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The Sunday Telegraph: Shell board shocked by devastating report


By Sylvia Pfeifer (Filed: 07/03/2004)


The interim audit review for Shell into the company's shock overbooking of reserves is believed to have concluded that the grave error was either the result of a breakdown of management control or an act of bad faith.


The dramatic findings of the report were the trigger which forced the Anglo-Dutch oil giant to oust Sir Philip Watts as its chairman last week.


Shell's Dutch supervisory board and the company's non-executive directors are understood to have lost confidence in Watts and Walter van de Vijver, the former head of exploration, because the two were responsible under US legislation for signing certificates which covered all the group's reserves. Van de Vijver was also forced to resign last week.


The review - prepared by an external counsel for Shell's group audit committee - is not expected to complete its investigation for another few weeks.


But the revelation of its interim findings will increase the pressure on Shell to clarify exactly what led to the overbookings which forced the company to admit in January that it had overstated its proven oil and gas reserves by 20 per cent.


It will also add to shareholder concerns about just how stringent the controls surrounding the booking of reserves had been at Shell between 1996 and 2002 when the mistakes occurred. Watts was Shell's head of exploration and production from 1997 to 2001 and so responsible for the booking of reserves.


Last week Watt's successor, Jeroen van der Veer, declined to comment on the findings, saying only that the boards' loss of confidence in the two executives had led to their departures. He stressed that the review was continuing and that "in the circumstance, I like to be prudent".


A Shell spokeswoman this weekend said: "We have said publicly that it was a lack of confidence in the directors that led to them being asked to resign. With regards to the interim report, we have no more detail to give at this time."


The interim report was presented to members of the supervisory board of Royal Dutch and Shell non-executive directors at a meeting in The Hague last Wednesday. It is understood that it was decided at the meeting to ask for the resignations of both Watts and van de Vijver. Neither was present at the time.


Last week van der Veer said the results of the review would be passed to the Securities and Exchange Commission, the US regulator, which has launched its own investigation. Shell says the review will be made public so that investors could see exactly what had taken place.


News of Watts' and van de Vijver's departures last Wednesday took investors by surprise. Watts had only recently told analysts and investors that he had the full backing of the board to remain chairman.


"It takes a Kremlinologist to work out what is going on," said one leading investor last week. "They may think they have made a bold move but, given that they haven't explained it, all it will do is make investors nervous about Shell's motives."

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