Houston Chronicle: 'Sick and tired about lying' at Shell
By BETH GARDINER
April 19, 2004, 11:33PM
Investigators disclose former executive's e-mail
LONDON — Walter van de Vijver, a top executive at Royal Dutch/Shell Group, wrote in an e-mail that he was "sick and tired about lying" about the company's inflated oil and gas reserves estimates, investigators commissioned by Shell revealed Monday.
The investigation, whose findings Shell accepted in full, found that some bosses knew for almost two years that the company had publicly overstated the size of its reserves. The shaken oil giant also announced that its chief financial officer, Judith Boynton, had stepped down, the latest in a string of high-level casualties since Shell's announcement in January that its confirmed oil and gas holdings were much smaller than it had claimed.
The company said Monday that it has now downgraded a total of 4.35 billion barrels, or about 22 percent of its reserves, from "proven" to less certain categories. That is 200 million barrels more than its previous estimate.
Shell, based in London and The Hague, said in January that it was downgrading 3.9 billion barrels, or about 20 percent of its total holdings. A March announcement brought the total downgraded to 4.15 billion barrels.
The disclosures caused a shareholder uproar and led to a string of resignations. Reserves are an oil company's most valuable asset, and any reclassification into less certain categories is a major concern for investors.
Monday's report also showed that internal audits on booking reserves, a crucial measure of value in the oil industry, were undertaken by a single former Shell employee working part-time.
Standard & Poor's cut its long-term credit rating on Shell one notch to "AA-plus" from "AAA" after the reserves report.
"Shell has unquestionably stumbled and has learned a tough lesson," said Lord Oxburgh, chairman of Shell Transport and Trading Co., the British component of the Anglo-Dutch group. Oxburgh called the inaccurate estimates a "major embarrassment."
"The story that has unfolded is not one of which anyone can be proud," Oxburgh said. "Our procedures for booking reserves were seriously flawed. There are explanations, but there can be no excuses."
A summary of an outside investigation into managers' conduct said executives in its exploration and production division had exaggerated the size of reserves and failed to act when it became clear the estimates were unrealistic.
Van de Vijver complained about the estimates after he took over as chief of the division in June 2001, replacing Philip Watts, who had been promoted to Shell chairman, the summary said.
The summary describes pressure that Watts exerted on the man who succeeded him as head of exploration and production to "leave no stone unturned" to meet the goal of reporting that the company was replacing every barrel pumped out of the ground with a new barrel of reserves.
The report said van de Vijver notified Shell's managing directors in February 2002 that the company's reserve classification rules did not match those of the U.S. Securities and Exchange Commission and that Shell might have overestimated its reserves by 2.3 billion barrels.
"I am becoming sick and tired about lying about the extent of our reserves issues and the downward revisions that need to be done because of far too aggressive/optimistic bookings," van de Vijver wrote in a November 2003 e-mail to Watts, released in the summary.
When legal advisers sent van de Vijver a memo a month later saying Shell should disclose the problems, the report said he responded by e-mail: "This is absolute dynamite, not at all what I expected and needs to be destroyed."
The memo was preserved, the lawyers' report said.
Other correspondence showed executives knew estimates were wrong but did nothing, the investigators found.
Instead, investigators found, executives attempted to "manage" the problem and "play for time" in hopes that future growth would eventually obviate the need to come clean.
But "this strategy failed as business conditions either deteriorated or failed to improve sufficiently to justify historic bookings."
Watts and van de Vijver resigned last month after lawyers at the New York-based Davis, Polk and Wardwell firm gave Shell a preliminary version of their report.
"It's incredible really to think that this kind of thing was going on at the top of a company with a reputation for such conservatism," said Jim Washer, editor of International Petroleum Finance, an industry newsletter. "You don't really expect blatant deceit."
Washer said that by releasing nearly final revisions of its reserve estimates, Shell may have come close to ending concerns about those numbers.
But the damage to the company's reputation could linger, particularly because the SEC, the U.S. Justice Department and European regulators are all investigating, Washer said.
Lawyers for Boynton, Watts and van de Vijver in Washington could not immediately be reached for comment.
Shell said Boynton quit her post as group chief financial officer but will stay at the company as an adviser at least until June. Oxburgh said Boynton had not been guilty of any financial impropriety.
The lawyers' report said she was responsible for Shell's financial statements and had failed to check the accuracy of the reserve estimates.
But it added that her responsibility may have exceeded her authority.
Reuters, Bloomberg News and the New York Times contributed to this report.