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The Australian: Shell chief faces the axe

By John Waples and Lucinda Kemeny of The Sunday Times

January 12, 2004


SHELL chairman Sir Philip Watts has four weeks to save his career or face being ejected by furious investors after the Anglo-Dutch oil giant unveiled a massive writedown of its reserves, including Australia's Gorgon gas field.


Shell's big shareholders were stunned on Friday after a shock announcement that the group was cutting estimates of its proven reserves at its giant gas field in Western Australia and onshore Nigerian operations by 20 per cent.


The shares fell 7.5 per cent after it said 3.9 million barrels of oil and gas - seen as a key measure of its prospects - would have to be reclassified. The reserves had been booked between 1996 and 2002, but there is now no guarantee they can all be produced.


Further reclassifications may be made as Shell, which last year replaced just 70-90 per cent of its 2003 output with new reserves, extends its review of reserves.


Shell holds two-sevenths, or 28.6 per cent, of the undeveloped Gorgon field and its estimated 14 trillion cubic feet of gas, which is the equivalent of about 2.5 billion barrels of oil.


Unlike its partners in the field - US petroleum giants ChevronTexaco (the operator) and ExxonMobil - Shell had already booked proven reserves at Gorgon even though it had no firm contracts for gas sales.


Shell and Chevron, which with Exxon are planning an $11 billion project to develop the gas from Gorgon, have reached arrangement of intent to supply liquefied natural gas to the US west coast from 2008. But no firm sales contracts are likely to be signed until next year.


Last year, the WA Government controversially granted approval for the Gorgon partners to use Barrow Island, a class A nature reserve, as a site to process the Gorgon gas.


Shell investors were incensed on Friday when Sir Philip and his finance director, Judy Boynton, refused to take part in a conference call to explain the fall in reserves from 19.4 billion to 15.9 billion barrels of oil and gas. Instead they let their investor relations team face angry shareholders and analysts.


Goldman Sachs said the affair raised significant concerns with respect to the credibility of the company's underlying operational performance.


One source close to the company, which holds a 34 per cent stake in Australia's Woodside Petroleum, said it was now make or break time for Sir Philip.


"He has until February 5, when the group publishes its year-end figures, to pull a rabbit out of the hat and show he is in charge, otherwise investors will be clamouring for change," the source said.


Sir Philip, 59 this year, may now be asked to stand down early from his position as chairman of the committee of Shell's managing directors. During 2002 he took home pound stg. 1.79 million, of which pound stg. 874,000 was performance related.


Insiders said that there were two internal candidates who had been marked out as chief executive material. The favourite is Walter van der Vijver, chief executive of exploration and production, the group's most important division. The other candidate is Malcolm Brinded, chief executive of Shell Gas & Power.


Sir Philip, who joined Shell 34 years ago as a seismologist, could still salvage his reputation, but he has a big task. One option is to launch another cost-cutting initiative. Another is to renew overtures to acquire BG, the British oil and gas group worth pound stg. 9.7 billion ($23 billion).


Friday's statement comes amid investor concern about growth at the company's exploration and production division. In October, Shell said it would miss its production target for 2003 and expected little change in output through next year.,4057,8369661%255E462,00.html


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