International Herald Tribune: Shell officers silent on alerts of oil gap

By Stephen Labaton and Jeff Gerth NYT

Wednesday, March 10, 2004

Its new chairman among executives told of shortfalls in 2002, memos show

WASHINGTON Executives at the Royal Dutch/Shell Group maintained a policy of near silence on Tuesday in the face of reports that the company's new chairman and current chief financial officer were among the officers advised of huge shortfalls in proven oil and natural gas reserves in 2002, two years before they were publicly disclosed.

.

The names of the chairman, Jeroen van der Veer, and the financial officer, Judith Boynton, emerged in internal corporate memorandums obtained by The New York Times that indicated that they had received information about the shortfalls as members of a small committee of senior Shell executives.

.

Rather than disclose the problems to investors, senior executives, according to a July 2002 memorandum, came up with - and later carried out - what was described as an "external storyline" and "investor relations script" that tried to "highlight major projects fueling growth," "stress the strength" of existing resources, and minimize the significance of reserves as a measure of growth.

.

Problems with reserves were discussed among senior executives months earlier.

.

A February 2002 memorandum said a billion barrels of reserves "are no longer fully aligned" with the rules of the U.S. Securities and Exchange Commission because the agency had clarified the regulations. The memorandum said a further 1.3 billion barrels of reserves were at risk because it was no longer certain that they could be extracted during the remaining term of licenses between the company and three foreign countries.

.

Oil and natural gas reserves represent a central asset of an energy company like Shell, which is the world's third-largest publicly traded oil company, and are closely followed by analysts and investors as an indicator of future profitability. The estimation of proven reserves is as much an art as a science, although there are extensive industry and government rules that try to ensure they are measured with some level of precision.

.

The misstatement of the reserves has led to one of Shell's most serious management upheavals. Last week, the board chairman, Philip Watts, and Walter van de Vijver, the head of exploration and production, were removed after a Shell audit committee informed directors of the preliminary results of an investigation into the reserve statements. The newly revealed memorandums are the first to reveal that high corporate officers still in power were sent information detailing the problem.

.

The Shell memorandums were prepared by van de Vijver for the committee of managing directors, the small group of senior executives that in 2002 was headed by Watts and included his successor, van der Veer. The July memorandum also noted that it was sent to Boynton, who is now on the committee and is the chief financial officer.

.

In conference calls with reporters last Friday, van der Veer repeatedly declined to explain what caused the company to remove Watts and van de Vijver, other than to say it had "lost confidence" in them. He cited the continuing investigation by the audit committee as a reason not to elaborate. On Tuesday, the company refused to comment on the newly revealed memorandums, similarly citing the same investigation.

.

In an interview in London with Bloomberg News, Malcolm Brinded, vice chairman of Royal Dutch/Shell, refused to confirm the report by The Times. "I'm not confirming anything," Brinded said. "It's all a matter for the internal inquiry to actually review all of the history and make their representations accordingly."

.

On Monday, The Wall Street Journal described an early 2002 memorandum warning of possible overstatements in reserves.

.

The company documents that were obtained by The Times are in the hands of lawyers investigating the company. They suggest that current and former senior executives knew about significant problems with reserves since at least 2002. The documents raise questions about whether the company moved swiftly to correct the problem and how top executives reacted to the information. The accounting of reserves is now under investigation by the Securities and Exchange Commission.

.

The July 2002 memorandum described licensing and other reserve problems in detail.

.

"Shell faces a challenge" in maintaining its proven reserves "over the coming years - particularly during 2002 and 2003," and simultaneously achieving production growth and keeping expenses down, the July 18 memorandum begins. It said technical and commercial constraints "equates to a shortfall of 2-3 billion" barrels of proven reserves.

.

The documents show that beginning late last summer, the company grew increasingly concerned about the reserves issue after facing audits of some reserves, a tougher accounting interpretation by the Securities and Exchange Commission and passage in 2002 of the U.S. Sarbanes-Oxley law, which imposes additional obligations on executives and audit committees. Company executives were also focused on an inquiry about reserves at several companies operating in the Gulf of Mexico, including Shell, that the SEC began in October 2002.

.

Shell stunned the markets two months ago when it cut its proven reserves of oil and natural gas by 20 percent, or the equivalent of 3.9 billion barrels.

.

In the conference calls last week, Van der Veer declined to say whether any former top executives had acted illegally and said he was awaiting the outcome of the company's own review.

.

"The investigation is not completed," he said. "Let's not speculate on what the conclusion is."

.

The New York Times

http://www.iht.com/articles/509533.html