Times Online: Shell fails to calm City fears

Report by Lucinda Kemeny

March 07, 2004

The unexpected resignation of the oil giant’s top duo has left suspicions that there is more bad news to come

THE announcement hit the screens just after 2pm last Wednesday. Sir Philip Watts, chairman of Royal Dutch/Shell, and his deputy in charge of exploration and production, Walter van de Vijver, had resigned.

The market did not wait for the details. “The witch is dead,” said one analyst as he watched the share price climb on the news.  

And so it seemed. A meeting of the non-executive and executive directors of Royal Dutch/ Shell — known internally as “the conference” — at the company’s headquarters in the Hague had concluded that the two had lost the confidence of the board.

It was not difficult at first glance to see why. Both men were partly responsible for the shocking announcement in January that Shell would have to wipe 20% off its proven oil reserves, a key measure of the company’s profitability.

America’s Securities and Exchange Commission (SEC) sets clear guidelines on this, stating that reserves can only be carried as proven if there is reasonable certainty that they can be delivered. Shell appeared to have broken the rules and the SEC announced that it would be launching an investigation.

But once the City had got over its surprise and initial delight at the resignations, reality dawned. Why had the company made such a dramatic move when, only four weeks before, Watts had told analysts and investors at the annual results conference in London that there was no question of him resigning? Shell compounded the mystery by releasing little detail about the departure of two men who had been at the company for so long that they were seen as the embodiment of Shell’s closed culture.

Rumour filled the void left by a lack of facts. “It’s a Dutch putsch,” said one investor, who saw the dismissals as a push by the Dutch company, which has a 60% shareholding in the group, to re-establish control.

Others said it was an extreme reaction to the SEC investigation because the company was paranoid about legal action by American investors. A class- action lawsuit is already being prepared by the American law firm Milberg Weiss and others could follow.

What is clear is that “the conference” had been debating the results of a review being carried out by a working party nominated by the group audit committee headed by non-executive director Sir Peter Burt, the new ITV chairman.

This “independent” body of six members had been asked to determine exactly how Shell had got it so wrong over the reserves. They are due to report in the next few weeks. As one oil specialist said: “The internal report was obviously enough to warrant firing people.”

But with Watts and Van de Vijver gone, what remains is a looming suspicion that more bad news is on the way. This feeling was strengthened last week during a hastily convened conference call on Friday morning with the new chairman, Jeroen van der Veer.

The company issued a statement on Thursday that the boards had found no evidence of illegal conduct and that “judgments were made in the past that would not be made today”. But repeated questioning of Van der Veer over the legality of the reserve bookings was met with a far more vague response.

“The reason they went was because the board believed, based on the facts of the audit committee, that a change in the leadership was necessary,” he said. “The work on the reserves recategorisation is continuing so I am not going to speculate if there was anything illegal.”

The volte-face was not lost on the market. By the close of trading on Friday, the shares had slid more than 7p to end at 374½p. Around the City, confusion reigned. After all, it was only four weeks ago that Watts shared the rostrum with Van de Vijver to announce the company’s results.

There he offered his heartfelt apologies for not being available when Shell made its January announcement that 20% of its oil reserves would have to be reclassified, sending the shares crashing 8% in one day. “I got it wrong,” he said.

Analysts and investors, although far from delighted, congratulated Watts on being open and appearing to be ready to listen to shareholders’ concerns.

One analyst said: “There is pressure to change from a double to a unified board because Shell is the most extreme of the Anglo-Dutch companies. At least Unilever has the same board members on both boards. It would go a long way towards improving transparency.”

Shareholders got the chance to put their case in the last few weeks as Royal Dutch/Shell’s senior management saw almost 50% of key investors.

It had seemed as if they were starting to make some progress. And yet, after all this, Watts has gone. Insiders went so far as to say that it was a shame because Watts was receptive to change and they favoured structural rather than management change.

One said: “The market would have tolerated Watts staying and the unification of the board. But the board has handed them two sacrifical lambs and not recognised that the market sees the lack of a unified board as the root cause of the underperformance.”

The ball is now in the court of the new management team, which includes both Van de Veer and Malcolm Brinded, now vice-chairman of the board of executive directors and responsible for the gas and power businesses, exploration and production.

Brinded is one of the few people who have gained from the reshuffle. He was largely written off as a future chief while Van De Vijver was still there because the Dutch board was seen to favour a Dutch chief after Watts. But given that Van de Veer will have to step down on reaching retirement age in 2008, Brinded’s name is already in the frame.

However, shareholders want more than just management changes, and the next few weeks will put the new chairman to an early test. He said that he was still open to change but there would be no quick decisions.

“There is an opinion that the dual structure prevents effective decision making. We will continue to listen and think carefully about what we should do. The logical time to do something is 2005,” he said.

Apart from shareholders, regulators are also breathing down his neck. Van de Veer confirmed that apart from the SEC, Shell has received questions from Euronext, the Amsterdam stock exchange.

The next few weeks will be critical. With the cloud of possible malpractice hanging about in the background, Van de Veer will need all the help he can get to ride out the storm ahead.