacle.


Reserves are the amount of oil and gas a company expects to commercially pump to the surface. They are a crucial measure for investors of an oil company's performance and future value. The size of Shell's restatement has triggered a number of regulatory probes in Europe and the U.S., including investigations by the U.S. Securities and Exchange Commission and the U.S. Justice Department.


Ms. Boynton is the fourth senior executive to lose her job in the wake of the reserves downgrades. Shell's boards ousted Sir Philip and Mr. Van de Vijver last month. Early this month, the company removed the finance chief of Shell's exploration and production business, the unit responsible for reserves bookings.


The audit committee report details a number of internal correspondences that highlight the realization at the very top echelons of Shell that problems found at the company weren't being communicated to the public. As previously reported, the report highlights a February 2002 memo to senior executives detailing potential reserves overbookings of some one billion barrels of oil equivalent. In addition, the memo states that another 1.3 billion barrels of oil equivalent were at risk if the company's business plans didn't transpire as expected, according to the report.


In a Sept. 2, 2002, note to Shell's committee of managing directors, the company's top management team, Mr. van de Vijver describes a "dilemma" facing exploration and production: "Given the external visibility of our issues the market can only be "fooled" if 1) credibility of the company is high, 2) medium and long-term portfolio refreshment is real and/or 3) positive trends can be shown on key indicators," according to the report. The memo continues: "We are struggling on all key criteria ('caught in the box')."


In the second half of 2003, Shell initiated a number of internal reviews into its reserves bookings. As those reviews were under way, the relationship between Sir Philip and Mr. van de Vijver became extremely strained, according to the report. On Nov. 9, 2003, for instance, after receiving what he considered an unfairly critical performance review by Sir Philip, Mr. van de Vijver e-mailed Sir Philip to say: "I am becoming sick and tired about lying about the extent of our reserves issues and the downward revisions that need to be done because of far too aggressive/optimistic bookings," according to the report.


Sir Philip didn't disclose receipt or the content of the e-mail to anyone until well after Shell's internal review, either in late December 2003 or early January 2004, according to the report.


Initial findings during the several-months-long internal review hadn't singled out Ms. Boynton for specific blame, according to people familiar with the situation, and most of the reserves overbookings occurred before she arrived at Shell as finance director and chief financial officer in 2001. But Ms. Boynton, 49 years old, signed the company's 2002 filings with the U.S. Securities and Exchange Commission, which included the company's reserves tally.


Mr. van der Veer, who succeeded Sir Philip in the top job at Shell, also certified the 2002 numbers as one of the company's most senior executives. He has acknowledged that he was warned about "exposures" -- or possible overbookings -- in written briefing material but denied knowledge of any "incorrect" bookings in SEC filings.


The company said it would host a press conference at 10:30 London time to explain the latest downgrade and the internal report.


Write to Chip Cummins at,,SB108235512406286426,00.html?mod=home%5Fwhats%5Fnews%5Fus



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