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The Scotsman: Shell investors braced for yet more oil and gas revisions




INVESTORS in Shell fear further downgrades in the energy giant’s oil and gas reserves within the next few weeks.


Only 40% of the company’s reserves have so far been audited following a shock downgrade in proven reserves in January that led to the subsequent departure of group chairman Sir Philip Watts.


The City is concerned that more revisions are likely as the true extent of the reserves overstatement becomes clearer. Shell reduced its proven reserves in Norway by 160 million barrels last week - its second downgrade of total reserves in the space of a month.


One fund manager said yesterday: "Anything could happen at this point. About 60% of reserves still have to be examined. Goodness knows what further gremlins are going to be uncovered."


Another analyst said: "The company has lost all credibility. Anything could happen now."


BP and Norsk Hydro, the Norwegian oil and gas company, are also coming under increasing pressure to defend their booking of reserves as suspicion grows that they might have been over-enthusiastic in their assessment of their own share in the same Ormen Lange field.


If the two companies do reassess their reserves at the field, it could cause a collapse in confidence across the whole of the global oil industry, and give weight to the view that the problems facing Shell could spread.


Financial watchdogs in the Netherlands are believed to be examining share transactions involving directors of Royal Dutch/Shell going back to 2002 as part of an insider dealing investigation connected to the oil giant’s reserves downgrade.


The investigation, by the Dutch equivalent of the UK’s Financial Services Authority, is thought to focus particularly on claims board members were aware of the overstatement of reserves long before Shell made a public disclosure on January 9.


On Thursday Shell sought to dismiss the investigation by Holland’s Autoriteit Financiele Markten as a routine inquiry.


Any Dutch investigation will run alongside an ongoing US Securities & Exchange probe into Shell.


Shell’s shareholders will also concentrate their questions next week on the company’s interests in Nigeria.


Shell has reduced its proven reserves in the African country by 1.3 billion barrels as part of its overall classification of 3.9 billion barrels of its reserves.


Emmanuel Agbegir, a spokesman for Nigeria’s Ministry of Petroleum, said yesterday: "In the case of Nigeria, Shell knows that when it talks about reserves, it is exact. But Shell cannot say the same thing about some of its operations in other countries."


The New York Times reported on Friday that Shell had kept secret key details of the January downgrading of reserves, especially those concerning Nigeria. The newspaper quoted "confidential documents" from late 2003 as showing that 60% of Shell’s Nigerian reserves did not meet widely accepted accounting standards for proved reserves.


In the wake of an ongoing audit into its reserves, Shell said last week it was to postpone the publication of its annual report and accounts.


The decision was taken following a board session on Wednesday when the company’s directors were putting the final touches to the report.


They had already gone through nine drafts since January 9 but two weeks earlier, while compiling a report for the Securities and Exchange Commission, the Norwegian error was unearthed.


Immediately it was announced, investors began asking how lightning could have struck twice. Pressure was quickly applied on the board with at least two non-executive directors of Shell Transport and Trading, the company’s UK arm, increasing their calls on management to address investors’ unease.


Ultimately it is the chairman, Jeroen van der Veer, whose future appears shakiest even though he denied allegations that he knew of ensuing problems with the reserves two years ago.


However, investors appear likely to press for an overhaul of corporate governance and, as reported in Scotland on Sunday two weeks ago, there are demands for a restructuring of the board. It currently has two boards - one each in the UK and Holland - answering to a supervisory committee.


UK shareholders have told the non-executive directors, former Bank of Scotland governor Sir Peter Burt and Lord Oxburgh, that they want to see changes. In particular they want new blood and have seen the departure of Sir Philip Watts, the group’s former chairman, as an opportunity to bring in fresh talent.


Punishing the existing board therefore seems a lower priority than finding a new structure that will satisfy investor demands.


The company’s problems appear to stem from this need to reorganise and ensure that internal systems are working correctly.


Ironically, UK investors face difficulty forcing change because of the voting structure, which is weighted in favour of management who own so-called priority shares.


Other problems for the company could ensue if its credit rating is downgraded by the leading credit rating agencies. A downgrade is a distinct possibility and would increase the company’s cost of borrowing.

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