Yahoo News Report: Shell Execs Hid Reserves Problem
By BRAD FOSS, AP Business Writer
Tue Mar 9, 5:20 PM
WASHINGTON - After senior executives at Royal Dutch/Shell Group were warned two years ago that the company overestimated its proven reserves of oil and natural gas, they reportedly orchestrated a plan to hide the problem from investors.
Senior executives and Sir Philip Watts, who resigned as chairman last week, were first told in a February 2002 memorandum that the company's accounting of reserves seemed inconsistent with Securities and Exchange Commission (news - web sites) guidelines, according to published reports.
Five months later, executives devised an "external storyline" and "investor relations script" that aimed to "highlight major projects fueling growth" and downplay the importance of reserves as a measure of growth, according to internal memorandums described Tuesday by The New York Times.
The documents were prepared by Walter van de Vijver, who resigned last week as head of Shell's exploration and production business.
It wasn't until nearly two years later that the company disclosed a problem — and a big one. On Jan. 9, Shell unexpectedly announced that it was reclassifying 20 percent, or 3.9 billion barrels, of its proved reserves to less certain, unproved categories. Proven reserves are an important asset and widely considered a valid measure of a company's future profit potential, according to analysts.
The news sent shares tumbling and prompted the SEC to launch a formal probe.
Shares of The Shell Transport and Trading Company PLC and Royal Dutch Petroleum have since recovered, in part because high oil and natural gas prices are serving as a cushion to the company's bottom line. The company told Wall Street last week that it does not expect any further revisions to its reserve estimate or financial health.
Yet despite this public disclosure and the resignation of Watts and de Vijver, investors are less comfortable with the company's credibility and financial stability longer-term.
A spokesman for Shell declined to discuss the memorandums described by the Times, saying Tuesday it "would be inappropriate for us to comment or speculate" and that the complete findings of an internal investigation would be presented to the SEC and other authorities "within a few weeks."
Analysts were already concerned with class action lawsuits stemming from the reserves fiasco and the related SEC investigation, not to mention Shell's poor performance, relative to peers, in the refining and marketing end of the business.
Now, revelations that top executives may have conspired for nearly two years to sidestep the reserves shortfall has led some to demand a much wider overhaul of management.
"Why were just two executives dismissed when other executives were part of a team that signed off on the reserve documents?" asked Fadel Gheit, an oil analyst at Oppenheimer & Co. in New York who personally owns shares of the company.
Indeed, the July 2002 memorandums were sent to the company's committee of managing directors, which included Watts' successor, Jeroen van der Veer, and to Judy Boynton, the current chief financial officer, according to the copy the Times posted online.
"I think they threw (Watts and van de Vijver) as sacrificial lambs to protect the rest of the management team, including the board of directors," Gheit said.
But Robert M. Romano, a lawyer who specializes in defending companies faced with SEC investigations, said Shell needs to find out how the various executives who received the July 2002 memorandums responded before determining their fate.
"The burden to demonstrate innocence here is significant," said Romano, a former trial attorney for the SEC. "You've got to give them a chance to give an explanation."
At the same time, Romano said Shell's lawyers and internal auditors have "got to be skeptical."
Shell is being advised by lawyers from Davis Polk & Wardwell and Debovoise and Plimpton, and its internal investigation is being spearheaded by six non-executive directors. Calls to Davis and Polk and Debovoise were not immediately returned.