Financial Times: Shell it out

Published: March 12 2004 4:00 |

Royal Dutch/Shell's massive cut in its proved oil and gas reserves has cost it a reputation for cautious solidity built up over nearly a century. It is now losing its reputation for secretiveness in the worst possible way, through leaks of internal memos apparently showing that top executives still in place knew of the reserve discrepancy as long ago as 2002.

Non-executives on the group's audit committee have now prepared a preliminary report into how Shell came to book improperly some 3.9bn barrels of oil and gas equivalent as proved. They are to make their completed report public in a few weeks, when they present it to investigators from the US Securities and Exchange Commission. Though the launching of class action shareholder suits against it in the US may be an inhibiting factor, Shell should release its audit report as a matter of urgency to remove the shadow its behaviour over reserves has cast.

As always, the big question is: who knew what, and when? Clearly something very serious went wrong for the board of Shell's two parent companies to have deposed its two top executives and for the group to have dropped its claim that the dubious reserves had been booked "in good faith". But partial leaks may do Shell a disservice. They indicate Jeroen van der Veer, Shell's new head, and Judy Boynton, his finance director, may have known of the reserve problem in early 2002, and apparent mention in a memo later that year of the need to develop "an external storyline" and "an investor relations script" suggests a cover-up.

But the real issue may be, not when did Shell's top brass first have an inkling of a discrepancy, but when did they have sufficient certainty of its extent as to make their obligation to disclose it inescapable? The second moment may have come well after the first, in a group with a vast portfolio of reserves and operating in 145 countries.

Shell and the SEC must also search for contributory factors for the over-booking. One was the way Shell used to leave reserve decisions to local managers. Other factors may be pay bonuses and tax breaks in some countries giving Shell executives undue incentives to book reserves. Looking to the future, Shell needs to strengthen the role of non-executives in its corporate structure. It has put a non-executive into the chair of Shell Transport and Trading, as happens at the other parent company, Royal Dutch. But it should also abandon its tradition of appointing former group heads as non-executive directors on the parent boards. Their presence surely acts as a damper on scrutiny of their legacy.

With the group down, some Shell shareholders also see an opportunity to kick it into a different shape. It is certainly the longest unconsummated merger ever, dating from 1907, and transparency might well be increased if the two parent companies fused. But we should not have to wait for Shell to become a "normal" company for its corporate governance to improve.