San Diego Union Tribune: Shell's new cut in reserves jars investors, arouses suspicions
By Andrew Callus
March 19, 2004
LONDON – Royal Dutch/Shell yesterday cut its oil and gas reserves for the second time this year in a fresh blow to investor confidence, as U.S. regulators stepped up legal investigations into the debacle.
Shell's decision to slash its proved reserves by 20 percent in January has already sent shock waves through the industry, cost its two top bosses their jobs and wiped billions of dollars off its stock market value.
Yesterday's cut in reserves was much smaller, at just 220 million barrels for 2003 and 250 million for 2002, than the original restatement of 3.9 billion barrels.
But it is just as embarrassing, because it includes reserves from Norwegian field Ormen Lange that were identified as bookable only a few weeks ago – after the January admission.
The new head of Exploration and Production (EP) said he was surprised, disappointed and embarrassed by the new problems, which occurred despite strict new booking guidance to engineers.
"I am determined, and we are determined, that EP and the group cannot again stumble in such a manner," Malcolm Brinded told a hastily arranged news conference.
"This means about a quarter of what they've booked for 2003 goes into non-proven reserves," said one trader. "Terrible."
"You just hope the new boss can draw a line under this whole affair," said BWD Rensburg fund manager Colin Morton.
Shell has appointed Jeroen van der Veer, former head of chemicals, as its new chairman to replace the ousted Phil Watts. Brinded replaced sacked colleague Walter van de Vijver.
Brinded, in the job less than two weeks, said there could be further reserve downgrades, since a "fast track" review triggered by his discovery of the Ormen Lange problems had only covered 40 percent of Shell's assets so far.
Investors also feared what else might be around the corner.
"You develop the cockroach theory," said James Halloran of U.S.-based National City Wealth Management Services. "Where there's one cockroach, you're going to find more. You've now been twice bit."
Brinded's review, by external experts Ryder Scott, is separate from one sought by Shell's non-executive directors, which is being run by lawyers at the request of Shell's audit committee, and being kept secret from executive management.
Yesterday Shell said the lawyer-led review was continuing, and "if additional actions are identified, they will be actioned and announced as appropriate" – a hint that more heads may yet roll.
Shell's main headache is from U.S. regulators.
The Securities and Exchange Commission is investigating, and may bring civil charges. The need to bring its booking policy into line with tightening SEC standards is at the heart of Shell's problems, and analysts suspect other companies are struggling with the guidelines too.
The U.S. Justice Department is conducting an investigation too, according to people familiar with the situation, which could expose Shell and its executives to possible criminal charges.
Shell executives denied knowledge of a criminal investigation yesterday.
Shell also faces other regulatory investigations in Britain and the Netherlands. One Dutch probe is nominally for insider dealing, but officials said this reflected the body's terms of reference and that there had been no evidence of improper share trading.
New Chairman Van der Veer rebuffed accusations in the press that he was aware of miss-bookings before the board was alerted to them at around the end of 2003.
"The question is, did I know about incorrect bookings? The answer to that is no," he said.
Because the annual report is now delayed, pending Brinded's review, Shell has also been forced to postpone its annual shareholders meeting from April to June.
First-quarter results will go ahead as planned April 29, and final dividends will be paid in May as promised in the final results in February, but they have been renamed "second interim dividends" because shareholders need to approve final dividends.
Shell said the latest downgrading of reserves would add $20 million to costs for last year on top of a $96 million charge for the original cut. These amounts are small for a company that makes more than $10 billion of net profit in a year. Analysts want reassurance that a big oil company still has lots of oil.
"There's a limited immediate financial effect, but the real point is what it tells you about their future potential," said Brendan Wilders, analyst at Oriel Securities.