The Financial Times: Shell forced to hold back annual report

By Ian Bickerton in Amsterdam and Carola Hoyos in London

Published: March 18 2004 18:50 | Last Updated: March 18 2004 18:50  

By late on Wednesday afternoon, most Royal Dutch/Shell executives in The Hague were making what they thought would be the final minor adjustments to the oil group's annual report, which they expected to be published on Friday.

It was, one insider quipped, "probably the ninth" redrafting since January 9, when the company was forced to slash its oil and gas reserves following rulings by the US Securities and Exchange Commission.

Few people - even at very senior level - expected a tenth revision. By Thursday afternoon it was clear that would indeed be necessary.

The announcement, reflecting the revision of "proved" reserves, was "disappointing and embarrassing", according to Malcolm Brinded, Shell's new head of exploration and production. "This is not an exact science but it is up to us to get it right. We can and should have done better."

But at the highest level it had become clear that no annual report could be published on Thursday. The required filing to the SEC would have revealed the reserves restatement.

It was during the finalisation of the company's SEC filing, that the error relating to reserves in a Norwegian gas field was unearthed.

"Concerns arose two weeks ago," said Mr Brinded. "We realised the implications and had to come with clarity today."

Jeroen van der Veer, Royal Dutch/Shell chairman, on Thursday acknowledged that the main question for most investors and analysts was "How could this happen after the major reductions announced in January?"

"These latest recategorisations are primarily technical in nature and the key issue is the criteria [allowed by the SEC for booking reserves]," he said.

It is in stark contrast to the misjudgments revealed on January 9 that prompted Shell to slash 3.9bn barrels, or 20 per cent of its reserves. Those misjudgements had been over whether the fields were ready to be developed under the SEC's guidelines, which state that companies must be more than 90 per cent certain the fields they booked as proved can be developed under existing economic, political and technical conditions.

In the case of Thursday's revisions, Ryder Scott, the US consultants, found that Shell had used seismic 3D mapping and other technology not deemed appropriate by the SEC to determine proved reserves volumes.

The revelation was especially embarrassing because it came to light over a field Shell had cut from its booked reserves in January and was intending to add back in its 2003 filings.

The issue could not be swept under the carpet because Shell had told investors at a February 5 analyst meeting that it had replaced 98 per cent of its proved reserves in 2003 and planned to file them with the SEC today. With Thursday's revision that number drops by 16 percentage points - a change few analysts would have missed.

But pressure on the company has been mounting on a number of fronts, with investors uneasy over questions raised by leaked documents given to the SEC.

The most serious allegation stated that Mr van der Veer and Judy Boynton, Shell's chief financial officer, were aware as early as 2002 over misjudgments made in booking fields.

Mr van der Veer, whose future as chairman was the subject of at least one dinner among non-executive board members this week, on Thursday for the first time denied the allegation.

He said: "The underlying question which you always get is did you know about incorrect bookings in SEC returns? The answer is no."

Investors - particularly in the UK - continued to lobby for a corporate governance overhaul, demands that appear to be taken seriously within Shell.

"We think that the whole reserves issue . . . is not related to the structure of the Shell group," Mr van der Veer said. But he added that this was not a justification to keep the structure of the corporate governance the same.

External investigations too were growing in number. On Thursday it emerged that the Dutch securities regulator AFM had launched an inquiry into possible insider trading.

The person close to Shell said: "They have realised how badly they screwed up the January announcement and [Thursday's announcement] was a combination of the investor pressure, the regulatory scrutiny, the internal discomfort and everything that has happened since the first announcement. There was a lot of internal discomfort about the way that this was handled the first time round."

That much was also clear in the forward looking statements of Mr Brinded. "We have done 40 per cent, there is 60 per cent to go," he said. "We have focused on those areas where we thought there might be an issue. But I have been in it two weeks and we have found another problem."

He added that it would be "imprudent" to give any outlook, but said he did not expect to find anything on this magnitude from the remainder of what he had to go through.