Toronto Star: Shell reduces profit over reserves $276 million U.S. overstatement: “Filing reveals impact of debacle”: "inappropriate" accounting in other areas"

Jul. 3, 2004. 01:00 AM

WASHINGTON—The Royal/Dutch Shell Group says the overstatement of its proven oil and gas reserves resulted in profits being exaggerated by $276 million (U.S.).

Europe's second-largest oil company also said yesterday that "inappropriate" accounting in other areas resulted in profits being embellished by an additional $156 million.

The embarrassing admissions follow a series of disclosures that in total reduced the company's reported reserves by nearly a quarter and led to the departure of several top executives.

The biggest downward revision was for 2002, when the faulty accounting resulted in profits being overstated by $208 million. In 2001 the reduction was $56 million, in 2000 it was $122 million — and prior to 2000, it was $46 million.

The company disclosed the overstated profits in a filing with the Securities and Exchange Commission late yesterday. The company explained that in addition to the problematic reserves accounting, it had also made errors in the way it accounted for exploration costs, certain gas contracts and the earnings per share of its parent companies.

However, because of a change announced yesterday in the way Royal/Dutch Shell will now account for its inventories of oil and gas, the energy giant said its net income for 2002 was actually higher than previously reported — at $9.72 billion, up from $9.42 billion it reported in Feb., 2003.

In a string of four restatements that started in January, Shell has downgraded its proven reserves by 4.47 billion barrels, or 23 per cent.

Proven reserves are the amount of oil and gas a company expects to commercially pump to the surface. They are a crucial measure for investors of an oil company's performance and future value.

The reserves debacle led to the resignations of chairman Philip Watts, head of exploration and production Walter van de Vijver and chief financial officer Judy Boynton. It also drew the attention of regulators in the United States and Europe.

Shell has an unusual, bi-national structure in which Royal Dutch Petroleum Co. of the Netherlands controls 60 per cent of the group. Britain's Shell Transport & Trading Co. PLC holds the remaining 40 per cent.

Investors and analysts alike have blamed this cumbersome structure for the breakdown in governance that led to significant overstatements of the company's oil and gas reserves.

Newspapers have reported that a board memo warned of problems last fall.

Associated Press