The Times: Big reservations remain at Shell

By Robert Cole

April 20, 2004 

THE new top brass at Shell believe that a line can now be drawn under the reserving issue that has tormented the oil giant since January 9. It is possible that the narrow issue of how to define the size of Shell’s oil reserves is settled. The policies now put in place raise realistic hopes that the company can be more sure that future statements about its hydrocarbons paint an accurate picture.

There is very little chance, however, that yesterday’s revelations will put an end to the chaos that has reigned at Shell in recent months. From the start, the reserving issue, while important, was little more than a window through which investors and analysts, regulators and employees could see, in all its awful glory, the way one of the UK’s leading companies was managed. Or mismanaged.

After all, no one is ever going to be able to come up with a cast-iron system for defining, to any degree of accuracy, what the reserves of any oil company are at present or are likely to be at any point in the future. There will always be a degree of guesswork in interpreting the findings of scientific investigation. Adopting appropriately conservative assumptions is wise, but at the same time wrong impressions might be built by adopting policies that are too conservative. The key is to hedge any statements about reserves, or any other unknowables, with appropriate caveats.

Bigger issues remain far from resolution. Granted, three of the key protagonists in this sorry tale have been written out of the story as far as Shell’s day-to-day management is concerned. Notably the two men — Sir Philip Watts and Walter van der Vijver — on either side of the scandalous “lying” allegations laid by Mr Van der Vijver, are gone. But the assertion that certain senior managers might have wilfully misled colleagues and the market will carve an indelible mark on the reputation of the once-revered company.

Deep, and perfectly legitimate, concerns will centre on the nature of the culture prevailing within the organisation. Other Shell executives who remain with the company may be able to prove that they were outside the loop of controversy that has opened. But many will wonder whether the argument that apparently raged so hotly between Sir Philip and Mr Van der Vijver manifested itself in other ways that impeded, and will still impede, the development of the company in the coming months and years.

Concerns that civil or even criminal actions will be pursued will remain. They cast a pall over Shell that yesterday’s events do not clear.

Shell needs to do four things to set itself back on course. So far it has gone a long way to settling the reserves issue — although that may be the least important of the four things and it could yet come back to haunt the group. It has gone some way, but not even halfway, towards one of the three remaining issues. It needs to sort out its Anglo-Dutch structure. Welcome noises were made yesterday about accelerating the review of corporate governance. But firm action is required to clarify the command and control functions.

Shell also needs an injection of fresh executive blood at the highest level. It will probably be insufficient, moreover, to expect that the appointment of a permanent new finance director from outside Shell will be enough to satisfy on this front.

Most importantly of all, Shell has to find oil. If it was finding oil at respectable rates over the past five years, it is probable that the reserving issues would never have emerged. Sadly, however, there is little evidence that Shell has the capacity to find the all-important black stuff.

http://business.timesonline.co.uk/article/0,,8210-1081201,00.html