The Sunday Times (UK): Anglo-Dutch oil giant casts off its old Shell: The recent reserves scandal and the subsequent pressure from shareholders have forced Shell finally to change its dual format.: “At the same time as it made the restructuring announcement, Shell warned yet again that it might have overstated the size of its oil reserves. Having already marked them down by about 4.5 billion barrels this year, the company admitted it was reviewing the status of another 900m barrels, with perhaps more to come as it continued an internal probe.” (ShellNews.net)
By Dominic O’Connell
October 31, 2004
THE DIRECTORS of Royal Dutch/Shell made short work of 100 years of corporate history last week. In a meeting on Wednesday they voted to abolish the two-nation structure that has governed the oil giant since 1901, and to recast it as an ordinary company.
In a last salute to Shell’s long life as a twin — it is a joint venture between Royal Dutch of the Netherlands and Shell Transport and Trading of the UK — the deal was delayed because it could not legally be completed at the meeting of the Dutch and English boards in London. According to company rules, the Dutch directors had to return home to rubber-stamp the deal.
The revamp was presented as a triumph. Lord Oxburgh, Shell Transport’s outgoing chairman and one of the directors who will leave as part of the restructuring, hailed the agreement as “a great day”. But a few minutes later his executives provided a timely reminder of the real reason for the shake-up. At the same time as it made the restructuring announcement, Shell warned yet again that it might have overstated the size of its oil reserves.
Having already marked them down by about 4.5 billion barrels this year, the company admitted it was reviewing the status of another 900m barrels, with perhaps more to come as it continued an internal probe.
It was the reserves debacle that led to last week’s historic abandonment of the company’s dual structure. Shell’s troubles began in January, when it shocked the market by disclosing that its proven reserves of oil — a key indicator of likely future profitability — were 20% smaller than thought. Since then, three further write-downs of reserves have trickled out, and several senior managers — notably Sir Philip Watts, UK chief executive, and Judy Boynton, UK finance director — have walked the plank.
Regulators on both sides of the Atlantic have taken a close interest in Shell’s statements on reserves, and probes have been launched by America’s Securities and Exchange Commission and Britain’s Financial Services Authority. Angry shareholders have also got in on the act — Shell is facing potential class-action law suits in America and strong pressure to change its unique corporate-governance structure.
Initially, Shell said the reserves problem was a one-off, caused by the actions of individuals, and rejected criticisms that its structure was antiquated and required reform. But in the face of shareholder revolt — the Association of British Insurers, the leading British institutional shareholder group, threatened to vote against key motions at the company’s annual meeting — it pledged to review its structure.
Lord Kerr, Shell’s transport director who led the review of the company’s structure and who will become deputy chairman of the merged group, admitted the reserves crisis had had “a catalytic effect”. “The changes would have happened at some point, but the reserves issue precipitated it,” he said.
Kerr said some 30 options for reform had been canvassed, and the most radical, the formation of a single company, had been chosen. “The management was very clear that was what they wanted, and the directors were unanimous in supporting it,” said Kerr.
The new company, Royal Dutch Shell, will have its operational headquarters in the Netherlands, but its primary listing will be in Britain. With a likely market capitalisation of about £100 billion, it could enter the FTSE 100 elite group of companies as No 2 behind rival BP.
Shell won plaudits from investors for coming up with a structure that preserved the existing tax status of Dutch and British shareholders. They will hold different classes of share, identical in all respects except their tax treatment. Shareholders in Royal Dutch will hold 60% of the merged company and Shell Transport investors 40%.
The split will continue on the board, with six of the 10 independent directors coming from the Dutch half. Aad Jacobs, chairman of Royal Dutch, will chair the new company, but will stand down in April 2006. The search for his successor has already begun.
All the old Shell management systems are now likely to be scrapped, starting with the committee of managing directors, the group that previously steered the group’s strategy in collegiate style.
“There will no longer be two sets of everything, as it has often felt in the past,” said Jeroen van der Veer, Royal Dutch’s chief executive, who will take the top executive job at the merged company. “We’ll be able to make faster, more focused decisions. And, of course, we’ll have checks and balances.”
Eric Knight, managing director of Knight Vinke Asset Management and a leading shareholder rebel, welcomed the changes. “There’s no major point they have not addressed, and they’ve come up with a very clever solution for the single-company structure. Shareholders were clear all along that management by committee just would not work.”
But the reserves problem continues to dog Shell. Last week’s caution over an additional 900m barrels resulted from a detailed scrutiny of just over half of the company’s reserves. Worryingly, it means the company can no longer stand by its guidance to investors on another crucial measure of oil-company performance — the rate of reserves replacement. Shell had forecast that it would replace between 60% and 80% of reserves this year, but it will not now know the final figure until February.
Malcolm Brinded, head of exploration and production, declined to give details of where the suspect 900m had been located — previous inquiries have centred on oilfields in Australia, Nigeria and Oman.
He said that although the reserves-replacement guidance was no longer valid, he was confident that Shell would replace 100% of reserves over the next four years.