Financial Times: Retired Shell engineer played central role: “the company had been engaged in accounting manoeuvres since 1997-98, including a flawed internal audit function” (ShellNews.net)

By Adrian Michaels in New York and Carola Hoyos and Andrew Parker in London

Posted 30 August 2004

US and UK regulators on Tuesday went several steps further than Royal Dutch/Shell in their dissection of what went wrong.

The Anglo-Dutch oil group had already presented the main findings of an internal investigation in April into its reserves debacle.

That report heavily criticised dismissed senior executives - Walter van de Vijver, the former head of exploration, and Sir Philip Watts, former chairman. But it had less to say on how the company had been engaged in accounting manoeuvres since 1997-98, including a flawed internal audit function. The US's Securities and Exchange Commission and the UK's Financial Services Authority delve into the origin of the problems. “

In 1998 Shell revised its internal [reserve] guidelines,” the SEC's legal papers state, referring to a new technical methodology that was used to determine how much of the reserves in “mature” fields could be classified as “proved” and therefore likely to be fully exploited.

“This guideline revision added substantial volumes to Shell's reported proved reserves. For instance, nearly 40 per cent of the total proved reserves Shell added in 1998 resulted from this guideline revision.”

The SEC is scathing about Shell's advice that it had changed its mathematics, saying in its 1998 report only that estimation methods “have been refined”.

A key figure, named only by job title in the reports, is Anton Barendregt, group reserves auditor.

“Shell's decentralised system required an effective internal reserves audit function,” both regulators write. “Shell had engaged as [group reserves auditor] a retired Shell petroleum engineer - who worked only part time and was provided with limited resources and no staff - to audit its vast worldwide operations.”

Mr Barendregt, the SEC says, “failed to act independently”, sometimes being more upbeat about reserves than local management. “At other times, solely to support booking proved reserves for otherwise uneconomic projects, he advised local management to submit development plans that were unlikely ever to be executed.”

He visited each operating unit only once every four or more years, and did not issue an unsatisfactory notice on whether any unit's reserves met group guidelines.

But Mr Barendregt is portrayed also as someone trying to operate as well as possible in a bad system, repeating concerns about reserves in three internal annual reports from 2000 without prompting the company to write down reserves.

The FSA says his report on 1999 reserves, dated February 2000, stated that there were licence expiry problems that were jeopardising reserve viability. Proved reserve figures could be supported only through “significant aspirational upturns”.

The management of the exploration division, the SEC says, “forcefully rejected” ideas that its reserve replacement ratio - a key figure that can sway investor sentiment - for 1999 should be 37 per cent, “and instead caused Shell to report a 56 per cent RRR for that year”.

The report criticises the company for its slowness in correcting problems. It in some way clears the company's non-executive directors, including the group audit committee, saying they were not provided with the right information.

Instead, the blame for slow reactions is mostly put on some of the senior executives no longer with the company. Again, they are named only by job title. By the end of 2001, the regulators state, in agreement with the company's own investigation, that Shell's failure to debook reserves had been identified as inconsistent with SEC rules.

But there is exasperation in the SEC's complaint. By the summer of 2003, it said, Shell's analysis of reserves exposures had made progress, but still no de-bookings had been recommended.

Andrew Procter, director of enforcement at the FSA, echoed this view: “The FSA views timely and accurate disclosure to shareholders as fundamental to maintaining the integrity of the UK's financial markets.”