The Wall Street Journal: Shell Officials Kept Board in Dark

Directors Weren't Told

Until December of Problems

With Reserves From 2002

By CHIP CUMMINS

Staff Reporter of THE WALL STREET JOURNAL

March 10, 2004 7:28 a.m.; Page A3

(See Corrections & Amplifications item below.)

LONDON -- Top executives of Royal Dutch/Shell Group, despite being aware as early as 2002 of the company's reserve-accounting problems, didn't inform independent board members about them until the end of last year, said a person familiar with the situation.

The timing of that disclosure raises further questions about Shell's handling of a controversy that is the subject of a probe by U.S. securities regulators.

Members of Shell's audit committee -- made up of nonexecutive directors from Shell's two parent companies -- requested and received a "routine" briefing about the company's oil reserves as recently as October 2003. But the briefing, conducted by a senior finance executive in the company's exploration-and-production unit, didn't indicate that top executives of Shell were aware of large potential shortfalls in the company's tally of oil and natural-gas reserves, according to this person.

Instead, nonexecutive board members -- directors who don't hold management roles at the company -- were informed that there was an unspecified reserve problem only in late December, this person said. At the time, the directors were asked to attend emergency board meetings in early January to review the problems. After those meetings, on Jan. 9, Shell disclosed publicly that it would slash its tally of reserves by the equivalent of 3.9 billion barrels of oil, or about 20%. The news prompted an investigation by the Securities and Exchange Commission and a fall in Shell's share price.

Communications between top executives -- unearthed by an internal Shell investigation only after the Jan. 9 disclosure -- made it clear that Shell's former chairman, Philip Watts, and his top exploration-and-production deputy, Walter van de Vijver, along with subordinates of both men, knew of potential overbookings as early as February 2002, the person familiar with the situation said.

Oil companies that trade on U.S. equities markets file an annual reserve report to the SEC, listing how much hydrocarbon resources they believe they can economically pump and sell. A company's reserves are a key gauge for investors and analysts of its operating performance and future prospects.

After the company's audit committee briefed nonexecutive directors on the communications last week, the company's twin boards convened and unanimously voted to oust Sir Philip and Mr. van de Vijver. The communications were reported Monday in The Wall Street Journal.

One memo, described by two people familiar with it, was drafted on Feb. 11, 2002. It warned that about one billion barrels of oil-equivalent reserves appeared not to be in compliance with SEC guidelines.

Tuesday, the New York Times, citing memorandums and notes of executive discussions, reported that current senior executives -- including Jeroen van der Veer, who succeeded Sir Philip last week, and Judy Boynton, the chief financial officer -- were also advised about the possible overbookings in additional internal communications. The Times reported that in a July 2002 memorandum, senior executives came up with what the memo described as an "external storyline" and "investor relations script" to downplay the significance of reserves as a measure of company growth.

Mary Jo Jacobi, Shell's vice president for external affairs, declined to comment about what Shell executives knew about the reserve issue, pending disclosure of the key findings of an internal review, except to say that, "the audit committee has yet to reach conclusions or findings with respect to illegal activities."

But A.G. Jacobs, a director and chairman of the audit committee at Shell that is conducting the internal review of the reserve issue, said in a statement that the committee has recommended to the company's two boards and external auditors "that they should feel confident in relying on the representations of the group's current senior management."

He said documents and information gathered in the review are being provided to the SEC. "The review is still in progress," the statement said. "Its main conclusions will be made public."

Shell said that Mr. van der Veer and Ms. Boynton weren't available to comment. Attempts to contact Sir Philip and Mr. van de Vijver weren't successful.

Shell spokesmen have repeatedly declined to comment on the preliminary findings of the internal investigation. Mr. van der Veer told reporters in a conference call that Sir Philip and Mr. van de Vijver had lost the confidence of the board, but declined to say specifically if anyone had acted improperly.

Shares in Shell's two holding companies, Royal Dutch Petroleum of The Hague, Netherlands, and London-based Shell Transport & Trading Co., fell sharply after the Jan. 9 disclosure, but have since regained some of those losses. Analysts and investors, who have long criticized Shell for ineffective communications, have been frustrated by the halting action by Shell to clear the air since its disclosure.

In 4 p.m. composite trading on the New York Stock Exchange, American depositary receipts of Royal Dutch, which owns 60% of Shell, were at $50.01, off 43 cents. ADRs of Shell Transport & Trading, which owns 40% of Shell, were at $42.03, off 38 cents.

Corrections & Amplifications:

A.G. Jacobs, a director and chairman of the audit committee at Shell that is conducting the internal review of the reserve issue, said in a statement that the committee has recommended to the company's two boards and external auditors "that they should feel confident in relying on the representations of the group's current senior management." The article above incorrectly used the word "representatives" instead of "representations."