The Independent: Shell chairman hangs on but pledges review of dual board

By Michael Harrison, Business Editor

06 February 2004

Shell 'open to changes' in structure; Audit procedures tightened up;

Shell responded to mounting shareholder unrest yesterday by agreeing to review its dual board structure in the aftermath of last month's shocking downgrade in oil and gas reserves.

The Anglo-Dutch oil giant said it was "open to change" and would listen carefully to what investors wanted. But Sir Philip Watts, Shell's embattled chairman, said he would not step down over the crisis, saying that he had the "full support" of the board. Nor, he added, had a single Shell manager been disciplined, even though the overbooking of reserves had taken place over a six-year period.

"On the matter of resignation, I came to my own personal decision that I should not do that," he said. "This thing happened on my watch and I have the will and determination to see us through this difficult patch."

Sir Philip also issued an "unqualified apology" for his failure to appear in person last month to explain the 20 per cent cut in Shell's proven reserves saying: "I regret that and I am sorry.... I got it wrong."

Shell's shares fell another 2 per cent to 358.5p. They have fallen 14 per cent since the reserves downgrade on 9 January, knocking £15bn from the combined group's value.

Analysts praised Sir Philip for his forthrightness but doubted that it would be enough to save him, predicting he would be gone by autumn as part of a top-level shake-up that would see a merger of the British and Dutch boards and the appointment of a conventional chief executive and non-executive chairman.

Asked whether Shell's arcane and much-criticised dual board structure would be scrapped, Sir Philip replied: "Both in Holland and in the UK, our shareholders have raised this issue and what interests our shareholders has to interest us. We have to think hard about our group structure. If shareholders tell us we have a problem then we had better have a discussion with them."

Sir Philip said he expected to visit investors owning about 35 per cent of the company over the next three to four weeks. However, he added: "We are not rushing to judgement."

Asked whether he would resign if the feedback from investors was that change needed to begin at the top, Sir Philip replied: "That is a hypothetical question which I can't answer."

Dressed in a dark suit, blue shirt and maroon tie, his bald pate glistening under the arc of the television lights, Sir Philip appeared humbled as he emerged in front of the massed ranks of analysts and journalists to present Shell's annual results and explain how the reserves downgrade had come about.

The detailed explanation of the reserves "recategorisation" was left to Walter van de Vijver, Shell's chief executive of exploration and production. Mr van de Vijver said the reserves had originally been booked in the mid- to late 1990s based on the judgement of Shell managers as to the "reasonable certainty" that they would be developed. "Judgements were made that would not be made today."

He said that Shell's procedures for booking reserves had been tightened up and henceforth the proved reserves figure would have to be signed off by the company's managing directors. However, he ruled out an independent external audit of reserves.

Sir Philip rejected suggestions that Shell's executive bonus scheme might have been partly responsible for the overbooking of reserves, saying that this element comprised only 5 to 6 per cent of the annual "scorecards" on which incentives were based.

Shell reported a 19 per cent fall in fourth-quarter profits to $1.875bn after taking $984m in one-off charges. Annual profits rose 35 per cent to $12.7bn.

How reserve booking policy came back to haunt Watts

One of Sir Philip Watts' first tasks when he became head of exploration and production at Shell in 1997 would have been to decide how to classify the group's interest in Gorgon, a large gas field off the north-west coast of Australia owned jointly with Exxon and Chevron of the US.

In the end, Shell decided to book its share of the field - some 560 million barrels - as proved reserves. Gorgon represented half the proved reserves Shell booked that year in its filing to the US Securities and Exchange Commission.

It was a decision that would come back to haunt Sir Philip. Last month, when Shell announced it was cutting its proved reserves by 20 per cent or 3.9 billion barrels, Gorgon was among the fields involved - all 560 million barrels have been reclassified as probable.

Although Shell was confident enough in the technical and commercial prospects of Gorgon's reserves being successfully developed, neither Exxon nor Chevron have yet placed their reserves in the "proved" category. Asked about the discrepancy, Shell's current head of E&P, Walter van de Vijver, said such matters were not discussed among partners. It was part of the "mystique of the oil industry".

To compound Shell's over-enthusiasm, it admitted yesterday that it had made a "mistake" in its original SEC filing. Instead of being classed as a "discovery", Gorgon was lumped together in the category of "revisions and reclassifications". For that reason, no one outside Shell spotted that Gorgon had been included in its proved reserves.

One analyst called it a "stealth booking". He also said that at the time of the Gorgon booking, he had spoken to one executive member of Shell's E&P committee who confided: "We were telling all the operating companies to look in the cupboard to see what they could find." Yesterday, Shell had to admit that one shelf of the cupboard was bare.

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