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The Scotsman: Shell's reputation left in tatters    

 

Martin Flanagan

Wed 21 Apr 2004

 

SHELLís reputation is in tatters. The little faith that remained in the company in the wake of its reserves over-booking scandal has now been decimated by the internal e-mails sent between senior, now-ousted, directors admitting to "lying" about the problem.

 

Therefore it was a case of wishful thinking this week when new chairman Jeroen van der Veer suggested the independent report into the chronic reserves fiasco by American lawyers Davis Polk & Wardell had "drawn a line" under the affair.

 

Rather, it could well turn out to be disaster by a hundred oil spills, as the 450-page report for Shellís audit committee has raised as many questions as it has answered.

 

The dirty washing is still blowing on the line from the initial overbooking of 3.9 billion barrels of "proven" reserves - 20 per cent of the groupís total - that then had to be switched to "probable" reserves. This made them much less certain of commercial exploitation and, therefore, less likely to influence the City positively.

 

Since then, Shell has announced the thick end of another one billion barrels of over-booked reserves. In addition, three top executives have been forced to walk the plank: former chairman Sir Philip Watts, former head of exploration and development (E&P) Walter van de Vijver, and chief financial officer Judy Boynton.

 

Van de Vijverís increasingly shrill e-mails to Sir Philip and other colleagues on his concerns about the reserves overstatement, outlined in Mondayís report, have taken the scandal on to a new plane.

 

However, even he does not emerge lily-white. Van de Vijver may have wanted to blow the whistle earlier, but another e-mail shows him wanting to take the whistle out of his mouth as he urged colleagues to destroy a "dynamite" report suggesting that Shell should come clean with the City late last year.

 

The famously tough US regulator, the Securities and Exchanges Commission, is investigating Shell, and the obvious conclusion of the companyís commissioned report is that the equivocation and hubristic ambition went right to the top.

 

There has even been commentary that Sir Philip, Van de Vijverís predecessor as head of E&P at the group, effectively "booked" his way to the top job.

 

It is thought the SEC is also particularly interested in the revelation that the bonuses of some senior management at Shell were directly linked to the level of reserves booked. However, the company has sought to play this down. Malcolm Brinded, the new head of E&P at Shell, said: "I think that we would say that at senior management level, itís unlikely that anybody effectively received more than 5 per cent of their salary in relation to a bonus associated with reserves."

 

The company also says that no staff now involved in booking or auditing reserves have reserves as a component part of their bonus.

 

However, what cannot be denied is that senior directors knew for nearly two years about the overbooking problem before it was announced to a stunned stock market in January of this year. Speculation is rising now not only as to how hard the SEC may come down on the beleaguered oil giant, but also whether criminal charges may be in the offing Š la Enron - a scandal of mis-reporting of only slightly older vintage.

 

A Shell spokesman would only say yesterday: "Our lawyers have made no comment on possible criminal charges. All we have said is that we have retained external counsel and will respond in due course."

 

Meanwhile, it is understood that class action legal moves are growing apace in the litigious US as lawyers scent blood in the water following the seismic Davis Polk & Wardell tome, of which interestingly we have only seen expurgated, if racy, highlights. Shell confirmed yesterday that it was aware of 15 class action lawsuits pending against it.

 

It may be vastly significant that it is understood the SEC and the US Department of Justice specifically asked Shell not to make the whole report public, as they may wish to pursue these darker inquiries away from the public hoopla.

 

Shell has tried to put the best face on it. It says it accepts the reportís findings and that it will institute a new reserves reporting regime, with greater transparency, controls and the scrutiny of outside consultants.

 

The company also says it will speed up its overall review of its corporate governance, with an increasing number of Shell- watchers believing that this will eventually lead to an end to its unpopular dual listing in London and Amsterdam.

 

Currently, Shell Transport and Trading is listed in London, while Royal Dutch is listed in the Netherlands, splitting ownership of the parent company 40 and 60 per cent respectively.

 

Insiders say that there are no sacred cows in the review, including the possibility of having a streamlined Shell, with a single head office in London and a sole stock market listing in London as well.

 

It has been said that this could be achieved by ST&T taking over Royal Dutch, but with an even split of the top jobs. Such a structure would at least make easier the job of non-executives in keeping an eye on squabbling executives with an almost Beckhamesque penchant for tension release via electronic means.

 

However, the oil giant yesterday stonewalled questions about such a scenario. "We are not commenting," said a spokeswoman.

 

Many City analysts would also like to see an end to the committee of managing directors at a company widely seen as a bureaucratic monolith.

 

Ironically, some would say that Shell has been brought low by the system for which it was once lauded: a multi-national that decentralised a lot of decision-making to local talent. That system, however, came unstuck in the reserves debacle.

 

But while a more transparent and less bureaucratically faceless Shell will be welcomed by the City, it can only go so far in repairing a shell-shocked share price.

 

The stock plunged from 419p to 346p in the wake of the initial reserves overbooking announcement in January, slashing hundreds of millions of pounds from Shellís stock market value. Last night the shares closed down 0.75p at 389p.

 

The truth is that this weekís report in the medium term worsens the oil giantís potential entanglements with both the SEC and litigious shareholders.

 

That continuing uncertainty can only continue to weigh on the share price, particularly as dumbstruck institutional investors cannot help to be impressed that, after a few hiccups on reporting procedures last year, Shellís rival BP can seemingly do no wrong at present.

 

By contrast, in terms of luck and judgment, it looks like Shell could not hit a cowís behind with a banjo at present.

 

Scottish oil and gas group Cairn Energy yesterday announced its third major oil find on the field in Rajasthan in India that it bought from Shell for just £4 million two years ago.

 

The blow to Shellís earnings from the affair has not been major, tens of millions rather than hundreds.

 

But image? Thatís a different matter. For some time to come, it may well be that the companyís unofficial slogan will be "You Can Be Sceptical of Shell".

 

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http://business.scotsman.com/index.cfm?id=446962004

 


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