The Guardian: Problems at Shell
Monday April 19, 2004
Mark Tran and Charles Orton-Jones explain why heads have been rolling at Shell
What is going on at Shell?
Shell is in trouble after overestimating its proven oil reserves.
The bad news broke 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.
Why the outrage?
The overbookings weren't just simple errors. An investigation into what went wrong has revealed long-term failings by Shell's most senior executives to act when they discovered serious problems. In particular Shell's chairman, Sir Philip Watts, failed to respond to warnings from the head of exploration and production, Walter van de Vijver, that the firm was misrepresenting the size of its proven reserves.
Why did the chief financial officer resign?
Judith Boynton, resigned on April 19, following the investigation's conclusion that she failed to take the initiative in checking the levels of reserves personally.
Is Shell the oil industry's Enron?
No. Shell booked profits of £6.4bn in 2003, and is still one of the world's best run companies. But is has suffered a fierce blow to its reputation, and its reserves are significantly smaller than previously believed. Furthermore, the investigators into what went wrong claimed condemned Shell's excessive concern about its public image, which prevented negative issues being addressed.
What steps is Shell taking to improve its procedures?
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. During the recent crisis it emerged Shell had cheaply sold its stake in an oil field that subsequently proved to be extraordinarily productive.
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.