Calgary Herald: Shell set to face the music
By Andrew Callus and Elisabeth Koch
Reuters Monday, February 02, 2004
Royal Dutch/Shell chief Phil Watts faces the biggest public relations test of his 30-month-old tenure when he meets shareholders and the media on results day next Thursday.
Watts has to explain to investors why the giant Anglo-Dutch oil group decided this month to cut the estimate of its proven petroleum reserves by 20 per cent, a move which wiped more than $15 billion off the value of its twin share listing.
Watt's decision not to take part in a telephone briefing after the announcement on Jan. 9 enraged many shareholders.
The chairman of the committee of managing directors has since promised to be "at the forefront" of the Feb. 5 presentation.
Watts told staff recently that resignation was not on the agenda, but nobody in the company is more closely linked to the over-optimistic bookings, which took place between 1996 and 2001. For most of that period, Watts was running the company's core exploration and production division.
The downgrade took 3.9 billion barrels of oil and gas -- enough to supply world oil demand for 50 days -- out of Shell's proven reserves category.
They were put into categories with less certainty of commercial exploitation.
At current production rates, this means Shell has assured reserves for 10 to 11 years instead of 13 to 14 previously.
Despite its troubles, Shell is a strong company.
It will announce close to $13 billion of net profit for 2003, one of its biggest-ever earnings hauls, and remains the world's third-largest oil company by market value at $164 billion.
Analysts estimate its dividend is covered by earnings even if oil prices, now at $30 a barrel, fall to $10.
Shell has said it expects to be able to re-book most of the reserves at a later date.
Analysts say Shell's problems with its reserves reflect a wider malaise facing the top players in the industry, where the cost of finding and developing the planet's finite reserves are rising.
Watts himself made this point in a speech on Wednesday -- delivered by a colleague as he struggled late to a function at the Said Business School in Oxford, west of London.
"Developing the energy supplies the world depends on requires very large and complex projects, often in remote and difficult environments," he said.
"They are becoming more complex and demanding."
Even before the reserves downgrade, Shell had for several years been the biggest disappointment in the sector on reserves replacement, and analysts say management has to take the blame.
"Shell looks like the accident prone one, the clumsy one of the pack," said analyst Peter Hitchens of broker Cheuvreux.
"Watts is going to face a real grilling on Thursday."
A special detailed outline of the company's reserves position will follow the usual results presentation.
The reserves issue is likely to overshadow the results themselves, where a $1-billion fourth-quarter charge writing off the value of asset sales will spoil an otherwise strong year for profits where supply disruption in Iraq, Venezuela and Nigeria kept crude prices high.
World No. 1 Exxon Mobil's stronger-than-expected upstream result last week bodes well for a good performance in this, Shell's core division.
But weak refining in the fourth quarter is likely to be a continuing theme, as they were for Exxon Mobil. Charges for asset sales will tip Shell's depressed chemicals unit into loss.
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