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The Guardian: Shell shocks shake the City


Michael Hann

Thursday April 22, 2004


How staggering were the revelations contained in Shell's internal probe of its oil reserves disaster?


So staggering that the Independent's City editor, Jeremy Warner, was reduced to aping Richard Littlejohn. "You simply couldn't have made it up," spluttered Warner. "Some quick minded soul will already be devising a movie script around it ... What emerges is cover-up, delusion and management intrigue on a grand scale."


"Shell, one of the world's largest companies, has been in crisis since it announced some months ago that what it had earlier described as proven oil reserves were not proven at all," said the London Evening Standard's Anthony Hilton, explaining the background.


On January 9 Shell had admitted it had overstated its global reserves of oil and gas by 20%. The admission saw the departure of two executives, including the chairman, Sir Philip Watts, who had overbooked the reserves while head of exploration and production.


Monday's report showed the true figure to be nearer 25%, and revealed the company had known of the discrepancy for at least two years and possibly seven. Shell said its finance chief had been forced to resign as result.


"The smoking gun unearthed in the internal inquiry by Shell's audit committee [is] emails from former exploration and production head Walter van de Vijver, including one to his boss, Sir Philip, saying that he was 'sick and tired of lying about the extent of our reserves issues'," said Martin Flanagan in the Scotsman. "Case, open and shut. Rearrange into phrase."


"For Shell, firing a third top executive, implementing a further reserves downgrade and accelerating the review of the Anglo-Dutch group's byzantine corporate governance structures is meant to 'draw a line under the uncertainties' that have plagued the oil giant since January. It may not prove that simple," said Alf Young in the Glasgow Herald.


Many shared that doubt. "Shell is accelerating its corporate governance review," said the Lex column of the Financial Times. "Any change, however, is still uncertain. Other positive catalysts are thin on the ground." And Robert Cole of the Times said there was "very little chance" the report would "put an end to the chaos that has reigned at Shell in recent months".


The contrast between Shell's reputation - as a superbly run company - and the reality was what shocked most observers. And, even then, the full extent of the firm's corporate failures was not clear. "We are only allowed to see the 26-page executive summary," explained Neil Collins, the Daily Telegraph's City editor. "The Shell board has been prevented from publishing the full document by the American Department of Justice, after it was told that to do so would not be considered as 'fully cooperating' with its inquiry."


Nevertheless, said Collins, "even the summary is shocking." As Alex Brummer put it in the Daily Mail: "No one at Shell can deny there was a cataclysmic failure of accountability which delivered enormous damage to its reputation and even its credit rating."


The mismanagement of the company - the failure to adopt proper procedures - was more important than the matter of the reserves, which were merely the "window" through which the City was able to observe Shell's failures, argued Cole in the Times.


"After all," he said, "no one is ever going to be able to come up with a cast-iron system for defining, to any degree of accuracy, what the reserves of any oil company are at present or are likely to be at any point in the future." The Standard's Hilton agreed: "Judging reserves is as much an art as a science."


"Where should Shell go from here?" pondered the FT in its leader column. "One lesson of [Monday'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.",12900,1200135,00.html

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