MARCH 31, 2004                             (Website editors note: Some of the more interesting bits
REPORT OF                                   are highlighted in yellow)
DAVIS POLK & WARDWELL
TO
THE SHELL GROUP AUDIT COMMITTEE               
EXECUTIVE SUMMARY
REPORT OF DAVIS POLK & WARDWELL
TO
THE SHELL GROUP AUDIT COMMITTEE
OF
MARCH 31, 2004
Executive Summary
I. Retention of Davis Polk & Wardwell
On January 9, 2004, following an internal review by Shell* management
( Project Rockford ), the Company announced that it would recategorize
approximately 3.9 billion barrels of oil equivalent ( boe ) of its reported proved
reserves.** Shell released its unaudited results for 2003 on February 5, 2004,
including details of the recategorization. On that date, Shell also disclosed that
the Shell Group Audit Committee ( GAC ) was conducting an independent
review of the facts and circumstances surrounding the recategorization.
On February 3, 2004, the GAC engaged Davis Polk & Wardwell
( DP&W or Davis Polk ) to act as independent counsel and lead an
investigation into the facts and circumstances of the recategorization.

The GAC also commissioned a special working group of Shell present and former
employees to assist with the investigation. Broadly speaking, Davis Polk s
mandate was to investigate, thoroughly and expeditiously, the conduct of Shell s
involved management and to determine whether remedial actions were warranted,
both in terms of personnel changes and broader control measures. A written
report was to be submitted on March 31, 2004. The investigation was also
requested by KPMG Accountants N.V. and PriceWaterhouseCoopers LLP (the
External Auditors ) in order to satisfy their obligations under Section 10A of the
United States Securities Exchange Act of 1934.

Early in the investigation, it was agreed with the GAC and the External
Auditors that Davis Polk would focus on the following areas: an examination of
the knowledge and conduct of Shell s most senior management with respect to
Shell s reserves disclosures; an examination of the extent to which Shell s own
internal guidelines for the booking of proved reserves (the Shell Guidelines )
were consistent with the requirements of the United States Securities and
* References to Shell or the Company herein refer to Royal Dutch Petroleum
Company and The Shell Transport and Trading Company, Public Limited Company, combined
with their respective subsidiaries and affiliate companies.
** See Tab A supra, for the discussion of the regulatory definition and standards for
proved and other reserve categorizations.
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Exchange Commission ( SEC ) applicable to disclosure of proved reserves ;
and four geographic areas of operation the Gorgon gas field offshore North
West Australia; Brunei [BSP]; Nigeria [SPDC]; and Oman [PDO]. These four
geographic areas were chosen because, individually, they each represented at least
300 million boe recategorized and, together, they reflect over 60% of the January
9, 2004 recategorization.
II. Overview of Investigative Procedures
Shell has cooperated fully with the internal investigation, providing the
investigation team with complete access to its records, files, electronic data, and
personnel. DP&W has been assisted by an internal team provided by Shell
consisting of Renger Bierema (Director Technology Gas & Power), Jim Cooper
(Head of Executive Talent Management EP), Jakob Stausholm (Group Chief
Internal Auditor) and Neil Sullivan (retired General Counsel of Chemicals Gas &
Power). DP&W has also engaged Gaffney, Cline & Associates, Ltd ( Gaffney
Cline ), independent petroleum engineers, to advise as to technical issues,
including an analysis of Shell s Guidelines. Fox Data Ltd. had been retained to
perform forensic analysis and data retrieval from individual desktops and laptops
and Shell servers.
Interviews
In its investigation, DP&W has conducted approximately 130 interviews
of over 90 witnesses, including directors, senior executives, members of the
executive committee of Exploration & Production ( EP ), reservoir engineers,
reserve coordinators and management from the different operating units under
review, the Group Reserves Coordinators from the relevant time periods
( GRC ), the internal Group Reserves Auditor ( GRA ), external auditors and
personnel from the various functional areas at Shell including finance and legal.
Some of these individuals were interviewed several times. (A list of the persons
interviewed, along with their titles, can be found at Tab J.)
