The Wall Street Journal: Shell Estimate Ignored Warnings

Company Managers in 2000
Were Told Production Goal
Might Not Be Attainable

By CHIP CUMMINS and ALEXEI BARRIONUEVO
Staff Reporters of THE WALL STREET JOURNAL
April 1, 2004; Page A3 
 
Royal Dutch/Shell Group planners warned their bosses as early as 2000 that the oil giant risked disappointing financial markets with overly optimistic assumptions about exploration-and-production projects around the world, according to internal Shell documents.
 
The warnings, contained in a June 2000 internal presentation, are part of a body of company documents warning at least Shell's top managers of deep-seated problems emerging at the Anglo-Dutch oil giant, according to a person familiar with the situation. The presentation is one of a number of documents that internal investigators probing Shell's separate energy-reserve accounting issue have recently uncovered and turned over to U.S. regulators, according to this person.
 
The report is the latest in a series of documents to emerge that indicate senior Shell executives were warned about serious problems at the company long before they disclosed them publicly. At the time of presentation, Shell was struggling to keep up with its closest rivals in finding new oil and gas discoveries to replace the energy it was depleting through production.
 
Those documents, along with the June 2000 presentation, were included in an initial briefing given to independent board members in early March by internal investigators who are probing Shell's overbooking of energy reserves, according to this person. Shell's twin boards ousted Chairman Philip Watts and Walter van de Vijver, former head of exploration and production, following the briefing.
It isn't clear who drafted the presentation or which executives received it. Its title page refers to Shell's exploration and production "executive committee," or top management team.
 
Sir Philip's attorney declined to comment. Attempts to reach Mr. van de Vijver since his ouster have been unsuccessful. A Shell spokesman declined to comment on the document.
 
On Jan. 9, Shell said it would slash its tally of oil and natural gas reserves by 20%. Reserves are an important gauge for investors of an oil company's performance and value. As previously reported, Sir Philip and other top executives were warned about potential reserve overbooking in Shell's filings with the Securities and Exchange Commission as early as 2002, according to documents described to The Wall Street Journal and according to people familiar with the matter.
 
The June 2000 presentation, reviewed by The Wall Street Journal, paints a picture of a deeply troubled exploration-and-production unit, at a time when Sir Philip and other Shell executives were publicly painting a rosy picture of the operation's recent performance and potential. Sir Philip led Shell's exploration-and-production unit, or "upstream" business, from 1997 to 2001.
 
In particular, the presentation warned Shell might be unable to meet its closely followed growth targets for oil and gas production. But it wasn't until September 2001, shortly after Sir Philip took Shell's top job and Mr. van de Vijver succeeded him as head of Shell's upstream arm, that the company told investors and analysts it was significantly reducing those targets.
 
In the introductory pages of the presentation -- under the heading "The Bad News" -- the Shell analysts warned that executives "run the risk of initiating an over-promise, under-delivery cycle."
 
At the time, Shell was publicly portraying the upstream business as poised for continued growth. In a December 2000 slideshow for investors presented by Sir Philip, the company said its upstream business was "delivering on promises," including a commitment to boost annual oil and natural gas output by 5% between 2000 to 2005.
 
But internally, Shell planners had already warned senior managers about significant problems, according to the presentation. In one page of the June 2000 document, titled "Exploration: Overstated Delivery?" Shell's own analysts wrote that internal estimates for initial oil production at a number of projects are "very optimistic and unrelated to historical performances." The presentation went on to cite a number of new projects with "possibly overstated value promises."
 
The Shell analysts questioned in the presentation whether Shell could deliver on its production-growth targets even as output from existing fields was decreasing by 10% each year. That decline came at the same time that planners raised questions about how funds were being allocated among exploration-and-production projects, the presentation said. "Growth in production is a major challenge," the presentation concluded in its summary.
 
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