The Wall Street Journal: Shell Report's Release Is Delayed
Some Directors Are Eager
To Make a Disclosure;
U.S. Investigation Continues
By ALEXEI BARRIONUEVO and SUSAN WARREN
Staff Reporters of THE WALL STREET JOURNAL
April 22, 2004; Page A9
Board members of Royal Dutch/Shell Group said they are eager to release the full contents of a 463-page report on the company's overbooking of oil reserves, but people familiar with the matter said the U.S. Attorney's office in Manhattan is holding up the release for fear that it will harm its own investigation.
A Shell spokesman said only that "U.S. government authorities" have asked the company not to release the full report, but he wouldn't comment on whether the request had come from the U.S. Attorney's office. A spokesman for the U.S. Attorney's office declined to comment.
The probe already has resulted in four top Shell executives losing their jobs, including Chairman Philip Watts, and led to investigations by regulators in the U.S., Britain and the Netherlands. One issue covered in the report and still to be made public is Shell's move to relax its standards for booking oil and natural gas reserves in the mid-1990s, which set the stage for the problems, according to people familiar to the matter.
On Monday, the Anglo-Dutch oil giant released a 25-page executive summary that laid blame for the fiasco squarely on the shoulders of Sir Philip and Walter van de Vijver, former head of exploration and production. A series of e-mails and correspondence between the two men over two years showed that they knew Shell wasn't in compliance with booking standards but failed to report the problems to directors or anyone outside the company.
In a letter released by his attorney last week, Mr. van de Vijver defended his role and said he alerted senior managers as soon as he became aware of problems. Sir Philip's attorney declined to comment.
The executive summary, part of the report prepared for Shell's audit committee by U.S. law firm Davis Polk & Wardwell, didn't mention another issue that planted the seeds for abuse. Changes in booking standards that date back about a decade inadvertently opened the door for Shell managers throughout the company to book reserves more liberally, said people familiar with the matter. The summary also didn't mention other key managers who played a role in the overbookings.
The spokesman said the summary "gives a full flavor of the whole report." He said the company has "endeavored to be as open and transparent as possible throughout this process."
One person familiar with the matter said that in the mid-1990s Shell felt pressured to bring its standards for booking proved reserves more in line with its chief competitors, who were having more success booking reserves. Proved reserves, a key measure of an oil company's value, refer to the amount of oil and natural gas that a company can commercially extract from the ground and produce for the market.
Once Shell loosened its standards, however, problems spread and outside auditors wielded too little power to do more than raise red flags about potential overbookings.
Part of the problem was in how easy it was to hide liberal bookings of potential reserves. An overly aggressive call on reserves could remain hidden for years, while an overestimation on future production was harder to hide because it was more carefully scrutinized by investor analysts, this person said.
The Shell spokesman declined to comment on whether the report discusses the relaxing of booking standards in the 1990s or on whether the report mentions other Shell managers involved in reserves decision-making.
Shell board members wanted to release the full text of the internal report on Monday, said a person familiar with the matter. But counsel told the board that the U.S. Attorney's office wouldn't agree to a full release out of concern that the report's extensive detail could affect their criminal probe, said people familiar with the matter.
The report identifies other Shell managers involved in making reserves-booking decisions, this person said, and explores, on a case-by-case basis, how decisions were made to aggressively book reserves at the giant Gorgon field in Australia, and at fields in Nigeria, Oman and Brunei.
Separately, the reserves issue prompted Moody's Investors Service to downgrade Shell's credit rating Wednesday to double-A-1 from its top triple-A rating, following a similar action by Standard & Poor's earlier in the week. Both ratings agencies cited Shell's weakened competitive position due to the reduction in its reserves, as well as concerns about weak corporate governance highlighted in the summary of an internal audit released Monday.
Write to Alexei Barrionuevo at firstname.lastname@example.org
and Susan Warren at email@example.com