The Wall Street Journal: Ousters at Shell Fuel Questions About Its Accounting Systems

By CHIP CUMMINS and BHUSHAN BAHREE

Staff Reporters of THE WALL STREET JOURNAL

March 4, 2004; Page A13

Far from restoring investor confidence, the ouster of Royal Dutch/Shell Group's chairman and another top executive has raised more questions about the company's basic accounting and auditing systems and its sprawling corporate structure.

Shell's twin Dutch and British boards on Wednesday ousted Philip Watts from the top job at the oil titan and Walter van de Vijver as head of exploration and production. The surprise move was triggered by unspecified information provided to the two boards by an internal task force investigating Shell's recent admission that it sharply overstated its oil and natural-gas reserves.

Shell declined to comment on what the internal probe found, and Sir Philip and Mr. van de Vijver were unavailable for comment. A spokeswoman said Shell was unaware of any evidence of improper acts by employees, but she said Shell officials no longer would offer the blanket assertion that all employees necessarily acted in "good faith" in the reserve issue. The phrase had been used repeatedly by Shell to characterize employee actions related to the reserve overbooking.

Investor enthusiasm already has waned after a short-lived rally that immediately followed the departure of Sir Philip. At 4 p.m. in New York Stock Exchange composite trading Thursday, American depositary receipts of Royal Dutch Petroleum Co., of The Hague, Netherlands, were at $50.20, off 45 cents. Shell Transport & Trading Co., of London, was at $42.35, off 58 cents. Royal Dutch owns 60% of Shell; Shell Transport owns 40%.

Shell has been under pressure from shareholders in recent years to boost reserves, because the company trailed archrivals Exxon Mobil Corp. of Irving, Texas, and London-based BP PLC in so-called reserve replacement, the rate at which an oil company replaces the oil it pumps out of the ground. The rate is a widely followed gauge of an oil company's performance.

Shell's new chairman, Jeroen van der Veer, is expected to make his debut Friday in conference calls with analysts, investors and the media. But even as Mr. van der Veer lays out his vision for the company's future, internal investigators, regulators and a bevy of lawyers will be sifting through a complex audit trail of reserve bookings, stemming from as many as three dozen separate exploration-and-production businesses around the globe.

Until last year, many of those businesses operated as independent fiefs with large discretion over operating standards, according to industry analysts. Some of Shell's biggest troubles in recent years appear to have come to light, at least in part, because of a long and halting internal consolidation process begun in the late 1990s.

In the wake of its January disclosure that the company would slash its total reserve estimate 20%, executives said they stumbled across some of the overbookings because of internal efforts to centralize Shell's far-flung exploration and production, or upstream, businesses. Last year, the company consolidated about 35 separate upstream businesses into five geographical centers.

Shell officials said the internal team investigating the overbookings should finish its work in a matter of weeks. The group is being advised by U.S. law firm Davis, Polk & Wardwell, and will turn over its findings to the U.S. Securities and Exchange Commission, which has launched a formal probe.

Separately, Shell has hired Debevoise & Plimpton to represent it in front of the SEC. Ralph C. Ferrara, a former general counsel to the SEC, is part of that team.