The Guardian: Shell forced to make fourth downgrade

Terry Macalister

Tuesday May 25, 2004

Oil stocks reduced again - as are 2003 profit figures

The reserves scandal that has been dogging Shell all year was back on centre stage yesterday as the company downgraded its figures for the fourth time.

The Anglo-Dutch group, which has already ousted three of its most senior directors, also cut the 2003 annual profit figures it published three months ago.

The 2001 profit figures have been reduced, too, in the set of accounts now finally signed off by the auditors. This means the delayed annual report can be published on Friday. Talks with American regulators on all these figures have still not been finalised, Shell admitted.

Malcolm Brinded, the group's new exploration director, said he was confident he would not have to come back to the market with another reserves downgrade, although he qualified this by saying he had learned "never to say never".

A further 103m barrels of oil equivalents have been sliced from the proved reserves as stated on December 31 2003, due to changes in the way Canadian assets have been booked.

This brings the total of reserves restated since the start of 2004 to 4.47bn barrels, and means the group's replacement ratio last year was 63 per cent.

Shell reported on February 5 that its 2003 net income was $12.7bn (£7.5bn), but yesterday it said this figure had been reduced to $12.5bn. Similarly, the 2001 figure was originally $10.85bn but this has been cut to $10.35bn, while the 2002 figure was increased from $9.4bn to $9.7bn. There was also a small financial downgrade attached to two "properties" believed to be in the North Sea, and overall production for 2003 was cut by 9m barrels of oil equivalents.

Chairman of the managing directors Jeroen van der Veer said publication of the annual report was an "important milestone" but he could give no date for when Shell might complete talks with the US securities and exchange commission. It needs to do this to file its 20-F, the equivalent of an annual report for the Wall Street watchdog.

Nor was Shell able to give any updates on investigations by the SEC into its previous filings. But it said it was cooperating fully and was anxious to put these setbacks behind it.

"This does nothing to boost confidence in the company," said a top analyst, who asked not to be named. "In many ways it raises more questions than it answers, because it highlights Shell has a different North American policy [on reporting reserves] than for the rest of the world."

The company's shares remained firm at 393p, having dropped from 540p since last summer. City analysts said the revelations were of no great consequence in financial terms but might further worry nervous investors. Fred Lucas, an analyst at Cazenove, believed the different announcements were a "minor positive" because a line had been drawn under the proven reserves recategorisation issue. "The associated impact on earnings [$256m] is as expected and small," he added.

So far the oil group has not set aside any special provisions to pay for the various legal claims being issued against it by angry shareholders but it is booking legal costs as they arise.

Friday's annual report will not contain details of any payments made to former chairman Sir Philip Watts and exploration director Walter van de Vijver, who left the firm, or to finance director Judy Boynton, who has been moved. The remuneration committee was still looking at this issue, the company said, implying that a severance pay-off has not been ruled out. With Shell not having completed its talks with the SEC, the City is crossing its fingers that there is nothing important to reveal.

The company has been trying to win back investor support recently by starting a share buyback initiative similar to that implemented some time ago by arch-rival BP.

Shell shocked investors in January when it first cut its proven oil and gas reserves by 20% - mainly in Nigeria and on Australia's Gorgon field. Since then it has gradually downgraded them further, with figures for the Ormen Lange field in Norway being changed to realign them with SEC requirements.

An internal report on the scandal published on April 21 concluded that Sir Philip and Mr van de Vijver had knowingly concealed problems from shareholders and regulators.

The report provided details of an email from Mr van d Vijver to Sir Philip written last November, in which he said: "I am becoming sick and tired about lying about the extent of our reserves issues and the downward revisions that need to be be done because of far too aggressive [or] optimistic bookings."

As long ago as September 2002, Mr van de Vijver wrote a "strictly confidential" personal note that was intended for the file. It reviewed Shell's decision to reduce production growth targets which disappointed the stock market in September 2001.

"The bottom line was that both reserves replacement and production growth were inflated: aggressive [and/or] premature reserves bookings provided the impression of higher growth rate than realistically possible," he concluded.

http://www.guardian.co.uk/business/story/0,3604,1223824,00.html