THE SCOTSMAN: Shell's massive miscalculation fuels fires of shareholder scorn

MARTIN FLANAGAN
CITY EDITOR
Sat 10 Jan 2004

IT IS going to be some time before the stock market can be sure of Shell again.

Nearly £3 billion was wiped off the value of the oil and gas giant yesterday when it said it had over-reported its proven reserves by 20 per cent.

We’re not messing at the margins here. This is billions of barrels of error, a big-time mistake from one of the biggest companies in the world.

Shell said it would now be recategorising 3.9 billion barrels of oil, or barrel equivalents of gas, that it previously had suggested were virtually black gold in the bank.

The extent of the overstatement of proven reserves, and subsequent reclassification into probable, or possible, reserves, almost beggars belief.

If it wasn’t such a serious subject, it would be laughable. Apparently, Shell took decentralisation to extremes, allowing local operators worldwide to make their own assessments of the quality of the oil and gas assets on their patch.

The jolt to confidence in the company on something so basic suggests senior management heads should roll.

When some fanciful-looking figures emerged out of Africa, the company decided that a common standard should be applied worldwide to any assessment of proven reserves.

When this was done, the deck of cards collapsed. The problems were not confined to Africa.

Anglo/Dutch-run Shell is a famously conservative and bureaucratic company. It may hope it can ride out the storm on bromides.

But the jolt to market confidence in the company on something so basic suggests senior management heads should roll.

There were obviously not just holes in the ground and holes in local operational management’s judgment, there were also holes in reporting disciplines up to the highest levels of management. Wholly unacceptable, in fact.

The effect has been for Shell to have put investors in the company in a fools’ paradise of false optimism.

To say, as the group did yesterday, that all mistakes had been made in good faith and that no managers responsible for the overbookings would be disciplined does not hold water. It certainly does not hold oil.

Systems are instituted from the top, and this one was woefully inadequate.

Oil prices are surging again, hitting nine-month highs yesterday.

If anything, it should be a time for the share prices of the majors to be roaring ahead. Instead, Shell’s price was hammered yesterday, closing off 7 per cent and with every likelihood that further falls are likely next week.

Appalling.

The jolt to confidence in the company on something so basic suggests senior management heads should roll.

http://www.business.scotsman.com/archive.cfm?id=29972004

Click Here to return to HOME PAGE for ShellNews.net & Royal Dutch Shell plc