Royal Dutch Shell Group .com

Business Report: Shell, the model of probity, must start from ground up 


April 21, 2004


London - No one could have ever imagined that behind the stately façade of Shell, Britain's most establishment company, there was a web of intrigue, lying and cover-up that would do justice to a John Grisham novel.


For more than a century Shell has dominated the British nation's energy sector. Its conservative management style was the envy of industry.


Indeed, the Shell diaspora dominates many City boardrooms, from the banker Lloyds TSB to the mining heavyweight Anglo American.


The company's leaders have been regarded as conservative, its management style imperialistic but impressive and its profit record second to none.


But it now emerges that senior management engaged in a systematic effort to window-dress the company's oil reserves to make them look stronger.


A company that was highly regarded for its probity now finds itself bracketed with the accounting frauds that have rocked American capitalism over the last few years.


The group's new British chairman, Ronald Oxburgh, the academic geologist who was brought in early this year to clean up the mess, maintains that there can be no comparison between Shell and Enron, the most notorious of American corporate wrongdoers.


"The only similarity is the size of the firms," he has said. "This is not about Shell; it's about a small part of the exploration and production division."


In one respect Oxburgh is absolutely right. Because Shell is in the oil business it generates extraordinary profit, earning £6.7 billion (R78.4 billion) a year, so there is absolutely no danger of an Enron-style collapse.


But simply generating cash is not good enough for oil firms.


They must also demonstrate to investors that their exploration is turning up new and ever-bigger fields and that they have sufficient reserves to keep the profit coming in future years. 


Shell found it was lagging behind its rivals and started to cheat. The better the reserves reported to the head office, the higher the bonuses for executives.


It has now been revealed that more than 20 percent of the reserves reported - 4.85 billion barrels - were nonexistent and senior managers refused to go public with the shortfall.


Three of these chiefs - former chairman Philip Watts; Walter van de Vijver, the head of exploration and production; and the company's top financial official, Judy Boynton - have all paid with their jobs.


It emerges that for more than 30 months Watts and Van de Vijver were engaged in a simmering battle over whether more honesty should be injected into the reporting, with the Dutchman questioning the "aggressive" reporting strategy.


The company's problems are far from over with the publication of the report, replete with detailed e-mail evidence.


The Securities and Exchange Commission, the US financial watchdog, is conducting its own probe and Shell faces billions of dollars of lawsuits from US-based investors who believe they were deliberately misled.


Remarkably, and without precedent for a firm of Shell's standing, it has not been able to publish its annual report this year because of the uncertainty over the underlying figures.


Now Shell has to rethink from the ground up. Its cumbersome Anglo-Dutch ownership and management structure is set for radical reform.


But restoring its reputation may take decades.

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