expatica.com: Will Shell sink or swim? Scandals, firings, fines and angry shareholders – it's been a tough year at Royal Dutch/Shell. As the energy giant prepares to make the Netherlands its world headquarters, Jennifer Hamm takes a look at the challenges the company will face in 2005. (ShellNews.net) 28 Jan 05
(Jennifer Hamm is a freelance journalist based in the Netherlands.)
From a scandal of mis-statement of its reserves to the largest management shake-up in the company's history, 2004 has not been kind to Royal Dutch/Shell.
"It's a year they'll be glad to see the back of," said Bruce Evers, an analyst at Investec in London.
The Anglo-Dutch oil and energy giant has a number of New Year's resolutions it hopes to make good on. By mid-2005, it plans to abolish its dual ownership structure made up of Royal Dutch Petroleum and Shell Transport &Trading, emerging as Royal Dutch Shell.
The single company will have its global headquarters in the Netherlands, with one board of directors and one chairman.
Some 200 managers and senior employees will be sent its main office in The Hague. Though a date for the relocation has not been set, it is expected after shareholder's vote on unification at next summer's annual general meeting.
Analysts agree that the unified company should streamline decision-making and accountability. But the new Royal Dutch Shell will still have to overcome a far greater obstacle.
"The key problem for the company is to find oil and gas again and to boost the production profile in the longer term," said Evers.
With the best geologists and engineers in the industry as well as a solid balance sheet and cash flow, Evers said Royal Dutch/Shell is well positioned to do so.
"There isn't going to be a quick fix," he said. "Rome wasn't built in a day and Shell is not going to be able to build its upstream [production] portfolio in a day. Shareholders are going to have to be patient."
In 2004, however, they were not. The announcement in January that the company cut its proven oil reserves by one-fifth angered shareholders. Their ire was raised further by the absence of chairman Sir Philip Watts during the conference call to explain the error.
"There is a sensitivity in the marketplace that says, 'Don't screw around with us. Tell us the way it is,'" said Fariborz Ghadar, director of the Center for Global Business Studies at Pennsylvania State University.
In the post-Enron environment, the reserves debacle was exacerbated by the fact that Shell has long had a reputation as being one of the "good guys" in the industry, said Ghadar.
By early March, Watts was forced to resign by Shell's board, who replaced him with Jeroen van der Veer, president of Royal Dutch Petroleum.
Since then, there have been further reserves cuts and some analysts speculate there could be more before or when the final results are released next year.
The reserves scandal also led to fines totalling £17 million (EUR 24.6 million) by the Financial Services Authority in the UK and $120 million (EUR 90 million) by US Securities and Exchange Commission. Both regulators have indicated they are still investigating key individuals, such as Watts.
Protests in Nigeria renewed attention to an ongoing dispute between Royal Dutch/Shell and a local group. Members of the Ogoni ethnic group contend Shell brought in and has refused to remove military troops that have been occupying its land. Shell denies any role in the troop deployment and maintains a commitment to resolving Ogoni concerns.
(Ogoni leader Ken Saro-Wiwa was hanged after what many say was a show trial)
But thousands of Ogoni activists were tear-gassed by police in November when they staged a protest in front of Shell's Nigerian headquarters.
With a presence in over 145 countries and territories worldwide, Shell can expect to have problems in one or two areas, said Ghadar of Penn State University. The events in Nigeria are only a small item on a longer list of issues that have rocked the oil industry in the last year. Political uncertainty in Venezuela, the war in Iraq and the Yukos scandal in Russia have contributed to a tense, erratic marketplace, said Ghadar.
"We're operating at very, very little margin of error in the capacity situation," he said.
In an effort to increase capacity and restore investor confidence at Royal Dutch/Shell, Van der Veer announced plans in September to invest $45 million (EUR 33.8 million) and sell off $12 million (EUR 9 million) in under-performing assets.
"We are focused on improving our competitive position, strong cash generation and total shareholder returns," said Van der Veer at the briefing in London. "Replacing our reserves is a priority to support future growth."
As it prepares to unify next summer, Shell faces a long road. Nonetheless, Ghadar said the company is doing "exactly what needs to be done."
"One thing that they need to do is come clean with all the facts. And they've done that," he said. "Or at least we believe that they've done that."
Royal Dutch/Shell Timeline
January 2004: Announcement
Shell overstated reserves by
20 percent
March 2004: Chairman Sir
Philip Watts resigns
July 2004: Penalties of nearly
€115 million in US and UK as
a result of the reserves scandal
October 2004: Royal Dutch
Petroleum and Shell Transport
& Trading announce intention
to unify under a single parent
company, to be called
Royal Dutch Shell
February 2005: Fourth Quarter
results and final reserves
re-calculation
June 28 2005: Annual General
Meeting scheduled, shareholders
will vote on unification
July 2005: Unification scheduled
for completion