The Guardian: Trail of emails reveals depths of deceit at the heart of Shell
Terry Macalister
Tuesday April 20, 2004
Finance chief shifted as oil group promises change
Shell promised to accelerate its review into its controversial dual company structure yesterday as part of a series of initiatives aimed at restoring confidence in the scandal-hit oil group.
The commitment came alongside a third downgrade of reserves and an admission that it would need to refile financial figures in the United States, knocking off $100m (£55m) from its earnings annually for the 2000 to 2003 period.
Standard & Poor's announced it would be downgrading the company's prized AAA rating to AA+. But the share price, which yesterday changed little, has already been badly mauled since the problems were made public.
Confidence in Shell was further undermined yesterday by a dramatic and damning report into senior management's behaviour regarding the downgrading of reserves earlier this year, which triggered the company crisis.
American law firm Davis Polk & Wardwell collected a series of emails from former chairman Sir Philip Watts and exploration director Walter van de Vijver, who were both dismissed earlier this year, showing they knew about the reserves problems at least two years ago - if not as far back as 1997.
Shell's joint chairman, Lord Oxburgh, accepted the report in full and while expressing his full confidence in Sir Philip's successor, Jeroen van der Veer, promised to draw a line under the past. "We believe that following the actions we have announced, Shell will be able to re-engage with its stakeholders and re-establish confidence in our behaviour as a business and employer."
While the company had expressed little enthusiasm in previous statements about its unusual Anglo-Dutch structure, it was much more forthcoming yesterday. The world's third largest quoted oil group said it was already "exploring all possibilities for improved governance and structure", and would bring its conclusions to the delayed annual meeting on June 28.
It has shifted finance director Judy Boynton to another post and said it will look outside as well as inside the firm for a full-time successor. Her role will be filled for the time being by group controller Tim Morrison. Ms Boynton is expected to receive a payoff in June.
Meanwhile Shell's ruling committee of managing directors has assumed responsibility for reviewing and signing off reported reserves every year, and reserves auditors now report to the group's internal audit.
But the group has so far turned its back on demands it should have all its reserves figures audited by an outside firm. The reserves downgrade yesterday brings the total to 4.35bn barrels of oil equivalents to the end of 2002 with an additional 500m for 2003. Only 90% of Shell's oil and gas reserves have been reviewed, raising the possibility that there could be more, if relatively small, downward reductions.
City analysts were pleased with some initiatives but questioned whether Lord Oxburgh and other non-executives should have done more. Fadel Gheit, from Oppenheimer & Co in New York, said he was unconvinced the senior executive team accepted the scale of the problem. "I am not 100% convinced this is the end of the [bad news] story. But the report was very thorough, and I never honestly believed this kind of thing could happen at Shell." He said the findings of the report only emphasised the need for a unified board.
The problems with reserves in fact go back eight years, according to the Davis Polk & Wardwell report, which shows figures were overbooked on the Gorgon field in Australia in 1997.
Mr Van de Vijver, as head of exploration, complains in emails to Sir Philip that "RRR [reserves replacement ratios] remains below 100%, mainly due to aggressive booking in 1997-2000", a period when Sir Philip was in charge of that department.
The two were increasingly at odds over the fact that Shell's public position was different to what they knew to be true. "I must admit that I become sick and tired of arguing about the hard facts, given where we are today. If I was interpreting the disclosure requirements literally (Sorbanes[sic]-Oxley Act, etc) we would have a real problem," says Mr van der Vijver on October 22 2002, referring to the US Sarbanes Oxley act on corporate behaviour.
In November Mr Van de Vijver told his staff in a note: "We finalised our plan submission and could easily leave the impression that everything is fine. The reality is we would not have submitted this plan if we 1) were not protecting the group reputation externally ... 2) could have been honest about past failures (...reserves manipu lation)". In September 2002, the exploration head wrote a "strictly confidential" personal note to file reviewing the decision to lower production growth targets, which disappointed the stock market in September 2001. He concludes: "Bottom line was that both reserves replacement and production growth were inflated: Aggressive/premature reserves bookings provided impression of higher growth rate than realistically possible."
But it was only in late 2003 that the se nior management decided what they termed Project Rockford must be introduced, downgrading reserves to bring them into line with private assessments and SEC requirements. This led to the first big announcement in January 2004.
Mr Van de Vijver was given legal advice from within the company about the potential problems caused by the downgrade which suggested, "disclosure [to the SEC] cannot await the next Form 20-F appearing in April 2004". The exploration head immediately emailed one of the note's authors, saying its conclusions were "absolute dynamite, not at all what I expected and needs to be destroyed". It was not shredded because the staff member took in-house legal advice not to do so.
But the most damaging email was one written on November 9 2003 by Mr van de Vijver after receiving what he considered to be an unfairly critical performance review from Sir Philip. The Dutch exploration head wrote to his chairman: "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 aggressive/optimistic bookings."
But when the downgrade of reserves was finally revealed to the public, Sir Philip suggested that overbooking was an issue that had only recently surfaced.
He was quoted on January 16 2004 explaining: "During the fourth quarter of last year, in-depth reserves studies were completed that triggered a broad review of our previously booked proved reserves ... Based on those reserves, I believe that individuals concerned worked in good faith to the interpretations in use when the bookings were made, following proper processes and that there was no evidence of any misconduct."
At a press and analyst conference on February 5, Mr van de Vijver indicated the difficulties had only been understood because of a new look at Nigerian reserves. "There were two events in 2003 that were the catalyst for what we announced on January 9. The first was a detailed review in Nigeria ... The other area where we last year put a lot of effort in was around Oman."
Davis Polk & Wardwell concludes that the booking of "aggressive" reserves and their continuing place on Shell's books were only possible because of deficiencies in controls.
The internal reserves audit function was understaffed and undertrained, says the firm's report. "This function was performed by a single, part-time former Shell employee; his cycle of field audits was once every four years; he was provided with virtually no instruction concerning regulatory requirements or the role of an independent auditor and no internal legal liaison."
Extracts from the emails
'Recently the SEC issued clarifications which make it apparent that the group guidelines are no longer fully aligned with SEC rules'
Van de Vijver to Shell committee of managing directors, February 11, 2002
'Given the external visibility of our issues (lean organic development portfolio, RRR low, F&D unit costs rising), the market can only be "fooled" if 1, credibility of the company is high; 2, medium and long-term portfolio is real and/or 3, positive trends can be shown on key indicators'
Van de Vijver to managing directors committee with copy to Ms Boynton, September 2, 2002
'I become sick and tired of arguing about hard facts given where we are today. If I was interpreting the disclosure requirements literally (Sorbanes [sic] Oxley act, etc) we would have a real problem'
Van de Vijver to Sir Philip, October 22, 2002
'We finalised our plan submission and could easily leave the impression that everything is fine. The reality is however we would not have submitted this plan if we 1, were not protecting the group reputation externally ... 2, could have been honest about past failures [ ... reserves manipulation]'
Van de Vijver to staff members, November 2002
In September 2002, Mr Van de Vijver wrote a 'strictly confidential' personal note to file and reviewed the decision to lower production growth targets which disappointed the stock market in September 2001. He concludes: 'Bottom line was that reserves replacement and production growth were inflated: Aggressive/premature reserves bookings provided impression of higher growth rate than realistic'
'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 aggressive/ optimistic bookings' -
Van de Vijver to Sir Philip, November 9, 2003
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