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The Independent: Shell plunged into fresh turmoil after second reserves downgrade


By Michael Harrison, Business Editor

19 March 2004


Shell was plunged deeper into crisis yesterday after the Anglo-Dutch oil giant cut its proven reserves for a second time in as many months and disclosed that it is the subject of an insider dealing investigation in the Netherlands.


To the amazement of analysts and investors, Shell said it was cutting its estimate of reserves by a further 470 million barrels, only two months after it shocked the financial markets by downgrading its reserves by 3.9 billion barrels or 20 per cent.


The fresh downgrade is the result of a second worldwide review of its proven reserves carried out by external consultants. This will delay both the publication of Shell's annual report and accounts and its annual shareholders' meeting by two months.


Shell's 2003 report had been due to be published this morning but it will not now appear until late May. The AGM has been put back until the end of June although Shell said this would not affect the final dividend which is being paid instead in the form of a second interim dividend.


The first reserves downgrade, on 9 January, has already cost of the jobs of Shell's chairman, Sir Philip Watts, and its head of exploration and production, Walter van de Vijver. The new chairman, Jeroen van der Veer, said yesterday that none of its four group managing directors, including himself, would receive a performance bonus for 2003.


The insider dealing inquiry, being undertaken by the Autoriteit Financiele Markten, the Dutch equivalent of the Financial Services Authority, means Shell is now the subject of at least four separate official investigations. In addition to the US Securities and Exchange Commission, which began a formal inquiry into the reserves downgrade in February, Shell is also being quizzed by the FSA and the European bourse authority Euronext.


There are also reports that the US Justice Department has begun a criminal investigation into Shell although Mr van der Veer said yesterday he had no knowledge of this beyond what he had read in the press. Mr van der Veer also responded to claims several Shell executives, including himself and the finance director, Judy Boynton, had been aware of the overbooking of reserves as long ago as early 2002.


Asked whether he had known about the incorrect booking of reserves, Mr van der Veer replied "No. It was only very recently that we came up with a figure as high as 20 per cent." But he conceded that Shell executives had been aware of the company's "exposure" because of its poor record of reserves replacement and changing SEC guidelines relating to reserves accounting.


He laid the responsibility for the misbooking of reserves between 1996 and 2002 on the group's E&P division, which was being run for most of that period by Sir Philip, saying: "There is a basic belief in the integrity of your colleagues. We assumed that E&P was taking care of appropriate reporting."


The original reserves downgrade is being reviewed by Shell's group audit committee which will publish its report in April. The second reserves review, being conducted by the consultants Ryder Scott, has so far covered 40 per cent of Shell's fields. As a result, 250 million barrels booked as proven reserves up to the end of 2002 have been reclassified while a further 220 million barrels which Shell had planned to book for 2003 have been recategorised. Of these reserves, 166 million barrels relate to the Ormen Lange field in Norway.


Malcolm Brinded, Shell's new head of E&P, described the second downgrade as "disappointing and embarrassing". Shell's shares fell 3 per cent to close at 361p yesterday.


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