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The Scotsman: Watchdog accused in Shell saga



22 March 04


EDINBURGH-based oil analysts at Deutsche Bank have written to the US Securities and Exchange Commission criticising the way it requires oil companies to book their reserves - implying that Shell may not have been the only guilty party in its recent downgrades.


In a strongly worded letter that adds a new twist to the Shell saga, the bankís head of oil research, J J Traynor, accuses the Wall Street regulator of enforcing "outdated" and "costly" rules that lack clarity and show "extreme conservatism".


The highly respected Traynor goes on to warn that oil firms across the industry could be forced to downgrade their reserves following the outcome of the SECís review of Shell - a move that would send the sectorís shares into a tailspin.


The three-page letter concludes: "We believe that standard industry practice is now well in advance of your [the SECís] guidelines, and that companies today ... should not need to follow your regulations to record their reserves."


The letter also reveals that Deutsche Bank is querying the way another major oil company treats its reserves. The bank has been engaged in correspondence with the SEC, seeking clarification over the watchdogís rules in this specific case.


Shell admitted last Thursday it had made another substantial downgrade to its oil reserves - the second in three months - following an external review. It admitted that further revisions are possible and postponed the publication of its annual accounts.


It is now rumoured that KPMG, the Anglo-Dutch oil giantís joint auditor with PricewaterhouseCoopers, refused to sign off the accounts, citing concerns about the reliability of Shellís information. The accounting group was unavailable yesterday to confirm the speculation, which emerged over the weekend.


It has also emerged that four chairmen of FTSE 100 companies are embroiled in a multi-billion dollar lawsuit against Shell, brought by the class-action US law firm Milberg Weiss Bershad Hynes & Learch.


Maarten van der Bergh, of Lloyds TSB; Sir Mark Moody Stuart of Anglo American and Paul Skinner of Rio Tinto are all former Shell employees named in the lawsuit. Shellís current chairman of its committee of managing directors, Jeroen van der Veer, is also involved.


But while the lawsuit holds the four men responsible for Shellís woes, Deutsche Bankís letter suggests the open-ended nature of some of the SECís rules may be at least partly to blame for the reserves debacle.


It calls for greater transparency and clarity on such SEC rules as the accounting of reserves in join ventures; the use of probabilistic reserves - which has been standard industry practice for more than a decade - and the booking of certain liquid natural gas holdings.


The letter raises seven distinct problems with the SECís reserves standards for oil firms. The 20-strong Deutsche Bank unit, based on Queen Street in Edinburgh, has sent copies of the letter to its institutional clients and fund managers around the globe.


A meeting is set to take place today between some of those investors and members of Shellís board.


Lord Oxburgh, chairman of the UK arm of Shell, and non-executive director Sir Peter Burt, formerly of Bank of Scotland, will face a number of fund managers, co-ordinated by the Association of British Insurers.


It is believed that Standard Life Investments will be involved in the discussions. David Cumming, head of UK equities at the Edinburgh-based fund manager, has been closely involved in putting pressure on Shell to reform.

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