Royal Dutch Shell Group .com

Financial Times: Unsure of Shell


Published: April 20 2004


Even for a company that pioneered scenario planning, Royal Dutch/Shell could never have foreseen itself yesterday admitting how its former top two executives persistently lied to investors over the real level of the oil group's proved reserves. Such a cover-up has destroyed the company's long-standing reputation for caution and probity. The fact that Shell published the report, commissioned by its audit committee from independent lawyers, gives some hope that it can regain its lost reputation one day. But, in the short term, yesterday's report is likely to compound the company's legal problems with government investigators and litigious shareholders in the US.


Until yesterday, it was possible to blame the overbooking partly on Shell's history as the most decentralised of the oil majors. For years it functioned as a loose federation of national operating units across the world, and for years this was hailed as making it a model multinational. The 1998 crash in the oil price brought the need for money-saving centralisation. But Shell managed to turn its exploration and production (E&P) activities into a unified global business only last year - which is when Sir Philip Watts, its former chairman, and Walter van der Vijver, its former head of E&P, had claimed their first real knowledge of the reserve overbooking.


But the lawyers' report cites private e-mails from these two dismissed Shell executives that tell a very different story. Immediately he took over from Sir Philip as E&P chief in mid-2001, Mr van der Vijver claims to have realised that Sir Philip had left him with exaggerated reserves, and no margin to downgrade them. Thereafter, Mr van der Vijver repeatedly warns his colleagues about "fooling" investors on the reserves, and complains of being "sick and tired of lying" to the market. But he continues to participate in the lie, even to the extent of destroying certain e-mails. In all, Mr van der Vijver is caught in the quandary of a man who has accepted a high call in liar dice - say four aces and a king - only to discover a mere pair of jacks under the cup, but still he has to pass on a yet higher call. As for Sir Philip, he appears to be ready to accept anything that bolsters his record. In 2002 he was urging Mr van der Vijver to use "all ways and means" to get reserves above production for that year.


Where should Shell go from here? Another head rolled yesterday, that of Judy Boynton, the chief finance officer, and management reforms are under way, including putting more than one part-time person on to internal reserve auditing. But one lesson of yesterday's report is that the non-executive board members of Shell's separate UK and Dutch parent companies need to be far more active in supervising the joint group's managers. Perhaps they can do this effectively only by combining forces through a merger that would produce a more transparent company. That would be a good result of Shell's crisis.

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