Financial Times: Shell shocks again
Mar 19, 2004
One thing that can be said for Royal Dutch/Shell is that it is getting quicker in confessing its problems. After having taken weeks, and maybe years according to some internal leaks, to bring itself to admit in January that it had over-booked its proved reserves to the tune of 3.9bn barrels, the Anglo-Dutch oil company yesterday again revised its reserves downward by another 470m barrels less than two weeks, by its own claim, after discovering the additional discrepancy.
But that does not make these surprises any more pleasant, and it feeds the impression of deep-seated structural problems at the company. Jeroen van der Veer, the Shell chairman, yesterday claimed "the reserve issue is not related to the structure of the group", and then he and his colleagues went on to make statements and announce internal management changes that showed precisely the opposite.
One problem for Shell in taking corrective action is simply the size of its operations in 145 countries around the world. The biggest single new problem to emerge yesterday was that Shell has had to "unbook" some 170m barrels of previously announced proved reserves from the Ormen Lange off Norway because it found it had not followed technical guidelines set by the US Securities and Exchange Commission, the acknowledged industry regulator. Shell confessed to particular disappointment because of "the attention this field has already received". But since this year's fast-track review has so far only covered 40 per cent of the group's upstream portfolio, what other nasty surprises may be in store? To prevent future problems, Shell now plans to retrain hundreds of its reserve assessors and auditors across the world on sticking to SEC guidelines.
Scale compounds Shell's reserve problem in another way. The bigger the oil company, the harder it has to work to replace production with reserves every year. And yesterday's reserve revisions now bring its reserve replacement ratio for 2003 down 16 percentage points to 82 per cent.
One reason for this poor performance, as Shell admitted yesterday, is that it has made too many scatter-shot investments in small fields simply because they were near existing infrastructure instead of concentrating on large frontier projects with bigger potential pay-off. And one of the reasons for this has been the group's decentralised structure with too many local upstream chiefs pushing for capital investment money to sustain their fiefs.
Despite Mr van der Veer's disclaimer about structure, he announced yesterday that reserve auditors and financial officers of Shell's operating companies would report directly to its group finance director and audit committee. Clearer reporting lines would obviously help the company in the future. But it also needs clearer leadership at the top, if it is to weather the regulatory investigations and lawsuits in which it finds itself on both sides of the Atlantic.