HoustonChronicle.com: U.S. regulators start formal inquiry at Shell
Feb. 20, 2004, 12:01AM
LONDON — Royal Dutch/Shell Group faced a fresh setback Thursday in its campaign to win back the confidence of investors after U.S. regulators launched a formal investigation into the company's overstatement of its oil and gas reserves.
The U.S. Securities and Exchange Commission had been making an informal inquiry into Shell's surprise announcement last month that it was downgrading 20 percent of its proven reserves and reclassifying them into less certain, unproven categories. The SEC has now decided to ramp up its inquiry and hold a formal investigation, both Shell and the SEC said.
Shell's announcement last month about its reserves worried shareholders and led some to call for the resignation of the company's chairman, Sir Philip Watts.
Shell spokesman Andy Corrigan said he believed the SEC's decision to intensify its inquiry was "fairly standard" and emphasized that the probe was not a criminal investigation. Shell would continue to cooperate fully with the SEC, he said.
An SEC official in Washington said a formal investigation means regulators have reason to believe laws may have been violated but added that the SEC has yet to reach any conclusions. The official spoke on condition of anonymity.
A formal probe gives the SEC legal powers to subpoena documents and testimony. The SEC has the power to investigate Shell, which is headquartered in London and The Hague, because the company's shares are traded in the United States, on the New York Stock Exchange. Shell's U.S. operations have headquarters in Houston.
Houston's El Paso Corp. said Tuesday it was reducing its estimated proven reserve base by 41 percent. The company also said it had informed SEC officials of the revision and would cooperate if regulators wanted more details.
An El Paso spokesman said Thursday the company hadn't gotten word from the SEC about an inquiry, either formal or informal, into the matter.
However, El Paso on Thursday became the target of shareholder litigation over the downward revision in its reserves and the $1 billion pre-tax charge triggered by the revision.
Law firms Abbey Gardy and Chitwood & Harley announced that they had filed lawsuits seeking class-action status against El Paso and key executives in federal district court in Houston.
The lawsuits allege securities fraud. An El Paso spokesman declined comment.
Some analysts suggested that the SEC's action Thursday would have little practical impact on Shell.
"It's not unexpected because the initial informal review would probably have raised further questions," said Tony Alves of Investec Securities in London. "I would say it's 99.5 percent a reputational issue."
However, the SEC's decision to look more closely at Shell's action does raise questions about why management overestimated its reserves in the first place.
Corrigan said he didn't know how long the formal investigation would last, nor could he comment on what the worst-case outcome for Shell was likely to be.
Watts, Shell's chairman, acknowledged earlier this month that Shell's reclassification of reserves had caused "concerns and disquiet" among investors. However, he insisted that it did not "fundamentally affect" the company's volumes of oil and gas and refused to step down.
About half of the downgraded reserves are in Nigeria and Australia.
Chronicle reporters Laura Goldberg and Nelson Antosh contributed to this story.