These interviews were not conducted under oath and Davis Polk was
unable to subpoena or otherwise compel the attendance of former employees.
Because of the time pressures and the disparate geographical regions at issue,
some interviews were conducted by phone and not all could be conducted with
the benefit of review of all relevant documentation. Three of the Shell employees
that were interviewed, Sir Philip Watts, then Chairman of the Committee of
Managing Directors ( CMD ), Walter van de Vijver, then Chief Executive
Officer of EP, and Judith Boynton, Group Chief Financial Officer, were
represented by their respective individual counsel during the interviews.
Documents
In addition to these interviews, DP&W has reviewed hundreds of
thousands of pages of documents obtained from hard copy files and reviewed
3
electronic files from approximately 50 individuals and from server data and backup
tapes for select individuals. In addition to electronic mail, the documents
reviewed include, among others, the following: CMD meeting minutes,
presentations and reports to the CMD, EP Executive Committee ( Excom )
meeting minutes, including presentations and reports to the Excom; GAC meeting
minutes, including presentations and reports to GAC; Conference meeting
minutes, including presentations and reports to Conference; EP Business Plans
and Group Operating Plans; Year End reserve submissions from the relevant
Operating Units; Year End Reserves summaries and reports by the Group
Reserves Auditor; SEC Proved Reserves Audits by the GRA; Annual Reports; EP
and Operating Unit Scorecards and Appraisals and Strategy Reviews; Letters of
Representations to the Group Controller; SEC Comment Letters and Responses;
SEC rules and Shell Guidelines and interpretations; Shell s public filings;
presentations and transcripts of analyst and investor presentations; documentation
related to the LEAP program and other strategic initiatives; and hard documents
from the desk files and/or archives of select individuals.
Again, given time constraints, there is a significant quantum of documents
and electronic information that has not been reviewed. Nonetheless, many of the
factual findings described herein are based upon documentary evidence. Many of
the key documents are clear and unambiguous; in this matter, the axiom the
document speaks for itself often applies.
Issues relating to Document Integrity
During the investigation, two instances were discovered in which the
integrity of documents might have been compromised.
First, described more fully below, on December 2, 2003, in response to a
Script that was prepared by the CFO of EP recommending that the Group
immediately disclose the need to debook proved reserves, Mr. van de Vijver
wrote to the author of the document that it should be destroyed. After receiving
this e-mail from Mr. van de Vijver, the author consulted various internal counsel
who secured an assurance that the document had indeed been retained and that no
documents would be destroyed. Document preservation notices were also
circulated. Copies of the document were maintained by its author, other
recipients of the Script and counsel. The electronic version of the Script sent
by the CFO of EP to Mr. van de Vijver was deleted from Mr. van de Vijver s
computer s in-box.
Second, from the period of approximately May 2003 through early
January 2004, the EP Unit moved office locations within The Hague. Some of the
most senior executives of EP, including members of Excom, the Reserves
Coordinator and the GRA moved offices in the period of November, 2003. This
move was part of an effort started in the mid-1990s as a result of a study
conducted by McKinsey & Company, to transform Shell s business practices to a
paperless operation. The facilities to which EP moved provided very little
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storage space and paper documents were thrown away during the move. The
vast majority of the paperwork and documents were also electronically
maintained, but the possibility that relevant notes and other documents not
electronically maintained were discarded cannot be dismissed.
Again, in the time period, it was not possible to complete full forensic
analysis of all files to assess their integrity.
III. Summary of Findings
In mid-2001, Mr. van de Vijver succeeded Sir Philip as Chief Executive
Officer ( CEO ) of Shell s EP unit, recognized as the most capital intensive and
profitable business unit of Shell. Sir Philip himself had ascended from that
position to the post of Chairman of CMD and Chairman of The Shell Transport
and Trading Company, Public Limited Company. Within the Group and the
market, there was a perception that Sir Philip s own success could be attributed,
in part, to his ability to meet or exceed reserve expectations.
Virtually from the time of Mr. van de Vijver s succession, the two
executives engaged in a pointed dialogue concerning EP s ability to meet a
number of targets or external promises , particularly those relating to reserves.
