The Independent: How a sure thing became a City liability
By Katherine Griffiths, Banking Correspondent
20 April 2004
When Sir Philip Watts, chairman of Shell, the world's second-largest oil and gas company, retreated to his Berkshire mansion at Christmas, he had some news to mull over that was going to stun financial markets around the world.
On 9 January Shell broke the news. Because of mistakes in the way it had calculated the amount of fossil fuels it had in oil and gas fields around the world, Shell said, it was going to have to slash its reserves by one fifth.
Shell, seen in the City as one of Britain's safest blue-chip companies, was thrown into crisis. Investors took fright and sold shares, wiping £8bn off Shell's value and sending its stock down 8 per cent.
The mistake claimed the job of Sir Philip, who would have been with the company for 35 years this year. His most senior lieutenant, Walter van de Vijver, former head of exploration and production, also had to step down. Yet the company known in the 1970s and 1980s for its advertising slogan "You can be sure of Shell" largely managed to reassure the City that it had disclosed its failings and could return to normal life as a multinational energy business.
That was not to be. Shell made more cuts to its reserves in March, and yesterday analysts and the financial press were again summoned to a meeting at Shell's iconic head office opposite Waterloo station to hear more bad news.
As well as publishing a hard-hitting report into its internal failures, the company trimmed its reserves for the third time in four months. Another head also rolled this time it was Judy Boynton, Shell's chief financial officer.
According to Shell's new management, assembled in the past few weeks to try to drag it out of the mire, this really was the last time Britain's seventh largest company would have a nasty surprise for its investors.
Malcolm Brinded, who has taken over the sensitive role overseeing exploration and production, said the company could "draw a line" under what must seem a surreal nightmare for many of the thousands of employees of Shell worldwide.
The rot has been stopped, according to Shell, because it has ejected the three managing directors it considered responsible for the overbooking of reserves and for its failure to address the problem more quickly.
Lord Oxburgh, the UK chairman of Shell, told the packed conference of City analysts: "The story is attributable to human failings, it is not structural. I personally am satisfied that the deficiencies were restricted to a small fraction of exploration and production."
The message Shell is keenest to convey is that it is not Britain's version of Enron, the financial and energy company which collapsed spectacularly in America in 2002. The message from Shell's board is that its fundamental business is sound and that it will remain for decades to come one of Britain's biggest blue-chip companies.
Lord Oxburgh said there was "absolutely no question" of financial impropriety on the part of Ms Boynton, and most Shell insiders do not believe that either Sir Philip, who joined Shell as a seismologist in 1969, or Mr van de Vijver were motivated by personal financial gain. But, while Shell's independent report, compiled by the American law firm Davis Polk & Wardwell, goes into painstaking detail about how Mr van de Vijver and Sir Philip fell out, there is little speculation about why Shell came so spectacularly off the rails.
According to many observers, Shell's historic structure should bear much of the blame. Formed in the early 1900s, Shell was the product of the merger of Royal Dutch of Holland and Shell Transport & Trading of the UK, which took its name from the fact that its original business was in selling sea shells to Victorian natural history enthusiasts.
Over the decades, Shell's two arms have remained separate, held together only by a number of boards which, critics say, do not know in detail what is going on at both arms. Investors are putting Shell under pressure to bring those two arms together, either by a full amalgamation of the businesses within Shell, or by changing the senior management structure so that there is a clearer line of command.
Yesterday Lord Oxburgh said Shell was "listening" to its shareholders but that the problem was "more complex than almost all of those who have offered advice can appreciate".
While the company has been keen to deny that anyone fiddled the books at Shell unlike at Enron or some of the other corporate scandals to hit the US it also said it would change the way its executives can earn bonuses. In the past, part of the windfalls paid every year to senior employees were linked to how large the reserves discovered around the world that year were. That structure has come in for particular criticism from the batch of lawyers now lining up to sue Shell and some of its directors, with critics pointing out that employees were being given incentives to count as fruitful reserves areas which in fact might not have looked that promising.
Mr Brinded, who has taken over the hot seat of trying to run Shell since Sir Philip stepped down, maintained that "honesty, integrity and respect for people" remained a "beacon" by which Shell did business. If so, that leaves many questions unanswered as to why the individuals who were involved in exploration and production erred so dramatically.
Those questions have been left to the raft of financial regulators and lawyers in the US, UK and Holland who are now sifting through Shell's documents. The process could take months, if not years, but if shareholders succeed in suing Shell for millions of pounds for misleading them, Shell's fate could end up looking not dissimilar to that of Enron.
SIR PHILIP WATTS
Until January, the chairman of Royal Dutch Shell had been at the heart of the multi-billion dollar global oil industry. Now, he can devote himself to his Japanese garden in his Berkshire home.
Sir Philip, 58, was a Shell lifer. Born on a Leicester council estate, he took a degree in geophysics and joined as a seismologist in his mid-20s. He rapidly moved up the ranks, working in oilfields in the Far East, Scandinavia and Africa.
But his rise, which included four years as head of exploration and production until 2001 (the period when reserves were "overbooked"), was marred by gaffes about "uncertainties" in Shell's exploration sector. He was also embroiled in questions about his remuneration, after his pay jumped 83 per cent. Sir Philip earned £1.8m in 2002 and has a pension worth £480,000 a year. After Shell revealed the 20 per cent reserves shortfall in January, Sir Philip vowed to carry on, insisting he had the "full support" of the board. He left two months later.
WALTER VAN DE VIJVER
The Dutch former head of exploration and production at Shell was once tipped to succeed Sir Philip Watts as chairman. Instead, they both resigned amid plunging share values and the deepest crisis in the company's history.
Mr van de Vijver, 56, who had been with Shell for nearly 30 years, angrily defended his record, saying he had led the campaign to come clean about its overstated oil reserves. But sources said he had been considered not to have done enough to earn his hefty pay packet, worth £1.1m in 2002 and accompanied by a generous pension. One Shell insider said: "The problem was that when the issue [of overbooking] came to the fore, he didn't act quickly enough. He was seen as not being the best man for the job."
He started as a field engineer in the Middle East, rising to be head of exploration and production, one of the three senior positions, and began to restructurethe operation. He described his dismissal in March as having taken place "without credible explanation".
The American-born finance director of Shell was named two years ago in a list of the most powerful businesswomen in Britain.
But the accolade, recognising 20 years of experience in the oil industry, has done little to protect Ms Boynton from the turmoil at the Anglo-Dutch conglomerate. Ms Boynton, 49, who has a degree in finance, joined Amoco, the American oil giant which later merged with BP, after university and rapidly established a reputation as a capable number cruncher. She joined Shell in 2001.
Despite being cleared of any wrongdoing in the "overbooking" scandal, her close alignment with Sir Philip Watts is thought to have convinced the Shell board that she was not sufficiently robust for the role. Like several other senior figures in the company, Ms Boynton has hired a high-profile lawyer ahead of investigations by financial watchdogs in Britain and America.
By Cahal Milmo