London Evening Standard: Fuel for thought over Shell

Anthony Hilton,

25 April 2004

Posted 26 April 04

THE people most likely to be feeling queasy after a week of astonishing revelations about Shell, and how it came to put an incorrect value on its reserves, might well be the insurers of Lloyd's of London. It looks increasingly likely that, somewhere down the line, they will be asked to pick up a large bill.

There are two routes to this conclusion. The first is that while much is made of the premise that valuing reserves is as much an art as a science, it is not total art. There are usually benchmarks. Either there is a signed-up customer for the product of a field or there is not - something that is particularly valid in the case of gas, where the cost and method of transportation to market is a major factor in the value ascribed to a field.

If there is a customer, there is a value. If not, in the case of gas, it is best to assume no value. Equally, it is relatively rare for large fields to be the province of one company. If there are other partners in a discovery, or in a neighbouring field with similar geology, they will also form a view of what their share of the reserves is worth, and valuations can be compared. Shell had partners where this tactic might have been employed.

This is where the auditors come in. One of the so far unanswered questions about Shell is the extent to which the auditors sought to challenge its valuations or verify them by reference to some of these external measures. The information is not publicly available but it may well turn out to be an important point.

It is probably only a matter of time before a disgruntled shareholder group comes looking for evidence that the auditors did not perform all the checks that might have been expected, and it will certainly seek to examine in detail the procedures to verify the accuracy of these valuations as it searches for a basis for legal action against the profession.

Even if it is not successful, there will be costs, which will ultimately fall on the insurance - either the inhouse insurance most of the big firms have or the external cover in places such as Lloyd's.

The other strand comes from the shareholder class actions that have already been launched against the company. It is early days yet in cases that might well drag on for years, and it is possible as time passes that the oil giant may try to transfer primary responsibility for the defence from its corporate self and to the shoulders of some of its past and present officers.

But whether or not that succeeds, it is likely that directors' errors and omissions policies, which again are a major staple of Lloyd's, will once again have to come into the picture. And to the extent that one day they may have to pay out, it will make directors' E&O cover even more scarce and expensive for everyone else.

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