Royal Dutch Shell Group .com

The Scotsman: Shell implodes as e-mails provide damning evidence


Martin Flanagan - City Editor

20 April 04


STILL not running out of unexploded Shells, then. Another ousted senior director at the flailing oil giant; another downgrading of "proven" oil and gas reserves; but, easily most damning, evidence yesterday that at least one senior director felt they were lying to the market about the level of those reserves.


The smoking gun unearthed in the internal inquiry by Shell’s audit committee are e-mails from former exploration and production head Walter van de Vijver, including one to his boss, Sir Philip Watts, saying that he was "sick and tired about lying about the extent of our reserves issues". Case, open and shut. Rearrange into phrase.


Van de Vijver, who sat alongside his former boss on the podium at the meeting to "explain" the reserves overbooking earlier this year, might well be a better poker player than he was a head of exploration and production.


Nobody at that mea culpa meeting could have guessed the absolute rift there was at the very top of Shell on the "issues", as "Philip" asked the now ousted chief financial officer "Judy" (Boynton) to take us through the financials. Judy won’t be taking any- body through the Shell fundamentals again, her job going initially to colleague Tim Morrison.


Van de Vijver in an e-mail to his boss last August: "The single, largest issue facing EP [Exploration and Production] is the shrinking opportunity portfolio exacerbated by ... too aggressive reserves bookings in the past [on Sir Philip’s watch]." Or last December to an unnamed colleague: "We are heading towards a watershed reputational disaster … the problem was created in the 90s and foremost in 97-2000 and any clean-up must reflect that … I will not accept any cover-up stories that it was OK then but not OK with the better understanding of the SEC [US Securities and Exchange Commission] rules now and that it took us two and a half years to come up with the right answer."


The damning e-mails suggest that Shell’s problems did not stop at slackness or incompetence, but embraced cover-up as well. This might keep the lawyers busy, particularly in the land of the litigious, the US of A.


This aspect of the story overshadows Shell’s expected ousting of Boynton, and an almost inevitable upwards tweak to the reserves overstatement figures. It stands at 4.85 billion barrels, after more than 100 of the group’s oil and gas fields have been reassessed, but who is counting, as they say?


Astonishingly, yesterday’s report from the audit committee, aided by Wall Street law firm Davis Polk & Wardwell, says Shell only had one part-time member of staff checking its own claims about its reserves. He would have to be very good.


Shell was seriously contrite yesterday, even more contrite than Watts and Van de Vijver were back in January and February before they were dumped.


The company said it accepted the report, which is nice.


Shell says that it accepts that there were disturbing deficiencies and it is determined to put this right through greater transparency and with outside help.


In future, external experts will be involved in the annual audit and reporting of reserves.


Shell had also previously said that in future its proven reserves will be reported by geographic region.


Both these measures should help transparency and help restore some credibility to a severely battered corporate reputation.


There is no doubt more to come out in the wash, but on yesterday’s tantalising evidence it looks like Sir Philip may have hitched his star to reporting 100 per cent reserves replacement, and that nobody in the company wanted to cross him.


Unfortunately, if true, it meant the investment community got double-crossed. The damage may be long-standing. Standard & Poor’s has stripped Royal Dutch/Shell of its top-tier "AAA" credit rating, citing yesterday’s bombshell news.


S&P cut Royal Dutch/Shell’s long-term rating by one notch to "AA-plus" from "AAA" and said it may cut again.

Click here to return to Royal Dutch Shell Group .com