The Wall Street Journal: Shell Report Blames Ex-Officials

For Energy-Reserve Overbooking

By ALEXEI BARRIONUEVO, SUSAN WARREN and CHIP CUMMINS

Staff Reporters of THE WALL STREET JOURNAL

April 12, 2004; Page A6

A draft report prepared by Royal Dutch/Shell Group's audit committee lays the blame for the oil giant's massive energy-reserve overbooking largely on Shell's former chairman, Philip Watts, and former exploration-and-production chief, Walter van de Vijver, according to two people familiar with the matter.

The report doesn't recommend any further changes within Shell's top management team, according to these people, though the boards of Shell's two parent companies haven't yet signed off on the report's findings and recommendations.

Shell's boards ousted Sir Philip and Mr. van de Vijver early last month. The draft report faults the two for failing to disclose the reserves problems early enough, according to a person familiar with the situation. Sir Philip's attorney declined to comment. Attempts to reach Mr. van de Vijver have been unsuccessful.

The report -- prepared by Shell's audit committee and a team of outside attorneys from law firm Davis Polk & Wardwell -- is currently circulating among board members and investigators. The full boards are scheduled to consider the report later this week.

On Jan. 9, Shell, one of the world's largest publicly traded oil producers, shocked investors by slashing its tally of oil and natural gas reserves by 20%. Last month, it trimmed its reserves again and delayed its annual report until the completion of further reserve reviews. Reserves are a key measure for investors of an oil company's performance and value. Investigators in Europe and the U.S., including the Securities and Exchange Commission, are probing the overstatements.

The document, more than 200 pages long, details how Shell officials made changes starting in the early 1990s that may have resulted in Shell managers and engineers feeling emboldened to inflate reserves without fear of consequence, according to a person familiar with the situation. Shell's management determined that the oil giant was too conservative in claiming reserves compared with its peers, according to two people familiar with the situation. Engineers and other managers appeared to have abused the relaxed internal rules to further their careers, and an effective internal auditing system wasn't in place to curb the abuses, one of these people said.

Current Shell Chairman Jeroen van der Veer and Judy Boynton, Shell's chief financial officer, have been under pressure in recent weeks to explain what they knew about the reserve overstatements before the company's disclosure in January. Last month, Mr. van der Veer said he had received written briefings about reserves "exposures" -- or potential overbooking of SEC-reported reserves -- but that he wasn't aware of any incorrect bookings. Ms. Boynton had also been warned about potential overbooking, according to people familiar with the situation.

Mr. van der Veer and Ms. Boynton have declined repeated requests for comment. A Shell spokesman declined to comment except to say that the company plans to make the review's main conclusions public once "management has had the opportunity to properly and thoroughly review the contents and implications of the group audit committee's final report."

While the report fails to assign blame to other, lower-level Shell managers, it does mention some other individuals by name. Decisions concerning those individuals will now fall to Mr. van der Veer. He has already announced a reorganization of financial and reserves-accounting personnel, including beefed up staffing and training as well as improved reserve-auditing procedures.

http://online.wsj.com/article/0,,SB108171843799679727,00.html