Royal Dutch Shell Group .com Shell executives hid shortfall for years



Reuters News Agency

Tuesday, April 20, 2004 - Page B10


Report reveals memos of official 'lying,' and the company fooling the markets


LONDON -- Royal Dutch/Shell Group executives knowingly hid an oil and gas reserves shortfall for years and feared the game was up as far back as 2002, an independent review revealed yesterday. The news came as the oil giant cut reserve estimates again and sacked a third senior executive, chief financial officer Judy Boynton, for her part in the scandal, which shocked investors when it finally became public this January.


Shell added 300 million barrels to total booked reserve cuts for 2002, to make a total reduction of 4.35 billion barrels of oil equivalent (boe) -- more than 22 per cent of reserves originally booked for that year.


It also cut a further 200 million boe from 2003 bookings for a total 2003 reserves cut of 500 million boe.


The eagerly awaited report, commissioned by non-executive directors in the aftermath of the reserves debacle and compiled by U.S. law firm Davis Polk and Wardwell, unearthed memos in which one executive talked of his "lying" and about how the firm had "fooled" the market.


It also showed that internal audits on booking reserves -- a crucial measure of value in the oil industry -- were undertaken by a single former Shell employee working part-time.


Standard & Poor's Corp. cut its long-term credit rating on Shell one notch to double-A-plus from triple-A following the reserves report. S&P said it lowered the long-term corporate credit and senior unsecured debt ratings on Shell Canada Ltd. from double-A-plus to double-A.


Shell's report "highlights areas of durably weak corporate governance with significant digressions from Securities and Exchange Commission rules," S&P said in a statement.


Shell's crisis came to a head Jan. 9 when it announced it had overbooked proved reserves by 20 per cent.


The debacle has prompted investigations by investment regulators in the United States and Europe, including the U.S. Department of Justice, and shareholder lawsuits.


Yesterday's report summary quoted from a September, 2002, note by former exploration and production chief Walter Van de Vijver, since sacked for his conduct in the job, in which he talked about how investors could not be "fooled" for much longer.


"The market can only be 'fooled' if 1) credibility of the company is high, 2) medium and long-term portfolio refreshment is real and/or 3) positive trends can be shown on key indicators," he said. "Unfortunately, we are struggling on all key criteria."


Then in November, 2003, he told the then chairman of managing directors, Phil Watts, that he was "sick and tired about lying about the extent of our reserves issues."


But a month later, Mr. Van de Vijver told staff to destroy a document outlining how 2.3 billion barrels of reserves were out of line with regulatory guidelines, because it was "dynamite."


The lawyers also criticized Mr. Watts, who was sacked along with Mr. Van de Vijver. Mr. Watts ran the core exploration and production division from 1997 to 2001 -- the period in which the misbookings were made. He was elevated from this post to the top job in 2001, leaving Mr. Van de Vijver to pick up the mess.


The report said Mr. Watts then attempted to "manage" the problem rather than reveal it. "Simply put, it is illustrative of a strategy to play for time in the hope that intervening helpful developments would justify or mitigate the existing reserve exposures," the report said. "Ultimately . . . this strategy failed."


"I think it's important that people don't get too bearish about the current situation," said David Cumming, head of U.K. Equities at Standard Life Investments.


The shares have been rising in recent weeks on perceptions of strength in long-term oil prices and hopes for a share buyback.

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