As described by Mr. van de Vijver in a letter dated March 22, 2004:
Soon after coming to office as head of EP in June 2001, I
observed that the health of the EP business was not as
robust as the Company-determined performance targets set
under the former EP CEO. In fact, EP was in a far worse
state in mid 2001 than was ever portrayed by my
predecessor to senior management or the Conference.
Mr. van de Vijver consistently pressed the position that reserves booked
during Sir Philip s term were aggressive or premature , non-compliant with
Shell Guidelines for booking and, implicitly, SEC rules. That Mr. van de Vijver
was in the main correct cannot be gainsaid in light of January 9, 2004, when many
of the questioned reserves were recategorized. While Mr. van de Vijver
complained repeatedly that the premature booking of the reserves had frustrated
his ability to meet business targets and reinforced an inaccurate perception in the
market, this issue was viewed primarily as a serious and immediate business
question but not, equally, as a regulatory and disclosure failing.
Some of this dialogue between Sir Philip and Mr. van de Vijver was
conducted by private e-mails and meetings; some aspects took place in the setting
of CMD. Accordingly, other executives and employees had, over time, varying
degrees of exposure to the debate and, in various strata of management at Shell s
Central Offices and in the field, involvement in the operations that were the
subject of the bookings. However, by both responsibility and authority, Mr. van
de Vijver and Sir Philip were uniquely placed to address these issues. These two
5
executives were viewed as the most powerful forces in management on one
side, the present Chairman and on the other a leading candidate as Sir Philip s
successor and the occupier of the position CEO of EP that had been the
platform for the last two Chairmen. Also, this dialogue involved a technical issue
proved reserves that was particularly within their expertise and concern.
Reserve reporting and the booking of reserves are viewed as much an art
as a science. Shell s 2002 20-F speaks directly to the lack of precision with
respect to reserves calculation: Oil and gas reserves cannot be measured exactly
since estimation of reserves involves subjective judgement and arbitrary
determinations. Estimates remain subject to revision. Royal Dutch
Petroleum/Shell 20-F, 2002 (emphasis added). Moreover, the calculation of the
amount of reserves is a fluid process that requires analysis of the status of projects
that are ever-changing.
Regardless, beginning in 2001, recognition of the strictures of SEC rules,
in place since 1978, increased within the Company, in part due to the publication
on the SEC website of SEC guidance regarding the importance of investment
commitments and other indicia of reasonable certainty, with a growing
recognition that the Company s reserve numbers were not in full compliance with
these rules.
There are a number of significant documents which capture the dialogue
between Sir Philip and Mr. van de Vijver and its escalation. On February 11,
2002, Walter van de Vijver forwarded a Note for Information to CMD which
warned that proved reserve exposures were as high as 2.3 billion boe because of
non-compliance with SEC guidelines:
Exposures
Securities and Exchange Commission (SEC) Alignment
Recently the SEC issued clarifications that make it apparent that the
Group guidelines for booking Proved Reserves are no longer fully
aligned with the SEC rules. This may expose some 1,000 mln boe of
legacy reserves bookings (e.g. Gorgon, Ormen Lange, Angola and
Waddenzee) where potential environmental, political or commercial
showstoppers exist.
End of License
In Oman PDO, Abu Dhabi and Nigeria SPDC (18% of EP s current
production) no further proved reserves can be booked since it is no
longer reasonably certain that the proved reserves will be produced
within license. The overall exposure should the OU business plans
not transpire is 1,300 mln boe. Work has begun to address this
important issue.
This Note is the earliest statement to upper management that the Company might
have significantly overstated its proved reserve position.
6
The Note raised issues of sufficient concern to Sir Philip that he required
that a further presentation be made to CMD. However, on May 28, 2002, before
this second presentation was made, Sir Philip directed Mr. van de Vijver by email
to leave no stone unturned to achieve 100% RRR for 2002, a result
inconsistent with significant debooking:
You will be bringing the issue to CMD shortly. I do hope that this
review will include consideration of all ways and means of achieving
more than 100% in 2002 to mix metaphors considering the
whole spectrum of possibilities and leaving no stone unturned.
