The New York Times: Shell's Report on Its Troubles Cites Discord at Top: "The report also noted that last December, Mr. van de Vijver sent an e-mail message directing a subordinate, Frank Coopman, to destroy a document Mr. Coopman had produced that concluded that the company was "under a legal obligation" to immediately correct overstatements of its proven reserves.": "Our story is not one anyone would be proud of, and we have no excuses," said Lord Ron Oxburgh, chairman of Shell Transport and Trading, the British half of Royal Dutch/Shell.
By STEPHEN LABATON and HEATHER TIMMONS
19 April 2004
Posted 20 April, 2004
A tense and at times hostile relationship between the two most powerful executives of the Royal Dutch/Shell Group caused the company to wait almost two years before addressing problems with overstated oil and gas reserves, according to a summary of an internal inquiry made public by the company yesterday.
The summary describes pressure that Sir Philip Watts, the chairman of the company from 2001 until last month, exerted on the man who succeeded him as head of exploration and production, Walter van de Vijver, 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 two men, whom the report called "the most powerful forces in management," resigned in early March, two months after Shell, the third-largest publicly traded oil company, disclosed that it had overstated its reserves by 20 percent, throwing the company into a crisis. The British and Dutch company is under investigation by regulators and prosecutors in Europe and the United States.
The internal inquiry also found that the company's chief financial officer, Judy Boynton, had been aware of the problems for the last two years but had done nothing to correct them. Ms. Boynton was relieved of her duties yesterday.
The company continued to express confidence in its new chairman, Jeroen van der Veer, even though he also was advised about problems with the reserves two years ago and failed to take any action. Mr. van der Veer was not mentioned in the internal inquiry's findings.
Shell revised its reserve figures downward yesterday for the third time, by another 300 million barrels. And a few hours after Shell disclosed the conclusions of its inquiry, Standard & Poor's stripped it of the AAA credit rating it had maintained for 14 years.
According to the internal inquiry, Sir Philip's order came in May 2002, after Mr. van de Vijver began to raise alarms inside the company that the exploration and production unit under Sir Philip might have overstated the company's reserves by as much as 2.3 billion barrels.
The tension between the two men boiled over last fall, when Sir Philip gave Mr. van de Vijver a negative personnel evaluation, and Mr. van de Vijver replied with a blistering e-mail message.
"I am becoming sick and tired of lying about the extent of our reserves issues and the downward revisions that need to be done because of far too aggressive/optimistic bookings," Mr. van de Vijver said in an e-mail message in November 2003 to Sir Philip that was quoted in the report.
According to the summary, Mr. van de Vijver first raised alarms about the reserve figures in a February 2002 memo to Sir Philip and other executives, and wrote a more explicit note for his files later that year.
"Bottomline was that both reserves replacement and production growth were inflated," he wrote in September 2002. "Aggressive/premature reserves bookings provided impression of higher growth rate than realistically possible."
But instead of publicly disclosing the concerns, the company embarked on a strategy of attempting to "manage" the reserve figures, the inquiry summary said, much the way many companies in the 1990's manipulated earnings to make it appear that goals had been met.
"EP management's plan was to `manage' the totality of the reserve position over time, in hopes that problematic reserve bookings could be rendered immaterial by project maturation, license extensions, exploration successes and/or strategic activity," the report said. "Simply put, it is illustrative of a strategy `to play for time' in the hope that intervening helpful developments would justify, or mitigate, the existing reserve exposures.
"Ultimately," the report concluded, "this strategy failed - as business conditions either deteriorated or failed to improve sufficiently to justify historic bookings."
Oil and gas reserves, and the rate at which their depletion is replaced with fresh reserves, are a significant barometer of an energy company's financial health. While the accounting treatment of reserves is as much art as science, the Securities and Exchange Commission imposes a series of strict rules that govern how companies report them.
The company began a systematic review of its reserves late last year, in response to audits revealing trouble in its operations in Nigeria and Oman. That review led to the first lowering of estimates in January by 3.9 billion barrels. Yesterday's reduction, by 300 million barrels, brings the amount wiped off Shell's books since January to the equivalent of about 4.35 billion barrels of oil, or 22 percent of the company's previously stated holdings. Executives said the company would have to revise its earnings downward by about $100 million a year from 2000 to 2003. The change amounted to less than 1 percent of total earnings over that period, the executives said.
The internal report said there was "no common explanation" for overstatements in reserves off the coast of Australia and in Oman, Nigeria and Brunei.
Though Shell's new S.& P.rating of AA+ is still considered very good, the company will now have to pay more to finance operations.
Shell's new chairman, Mr. van der Veer, acknowledged yesterday that he "did not appreciate the severity and magnitude" of the reserves issue when, as a member of a small committee of senior executives, he received memos about them in 2002 and 2003. He said he had been too wrapped up in his work as a top executive at Shell Chemical Company in the United States to pay much attention.
The report says that Mr. van de Vijver never took his doubts about the reserves to Shell's outside directors or to its audit committee because of the company's culture.
"Because the unspoken rule within the company is that you are not supposed to go directly to individual board members or to the group audit committee, I had to rely on the chairman and the C.F.O. to advise" the audit committee,, he told the lawyers who conducted the inquiry.
The inquiry was conducted on behalf of the company's audit committee by a New York law firm, Davis, Polk & Wardwell, over the last two months. The lawyers said they based their summary on interviews with current and former executives, company documents and e-mail messages.
Washington lawyers representing Ms. Boynton and Sir Philip did not return telephone calls seeking comment.
Mr. van de Vijver's Washington lawyer, John M. Dowd, said the report showed that his client "had the courage and integrity to discover the potential problems regarding prior reserves bookings" and "direct details inquiries to determine accurately that may have to be rebooked."
The report also noted that last December, Mr. van de Vijver sent an e-mail message directing a subordinate, Frank Coopman, to destroy a document Mr. Coopman had produced that concluded that the company was "under a legal obligation" to immediately correct overstatements of its proven reserves. The document was not destroyed.
Mr. Dowd criticized the report for failing to "include the context in which the e-mail was written and its true meaning." He said that Mr. van de Vijver had sent the message after he received an e-mail message from Ms. Boynton that suggested Mr. Coopman's document had been "incomplete and prematurely conclusory." Mr. Dowd said Mr. van de Vijver concurred, and concluded that Mr. Coopman had gone beyond his assignment of preparing a preliminary status report.
The inquiry summary also disclosed weaknesses in the company's financial controls that its authors said had enabled the reserve problems at Shell to fester. Many large oil companies employ teams of auditors to monitor their reserves each year. But at Shell, the inquiry found, the job was "performed by a single, part-time former Shell employee" who only performed field audits once every four years.
"He was provided with virtually no instruction concerning regulatory requirements, or the role of an independent auditor and no internal legal liaison," the summary report said.
Shell said on Monday that it had changed its practices to make sure that its reserves were accurately reported from now on.
"Our story is not one anyone would be proud of, and we have no excuses," said Lord Ron Oxburgh, chairman of Shell Transport and Trading, the British half of Royal Dutch/Shell.