Royal Dutch Shell Group .com

The New York Times: Justice Dept. Opens Inquiry Into Shell Oil




Published: March 17, 2004


WASHINGTON, March 16 - The Justice Department has opened an inquiry into whether executives at the Royal Dutch/Shell Group violated any laws by failing to disclose in a timely fashion a significant shortfall in proven reserves of oil and natural gas, a person involved in the inquiry said Tuesday.


The company and its executives are already the focus of investigations by European regulators and officials from the Securities and Exchange Commission. But the Justice Department, unlike the commission, has the authority to bring criminal charges as well as civil ones. British and Dutch regulators are also examining the company.


The Justice Department inquiry, which was opened in recent days, is being conducted by prosecutors in the United States attorney's office in Manhattan, which often handles securities law inquiries involving large publicly traded companies. Shell, the world's third-largest publicly traded oil company, is controlled by Dutch and British executives. It has publicly traded shares on major exchanges around the world, including the New York Stock Exchange.


A spokesman at the company, Matt Samuel, said it had not been contacted by Justice Department officials.


Marvin Smilon, a spokesman for the United States attorney in New York, did not return a phone call seeking comment.


Two months ago, the company lowered its estimates of proven oil and gas reserves by about 20 percent, or 3.9 billion barrels. Company documents from two years ago show that current and former top executives were aware of a significant shortfall in reserves and came up with an "external storyline" and "investor relations script" that minimized its significance.


Two weeks ago, the group dismissed its chairman, Sir Philip Watts, and its head of exploration and production, Walter van de Vijver.


Sir Philip was succeeded by Jeroen van der Veer. The 2002 documents describing the shortfall in reserves were sent to the committee of managing directors, which at the time included Mr. van der Veer. A memorandum dated July 18, 2002, and sent to the managing directors and Judy Boynton, the current chief financial officer, predicted a "shortfall" of two billion to three billion barrels of reserves.


An earlier note to the committee, dated Feb. 11, said that the equivalent of 1 billion barrels of reserves "are no longer fully aligned with the S.E.C. rules" and that 1.3 billion barrels 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.


Reserves are an important asset of any oil and natural gas company. In the 1990's, Shell found itself in an increasingly difficult position as it was unable to find enough new natural gas and oil to offset exhausted reserves to keep up with production. The fall in the so-called reserve replacement ratio troubled analysts and investors because it is a crucial measure of an oil company's prospects.


Company documents show that senior executives ignored warnings over several years of the possible inflation of reserves. The documents show that the executives were concerned that Shell was falling behind its rivals in maintaining its reserve replacement ratio. Most of the misstated reserves were recorded from 1997 to 2000, when Sir Philip was in charge of exploration and production.


In recent months, the company has been preparing for an onslaught of regulatory examinations and shareholder lawsuits. It has retained one American law firm, Davis, Polk & Wardwell, to conduct an internal review with its audit committee. A second law firm, Debevoise & Plimpton, has been hired to handle investor suits and the S.E.C. inquiry. European lawyers have been retained to handle the inquiries overseas.


The company is planning to complete an internal review by its audit committee in the next few weeks, and Mr. van der Veer has said the results will be made public. 

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