The Guardian: Problems at Shell
Mark Tran explains why Anglo-Dutch oil giant Shell is facing investigation by the US justice department over its slashing of oil reserves
Wednesday March 24, 2004
What is going on at Shell?
Shell is in trouble after twice cutting its estimated oil reserves. The first dose of bad news came in January, when the Anglo-Dutch oil giant slashed its reserves by 3.9bn barrels, or a fifth of total holdings, in locations such as Nigeria. Reserves form a valuable asset for an oil company and any reclassification into less certain categories is a major cause of concern. Investors were livid.
What about the second revision?
That was a smaller affair. In March, Shell said a review of its Ormen Lange gas field in Norway had revealed stocks to be 150m barrels lower than previously thought. In announcing the second shortfall, Shell postponed its annual meeting from April to May, a humiliating move for a top UK company, and delayed publication of its annual report.
How did Shell get it so wrong?
The company is now conducting an internal investigation and the securities and exchange commission (SEC), the US financial watchdog, is carrying one out as well. Some analysts believe the SEC is partly at fault because it has failed to issue clear industry guidelines when it comes to reporting reserves.
What are SEC guidelines?
In its push for greater transparency on the issue of reserves, the SEC has no less than three categories - proved reserves, proved developed reserves, and proved undeveloped reserves. As far as the SEC is concerned, reserves fall under the first category only when commercially viable oil is flowing.
What is the problem with that?
Some analysts think the guidelines are too conservative. In an open letter to the SEC, Deutsche Bank said: "The discrepancy between these guidelines and industrial reality, and the market climate following the Enron affair, is generating an unwarranted external push on the oil companies to underbook reserves and over-amplify costs. This has the knock-on effect of reducing market values and negative implications for oil companies' ability to raise finance."
What has been the fallout for Shell?
Sir Philip Watts resigned as chairman in early March, along with the company's head of exploration and production, Walter van de Vijver, and more heads may roll. What particularly irked shareholders was that Sir Philip left it to his aides to deliver the shocking news of the January downgrade rather than face the music himself.
What is Shell doing to rectify matters?
Shell is not exactly imploding - it announced profits of $11.7bn (£6.4bn) for last year - but it has suffered immense damage to its reputation. The company, under its new chairman, Jeroen van der Veer, has announced a raft of changes to repair the damage.
What changes are in store?
For a start, Shell is tightening its internal controls, revising its reserves reporting guidelines to remove any "remaining ambiguity" in the application of SEC rules, and significantly increasing the number of staff dedicated to managing reserves. In another significant change, reserves bookings will no longer be linked to pay bonuses. Until now, such bookings constituted between 5% and 15% of total available bonuses for exploration and production executives.
Is Shell accident-prone?
At the very least, the company's PR machine leaves much to be desired. It was humiliated by Greenpeace activists in the Brent Spar crisis of 1995. The eco-warriors inspired the biggest ever consumer boycott of a corporation across Europe, when Shell announced plans to dump an oil rig into the North Sea. Even when it emerged that Greenpeace had miscalculated the environmental damage, Shell emerged tarnished.
Has Nigeria been a bugbear for Shell?
Nigeria, where Shell has extensive reserves, has also been a headache for the company, particularly after the company was caught up in a controversy over the state execution in 1995 of the poet, Ken Saro-Wiwa, and eight others from the Ogoni region. He had campaigned against the oil group's environmental record and alleged human rights abuses by the military in Ogoniland.
Is there a problem with Shell's structure?
This is a crucial issue for big shareholders. They are unhappy with the fact that the company, created through the merger of the Dutch group, Royal Dutch and Britain's Shell, consists of two entirely different boards - one for each part of the group. But operational power rests with a separate, unelected board, the committee of managing directors, consisting of senior executives from each of the two public companies. Shell has acknowledged the need to change this structure.