Royal Dutch Shell Group .com

The Sunday Telegraph: It happened on my watch. I am determined to fix it'

By Sylvia Pfeifer and Robert Peston

(Filed: 08/02/2004)


Shell chairman Sir Philip Watts is resisting pressure to quit following the oil giant's devaluation of its reserves. In an exclusive interview he tells Sylvia Pfeifer and Robert Peston why


They sought him here, they sought him there - and last week the Telegraph finally tracked down Sir Philip Watts, the 58-year-old chairman of Shell.


In an interview held in a dowdy room in a distinctly unglamorous London business hotel, Watts was remorseful about the sins of the past but determined to battle on and to restore his reputation and that of the world's third largest oil company.


Sir Philip Watts: says he has learned serious lessons from this episode

Inevitably, he began with a mea culpa for not being around on January 9 to explain to shareholders and analysts why Shell was reducing the value of its proven oil and gas reserves by a shocking 20 per cent (or, to put it another way, why it had overstated these reserves by a quarter).


What on earth made him think that the owners of his business wouldn't want him to explain this dreadful disclosure? He is elliptical: "The decision was taken, I wasn't there on the day. I may have all kinds of perfectly logical explanations, but I wasn't there. I regret it and I am actually sorry for that."


Then, of course, there is the more material question of how the group managed to overstate its assets quite so substantially. And what prompted the review that uncovered the mistake?


He says alarm bells rang when the company noticed that production in Nigeria was not increasing as fast as expected and that output in Oman was starting to decline.


"Both revealed lack of project maturity for sustaining the production profiles," Watts says, in an accent that he describes as midway between Leicester (where he grew up) and Leeds (where he spent some formative years).


An assessment of two countries then became global. "In December, as soon as this thing came to my attention, this was a matter of all hands on deck," he says. "I remember issuing the watchwords 'get the facts and do the right thing'. And that's what we did in an absolutely intense period through to January 9.


"The challenge was to disclose it as soon as we possibly could, but on the other hand we needed to do enough work to get sufficient certainty . . . The last thing we wanted to do was to compound a mistake with a mistake."


But what does he have to say about the most controversial of the reserve downgrades, relating to Shell's interest in Gorgon, a huge field in Australia? In this case, Shell had booked reserves in 1997 while its partners - ExxonMobil and ChevronTexaco, the operator - did not.


"I think people in 1997 did what they thought was right at the time," he says. "Now if you look from today, with the wisdom of hindsight, according to the stricter guidelines which we have, judgments were made then that we would do differently now."


And what about his own involvement? At the time, he was in charge of exploration and production (E&P) for Shell. Does he remember querying whether it was right to book the Gorgon reserves?


"I was the non-executive chairman of the E&P business committee at that time and the reality is that if you are in charge you have personal accountability," he says. But he adds: "As you can imagine, it's been a number of years [since then]. In any one year there's lots of things. I just don't specifically remember that one."


It may seem slightly odd that he can't remember the episode, since the Gorgon find was pretty important to Shell. The company's additions to net reserves were some 2.1 billion barrels in 1997, implying that the Australian field accounted for about a quarter of the entire reserves growth that year.


Anyway, he accepts that a bad mistake was made. "You can well imagine that looking back from today, I find it frankly distressing and disappointing for the shareholders, but . . . you rely on audits, assurance processes."


Apparently, however, there is a silver lining: "I think there are very serious lessons to be learned from this episode. I wouldn't want to rush to judgment today on those lessons . . . We have to learn from the process and it's a pretty tough, painful learning process. I do think in the end that Shell will be stronger for this."


Meanwhile, the Securities and Exchange Commission is assessing the gravity of Shell's mis-statement of its historic figures and a series of class actions have been launched in the US by disgruntled shareholders against company directors.


But even though the group's market value has fallen by 12 billion or more than 12 per cent since January 9, Watts is confident he will be able to demonstrate that he and his colleagues acted properly.


He says: "When this thing arose on the 9th, we made our first submissions to the SEC. We've been completely open and transparent with them, totally co-operative."


If surviving the regulatory and legal buffetting were not enough, Watts is simultaneously facing demands from shareholders to streamline and simplify the complicated structure of the group - which has two top companies, Royal Dutch of the Netherlands and Shell of the UK, and a complex and unconventional board structure that reflects this dual corporate personality.


How's he responding to this pressure? "You won't be surprised that they [shareholders] are already having conversations with our non-exec directors. And over the next three weeks I will be on the road in a series of one-to-one meetings with investors."


But would it be right to unify the top companies? He says that - in a relatively inconspicuous way - he has already put in place a more rational divisional structure and created a single top executive team. "I don't feel in any way constrained by the two parents to do what we need to do, but if that perception is . . . affecting the share price and shareholder value, then we've got to somehow overcome that."


Then there is the most painful question of all. Why have Shell's shares underperformed those of its arch-rival BP since he took the helm in 2001?


Watts's answer is that "we've had a lot to do in the last few years . . . We've got to upgrade the portfolio and we're absolutely unremitting about weeding out underperformance".


"The other strategic drive is that we have to establish what I call the strategic legacy positions of the future [or create huge energy reserves] . . . My ambition for when I leave Shell is to leave the legacies of the future," he adds.


Surely, though, in the past few weeks he pondered quitting earlier than his scheduled retirement date in the middle of next year. Did he think about following the lead of Greg Dyke, the former director-general of the BBC, by tendering his resignation to the board?


"If something like this happens, you can imagine that this is personally more than disappointing . . . and you ask yourself 'what is the best thing to do'. I made up my mind that I was willing and actually determined to get this matter put right.


"It happened on my watch. I am determined to fix it, I am in a position to do so, it is a painful process."


But did he actually offer to go? "What I said was each of us has a fiduciary duty to the company. I think my duty is to press on and get this situation fixed and they [the board] expressed their wholehearted support in my doing it."

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