Los Angeles Times: SEC Probes Shell's Oil, Gas Report

By MARCY GORDON, AP Business Writer

March 11, 2004  

WASHINGTON — The Securities and Exchange Commission is investigating whether bonuses may have encouraged executives of Royal Dutch/Shell Group to overstate the company's oil and natural gas reserves, a person familiar with the inquiry said Thursday.

The SEC has been investigating the oil giant's accounting of its reserves since early January, when Shell unexpectedly announced that it was downgrading 20 percent, or 3.9 billion barrels, of its proved reserves to less certain, unproved categories. The agency is looking into the possible role of bonuses or other incentives for executives as part of that investigation, the person familiar with it said, speaking on condition of anonymity and confirming a report in Thursday's Wall Street Journal.

The SEC investigators are said to be examining the Anglo-Dutch company's tying of bonuses to its reported level of reserves and how many executives received the bonuses.

Proven oil and gas reserves are an important asset and are closely watched by investors as a key measure of an energy company's future profit potential.

After senior Shell executives -- including the new chairman installed by the company's directors because of the reserves debacle -- were warned two years ago that the company had inflated its reserves, they orchestrated a plan to hide the problem from investors, internal company documents show.

The executives were first told in a February 2002 memorandum that the company's accounting of reserves appeared inconsistent with SEC guidelines, according to documents described in a report Tuesday by The New York Times.

Five months later, executives devised an "external storyline" and "investor relations script" that aimed to "highlight major projects fueling growth" and downplay the importance of reserves as a measure of growth, The Times reported.

Spokesmen for the company have declined to discuss the documents cited by the newspaper or the SEC's investigation. Formally named Shell Transport and Trading Company PLC and Royal Dutch Petroleum, it is the world's third-largest publicly traded oil company.

The revelation that top executives may have conspired for nearly two years to sidestep the reserves shortfall has prompted some financial analysts to demand a wider overhaul of Shell management.