London Evening Standard: Shell bosses lied to the City

Jonathan Prynn and Steve Hawkes,

19 April 2004

THE City was rocked today when Shell admitted it had organised a campaign of lies to investors. In one of the biggest scandals to hit a major British company for almost 20 years, oil giant bosses confessed in an extraordinary statement.

Former executives, led by ex-chairman Sir Philip Watts, admitted they had repeatedly lied to investors about the true level of Shell's oil and gas reserves.

The scandal is certain to lead to a wave of legal cases from furious investors who believe they have lost billions as a result of a fall in Shell's share price since the overstatement of reserves became known in January.

There is also a possibility of criminal charges being brought against executives by American financial authorities.

The unfolding debacle also claimed a third senior scalp today. The Anglo-Dutch multi-national said chief financial officer Judith Boynton, one of Britain's most senior female industrialists, had 'stepped asideî. She will remain an adviser until June when she is expected to leave with a pay-off worth up to £1m.

The scandal is seen as one of the most damaging at any blue-chip British firm of its stature since the Guinness affair in the mid-Eighties. Shell is Britain's seventh largest public company and a pillar of the global business establishment.

The extraordinary statement to the Stock Exchange revealed how some of Britain's most respected industrialists orchestrated the huge deception of shareholders over at least seven years.

It revealed how senior executives had exchanged furious emails over what they should tell shareholders about projections of reserves.

In November last year the former head of Shell's oil exploration division, Walter van de Vijver, sent an email to his boss, ex-chairman Sir Philip Watts, saying: 'I am becoming sick and tired about lying about the extent of our reserves issues and the downward revisions that need to be done because of far too...optimistic bookings.'

Today's statement, which follows an internal inquiry by a leading US law firm, also revealed Mr van de Vijver ordered the destruction of a report drawn up for him on the overstatement of oil reserves.

The levels of 'proven' reserves disclosed by the company are hugely important for the City as they are one of the primary methods of valuing it and have a massive impact on the share price.

In January the company, the world's third biggest oil business, was forced to admit to investors that it was downgrading 3.9bn barrels of reserves, about 20% of its total, triggering a disastrous run on its shares. The downgrade was increased today to 4.35bn barrels after more than 100 of its oil and gas fields were reassessed.

The January disclosure caused a shareholder furore that led to the resignations of Sir Philip and Mr van de Vijver.

Today, Shell's joint chairmen, Aad Jacobs and Lord Oxburgh, said the internal report revealed 'disturbing deficiencies' in our past reserves reporting practices and the manner in which Shell dealt with these issues. We have accepted these difficult findings in full and have taken vigorous action...We believe this deals with our past mistakes and sets new standards for the future. Shell simply cannot allow this to happen again.'

However, Lord Oxburgh insisted there was no evidence of 'personal financial impropriety'.

The breathtaking scale of the scandal even forced Shell to issue an unprecedented statement reassuring shareholders of its financial health.

The report revealed huge internal failings. The group, which employs more than 100,000 people, had only one part-time member of staff checking its own claims about its reserves.

In a statement, the unnamed employee said: 'With hindsight I should have been more forceful...It would have been a clear break with all my predecessors and it probably would have cost me my job in those days, but I should have.'

It also revealed the levels of reserves help determine senior executives' remuneration. US regulators asked Shell not to release the full text of the report from Wall Street law firm Davis Polk and Wardwell while officials trawled the findings for evidence of possible criminal wrongdoing.

Fallen giant aims to regain credibility

SHELL may announce firm plans to abandon its dual-listed corporate structure as early as June, as the fallen giant looks to placate investors furious over the collapse in credibility at the company.

A working party has already begun 'exploring all possibilities for improving governance and structure', and a timetable for its conclusions will be given at Shell's delayed annual meeting in two months.

The tone is markedly different from chairman Jeroen van der Veer's defence of the company's century-old structure when taking over the top job just a month ago.

Investors have long attacked the group for its cumbersome nature and poor communications, and are now pushing for change as the reserves crisis leaves the once-proud business on its knees.

Shell is 60% owned by its Dutch side - Royal Dutch - with the balance held by the UK-listed entity Shell Transport & Trading. Both groups have boards, which in turn report to the main board - the committee of managing directors.

Robert Talbut, chief investment officer at ISIS Asset Management, welcomed today's moves by Shell as a sign the company was taking on board advice from institutional backers.

'I think it's a good thing and that it's a step in the right direction,' he said. 'It will be what investors want to hear and I think we are moving towards a streamlined operating structure.

'People feel Shell in its current form is cumbersome. There are too many individuals involved at the top level.'

©2004 Associated Newspapers Ltd. All rights reserved.

http://www.thisismoney.com/20040419/nm77111.html