THE WALL STREET JOURNAL: SEC Order Shows Many Involved In Shell Reserves Debacle: “administrative order confirms that the scandal touched many officials beyond the senior executives who have left the company” (ShellNews.net)

By JOHN M. BIERS

August 24, 2004 6:25 p.m.

Of DOW JONES NEWSWIRES

HOUSTON -- After months of quietly investigating the Royal Dutch/Shell (RD,SC) accounting scandal, U.S. regulators finally weighed in Tuesday, concluding in an official report that the company "knowingly or recklessly" misrepresented its oil and gas holdings.

The government disclosed no new bombshells, but a Securities and Exchange Commission administrative order confirms that the scandal touched many officials beyond the senior executives who have left the company. Shell neither confirmed nor denied the findings in a 19-page SEC order released in tandem with $125 million settlement.

Analysts said the SEC settlement, along with the departures of former Chairman Phil Watts and two other senior executives, frees Shell to move beyond the reserves scandal and address other weaknesses, including a lack of major discoveries. John S. Herold Inc. senior analyst Lysle Brinker predicted more executive departures may come once the company completes a much-needed review of its corporate structure.

"I think most people are satisfied, anticipating additional changes," Brinker said.

Watts and the company's head of exploration and production, Walter van de Vijver, were forced out of their jobs this spring following the first disclosure that Shell had overstated its proved reserves of oil and gas, a measure closely watched by investors as an indicator of oil companies' future prospects. The Anglo-Dutch company eventually reduced its reserves tally by more than a fifth, or 4.47 billion barrels.

Many Contributed To Flawed System

While the SEC order mentions no company official by name, it refers to a vast array of employees who played a role in creating a system that ultimately led to fraud.

For example, a Shell "value creation team" helped push through guidelines that boosted new reserves in 1998 by 40%. After Shell Nigeria managers alerted executives in January 2000 of problems, management froze new reserve additions but didn't order reserves debooked. And Shell's lone internal reserves auditor was sometimes "bullish" and encouraged officials to submit long-shot plans to support bookings for "otherwise uneconomic projects."

The SEC order also confirms that senior Shell executives still at the company made no effort to fix the system after they were alerted to problems. Shell made a "large, questionable" booking of reserves at the giant Kashagan project in Kazakhstan in September 2002, two months after senior executives discussed how the company had been "too aggressive in the past," according to minutes of a meeting cited by the SEC.

The SEC said Tuesday it continues to investigate "other individuals and entities," but an agency official declined to comment on remaining management. David Peavler, a branch chief at the SEC's Fort Worth office, pointed to a series of company-initiated reforms and said the agency generally takes a more lenient approach to companies that cooperate.

Shell "continues to have confidence in its current managing directors," spokesman Andy Corrigan said.

Nobody Cleared

The SEC order stops short of a company-initiated investigation that cleared remaining managers. The Shell review, conducted by outside counsel Davis Polk & Wardwell, said Watts and van de Vijver were "uniquely placed" on the matter, a conclusion that absolves current chairman Jeroen van der Veer and others who remain. The SEC order "does not address the responsibility of anyone," Peavler said. "By the same token, it doesn't absolve anybody."

Jim Halloran, an analyst with National City Private Client Group, which manages $33 billion in assets, praised Shell for taking steps to move beyond the reserves debacle and said the company couldn't function without some managers who were involved in some capacity.

But Halloran said Shell's lagging performance raises questions about remaining management. The Cleveland firm holds about a half million shares of Shell stock.

"I'm not confident they have the right people, not because they were implicated with the reserves problem, but because they came from the same culture as the people who were responsible," Halloran said.

-By John M. Biers, Dow Jones Newswires; 713-547-9214; john.biers@dowjones.com