On July 22, 2002, the further presentation was made to CMD by way of a
Note for Discussion submitted by Mr. van de Vijver. The Note failed to address
the non-compliance with SEC rules which jeopardized 2.3 billion boe, highlighted
in the February 11, 2002 Note. Rather, it is an example of a series of documents
which suggest that EP management s plan was to manage the totality of the
reserve position over time, in hopes that problematic reserve bookings could be
rendered immaterial by project maturation, license extensions, exploration
successes and/or strategic activity. Simply put, it is illustrative of a strategy to
play for time in the hope that intervening helpful developments would justify, or
mitigate, the existing reserve exposures. Ultimately, as described below in the
discussions of Australia (Gorgon), Oman, Nigeria and Brunei, this strategy failed
as business conditions either deteriorated or failed to improve sufficiently to
justify historic bookings.
The minutes of the same July, 2002 meeting establish that it was
recognized that delay in debooking could not be continued indefinitely:
It is considered unlikely that potential over-bookings would need to
be de-booked in the short-term, but reserves that are exposed to
project risk or licence expiry cannot remain on the books indefinitely
if little progress is made to convert them to production in a timely
manner. *
On September 2, 2002, Mr. van de Vijver submitted a further note to the
CMD (with a copy to Judith Boynton) describing the dilemmas facing EP and
the uncomfortable situation EP is in :
Given the external visibility of our issues (lean organic
development portfolio funnel, 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 refreshment is real and/or 3)
positive trends can be shown on key indicators.
* Given the acknowledged production and other difficulties, the strategy of playing for
time was unrealistic. (See Tabs F & G.)
7
Unfortunately : - We are struggling on all key criteria ( caught in the box ).
The immediate risk that we are facing is on the negative spiral of
our boxed situation:
- RRR remains below 100% mainly due to aggressive booking in
1997-2000.
Sir Philip and Mr. van de Vijver met to discuss these concerns privately
over dinner. Thereafter, in October 2002, Sir Philip responded to Mr. van de
Vijver s concern, described in the September memorandum, defending the
business plan targets, including RRR of 100%. On October 22, 2002, Mr. van de
Vijver replied:
I must admit that I become sick and tired about arguing about the
hard facts and also cannot perform miracles given where we are today.
If I was interpreting the disclosure requirements literally (Sorbanes
[sic]-Oxley Act etc) we would have a real problem.
After this exchange and meeting, on November 15, 2002, Mr. van de
Vijver circulated a brief outline of business plan issues to members of his EP staff
and stated:
We finalized our plan submission and could easily leave the impression that everything is fine.
The reality is however that we would not have submitted this plan if we
1) were not trying to protect the Group reputation externally
(promises made) and
2) could have been honest about past failures (business focus
w.r.t. aspired portfolio, disconnects with reality, poor
performance management, reserves manipulation).
Throughout this dialogue, it is clear that both Sir Philip and Mr. van de
Vijver were alert to the differences between the information concerning reserves
that had been transmitted to the public, external, and the information known to
some members of management, internal. An insight into this conflict is
provided in Mr. van de Vijver s strictly confidential personal Note to File of
September, 2002:
During the last 1.5 years the technical competence and overall
integrity of the EP business within Shell has been questioned both
8
internally and externally, most prominently through lowering of the
production growth target in August/September 2001 and due to a
deteriorating proved reserves replacement ratio. Providing credible
explanations for these issues proved near impossible given the
disconnects between external promises/expectations and the reality
of the state of the business.
Bottomline was that both reserves replacement and production
growth were inflated:
- Aggressive/premature reserves bookings provided impression
of higher growth rate than realistically possible.
The concerns around the caught in the box dilemma and stretch in
the EP business plan have been flagged at the highest level in the
company, but obviously transmitted in a careful fashion as not to
compromise/undermine the previous leadership. The severity and
magnitude of the EP legacy issues may therefore not have been fully
appreciated.
