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Houston Chronicle: Analysts say Shell should repair internal culture



Associated Press

April 21, 2004, 12:25AM


LONDON Revelations about dishonesty at the highest levels of the Royal Dutch/Shell Group could prompt reforms, but the oil giant will have to work hard to regain investor confidence, analysts said Tuesday.


A company-commissioned investigation found some bosses knew about problems for nearly two years and exaggerated the numbers, news that stunned the oil and financial worlds.


"All of us ... were giving Shell the benefit of the doubt, that there may have simply been some confusion," Houston securities law expert Thomas Ajamie said.


To regain trust, though, Shell will have to tighten internal controls and change a culture that stressed keeping reserve estimates high, the experts say.


Many place some blame on Shell's decentralized structure, saying its complicated setup let problems go undetected.


Shell is made up of two separate companies, Netherlands-based Royal Dutch Petroleum and Great Britain-headquartered Shell Transport and Trading Co. The entities have separate boards, and Shell only recently began asserting control of subsidiaries around the world that once ran themselves.


Lord Oxburgh, chairman of the British Shell, said Monday that the relationship between the companies was "on our agenda" and that both boards realized it was time to reconsider the setup.


Shell came under scrutiny in January, when the company announced its confirmed oil and gas holdings were 20 percent, or 3.9 billion barrels, smaller than it had previously claimed. Shareholders were outraged, and three top executives have subsequently resigned, including chairman Philip Watts and finance chief Judith Boynton.


Since then Shell has further reduced its estimates of proven holdings, mostly recently this week, bring the total downgrade to 4.85 billion barrels, a number the company said is nearly final.


Reserves are an oil company's most valuable asset, and any reclassification into less certain categories can affect its stock price. The Securities and Exchange Commission, the Justice Department and European regulators are investigating Shell's overstatement, threatening costly legal headaches.


Shell's solid finances should ensure that the company weathers the scandal over its inflated oil reserve estimates, and analysts say they believe the new reserve figures are likely an accurate reflection of the company's holdings.


The results of Shell's internal investigation showed Watts urged Walter van de Vijver, then chief of the company's exploration division, to keep proven reserve estimates high. Van de Vijver complained about the estimates done when Watts ran the division and wrote in a November 2003 e-mail to the chairman that he was "sick and tired about lying" about numbers that were "far too aggressive/optimistic," according to the report compiled by New York-based law firm Davis, Polk and Wardwell.


Van de Vijver resigned last month. His lawyer, John Dowd, said he had been "outspoken and persistent" in trying to correct the estimates. He ordered reviews in problem areas and told top executives of his concerns, Dowd said.


The investigation also found inadequate oversight and said auditing reserve estimates was the responsibility of a lone part-time former employee.


"There was just a massive breakdown in internal controls; there was no real accountability, and the reporting lines were incredibly blurred," Investec Securities oil analyst Bruce Evers said.


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