The Times: Shell shock will be hard to dispel

25 May 04

SIR PHILIP WATTS may be expecting that his lawyers can prise a farewell of £1 million or more out of Shell but the company should refuse to hand it over until he hands back the missing oil.

Two restatements of reserves might be embarrassing but four just makes an organisation look inept. Yesterday’s latest revision from the company admitted that a staggering 4.47 billion barrels have vanished. Even a Saudi sheikh would notice if that much oil went missing. For Shell, whose accounts will now show proven reserves of only 14.35 billion barrels, a loss on this scale is, as the accountants would put it, significant.

Yesterday’s latest change was not: after all, 120 million barrels are easily mislaid. Changes in accounting policy, the result of discussions with the US Securities and Exchange Commission, lay behind the latest revisions.

However, when the new head of Shell’s exploration and production division says that there are no plans for further revisions of the figures, investors have little reason to be sanguine. The revelations that have poured out of Shell have left the City deeply shocked at the scale of the cover-up that had been conducted. Although the chairman who had been instrumental in it, Sir Philip, has now departed, along with the former head of exploration, there is still deep disquiet about the company. If the culture could have enabled such a state of affairs to persist, then merely changing a couple of faces is not going to be enough to safeguard investors’ interests.

Until there has been a drastic restructuring of Shell, there will be deep suspicions that the culture that allowed Sir Philip to dictate what happened will persist. The fact that the company has said it has no plans to change the auditors who signed off the accounts which, it now transpires, were so misleading, is also likely to cause concern. Valuing oil reserves is not a task easily undertaken by a City accountant but the scale of the discrepancies that have emerged does raise the issue of whether the auditors were rigorous enough in their questioning of those responsible for Shell’s imaginative valuations.

In the longer term, it may transpire that the writedowns now being made are erring on the conservative side and, actually, Shell is rather better reserved than it now looks. And since the company only replaced 63 per cent of its reserves in 2003, the seepage is set to continue, whatever the next valuations say.