The discussion continued in 2003. On February 28, 2003, Mr. van de
Vijver sent Sir Philip a copy of a February 23, 2003 e-mail in which Mr. van de
Vijver stated to his EP staff:
We know we have been walking a fine line recently on external
messages Promising that future reserves additions are expected in
2003 whilst we know that there is some real uncertainty around
this [W]e know our ongoing exposures on Oman/Nigeria reserves
and on early bookings, notably Gorgon and Ormen Lange.

On August 25, 2003, Mr. van de Vijver directed a draft of his Mid-year 2003
Review Summary to Sir Philip, complaining that: The single largest issue
facing EP is the shrinking opportunity portfolio exacerbated by too aggressive
reserves bookings in the past.

On November 9, 2003, after receiving what he considered an unfairly
critical performance review from Sir Philip, Mr. van de Vijver e-mailed to Sir
Philip that:
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.
Sir Philip did not disclose receipt or content of this e-mail to anyone until well
after Project Rockford had started, either in late December 2003 or early January
2004.
9
There can be no issue that proved reserves and RRR were understood to
be of significance to the market. On November 8, 2003, the day before this
e-mail to Sir Philip complaining that he was tired of lying about proved
reserves, Mr. van de Vijver wrote in an e-mail to a colleague:
As you know 2003 RRR is the most important share price
influencer also as expectations are high and they do not know that
we are still paying for aggressive reserves bookings [including
thos[e] that have not reached FID yet!!] in the past!
RRR had previously been described as a kpi, key performance indictor, and Mr.
van de Vijver had participated in analysts presentations in which the issue of
proved reserves and RRR were a focus.

In late 2003, catalyzed by the troublesome results of reserves studies and
audits from Nigeria and Oman, and, perhaps, a draft memorandum prepared by
EP which included legal advice from Cravath, Swaine & Moore, the process was
begun Project Rockford that ultimately resulted in the disclosures of January 9, 2004.

While different interviewees provide different explanations for starting
this project, the advice provided by outside counsel is significant.
In a December 2, 2003 memorandum entitled Script for Walter [van de
Vijver] on the proved reserves position prepared by EP staff, the assumption was
made that approximately 2.3 billion boe of proved reserves were non-compliant,
(approximately the same amount identified as exposed on February 11, 2002), and
that this was material to the market. Given these facts, the following legal
conclusion was described:
If and from the time onwards that it is accepted or acknowledged by
the management of the issuers (Royal Dutch and STT), that, when
applying the SEC rules, the 2002 proved reserves as reported in the
Form 20-F are materially wrong, the issuers are under a legal
obligation to disclose that information to all investors at the same
time and without delay. Not to disclose it would constitute a
violation of US securities law and the multiple listing requirements.
It would also increase any potential exposure to liability within and
There are indications that in December 2002 and again in November 2003, Mr. van de
Vijver considered the idea of a comprehensive debooking of all known exposed reserves. In
December 2002, he asked the Group Reserves Coordinator for an analysis of the effect of a
debooking of all questionable reserves. And in late November 2003, he stated in a message to
the Coordinator, I would prefer to re-state our 1/1/03 reserves and de-book all remaining legacies
to allow for a clean start. At about the same time, however, Mr. van de Vijver delivered an
encouraging message on planning goals to all senior EP executives in which he warned: One
final word on 2003. It would be an enormous blow to the Group s credibility with the Market if
we do not deliver on RRR this year.
10
outside the US. Note that the reserves information also appears in
the non 20-F Annual Reports.
Disclosure cannot await the next Form 20-F appearing in April, 2004.
On the same day this script was provided to Mr. van de Vijver, he
immediately e-mailed one of its authors:
This is absolute dynamite, not at all what I expected and needs to be
destroyed.
Because of prompt interdiction by internal counsel, the document was retained.
Even in the recategorization process, a controversy arose concerning the
explanation that should be given for the recategorization, particularly whether it
should be made clear when the original reserves were booked and whether the
recategorization was the result of recent SEC rulings and other developments.
Mr. van de Vijver e-mailed a colleague:
We are heading towards a watershed reputational disaster on
Rockford and I do want to stick to some very firm criteria: the
problem was created in the 90 s and foremost in 97-00 and any
clean-up must reflect that .. I will not accept cover-up stories that it
was Ok then but not OK with the better understanding of SEC rules
now and that it took us 2 1/2 years to come to the right answer.
Similarly, on December 8, 2003 Mr. van de Vijver e-mailed his colleagues
in EP:
When looking at SPDC and PDO is it really valid to
portray that we only recently discovered the problem in
Oman and Nigeria? I think we knew much earlier. . . .

However, the explanations given to a press and analysts conference, on
February 5, 2004 when Mr. van de Vijver presented the 2003 results and
commented on the January 9 recategorization, strike a different chord:
There were two events in 2003 that were the catalyst for
what we ultimately announced on the 9th of January. The
first was a detailed review in Nigeria . The other area
where we last year put a lot of effort in was around Oman.
. . . . . . .
The shock outcome of [the Nigeria and Oman] reviews
immediately sort of triggered the process to look at the
whole globe and make sure that we had a totally
consistent approach at everything.
11
The statements made by Sir Philip at the same conference also need to be
scrutinized in the light of the documentary record:
We ve always believed and I ve always believed that
Shell in aggregate was materially compliant with its own
and the SEC guidelines, and we relied on audits and
assurance processes.
. . . . . . .
This thing came up late last year, catalytic events coming
out about reviews in Nigeria, also the Middle East. As
soon as that came to my attention, it was a matter of all
hands on deck. And I remember writing down the words
get the facts and do the right thing.

And, on January 16, 2004, Sir Philip Watts has been quoted as saying:
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
reviews, 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 is
no evidence of any misconduct.
* * * * * * * * *
While the dialogue, described above, confirms that these two senior
executives were aware of the issue of aggressive proved reserves bookings and,
in a manner, attempted to address it, these documents do not reveal the causes of
the questionable bookings. To ascertain the need for the recategorization, the
investigation has focused upon developments in four geographic areas
Australia
(Gorgon), Nigeria, Oman and Brunei. While the findings of those inquiries are
described in detail at Tabs E through H, it is worth observing that there is no
common explanation.

Australia (Gorgon). As of December 31, 1997, the Group booked over
500 million boe of Gorgon gas reserves as proved. The Shell Guidelines at the
time allowed proved reserves based on an expectation of availability of
markets, and for a brief period, commercial expectations for Gorgon arguably
met this loose requirement. From its inception, the Gorgon proved reserves did
not meet the overriding SEC standard of reasonable certainty. There is no
written audit trail indicating who made the decision to categorize Gorgon reserves
as proved, or the basis of that decision. Sir Philip, EP CEO at that time, reports
no recollection of the Gorgon booking, notwithstanding its size and impact on
RRR for 1997. The questionable status of Gorgon was re-visited at several
points, beginning with the January, 2000 decision
reviewed in a presentation to
12
EP Excom attended by Sir Philip to freeze the booking despite a 20% increase
in technical reserves. In October, 2000, the Group Reserves Auditor affirmed this
freeze status, against a local technical opinion in favor of debooking. While
debooking continued to be debated, no action was taken until January, 2004. In
the words of the current Group Reserves Coordinator, Gorgon had long stuck out
like a sore thumb, but, at over 500 million boe, debooking of the reserve was
too big to swallow.
Oman. Proved reserves were increased in 2000 in response to top down
encouragement from Shell to bring its proved reserves of mature fields in line
with its expectation reserves. Insufficient technical work was done to support this
increase. When serious production declines were suffered thereafter, these
increased reserves were maintained based upon aspirational production targets. It
is clear that various members of management at EP, including Mr. van de Vijver,
were aware of this situation since late 2001, when the production problems
increased and Shell agreed to make a $30 million down payment (in the form of
a deduction against its 2001 net reward) in partial payment for an inchoate
debooking of expectation reserves.
Nigeria. SPDC accumulated over the 1990s and, particularly, in the late
1990s very large volumes of proved oil reserves. No later than early 2000,
however, it became clear to EP management that SPDC s substantial proved
reserves could not be produced as originally projected or within its current license
periods. Rather than de-book reserves, an effort was undertaken to manage the
problem through a moratorium on new oil and gas additions, in the hope that
SPDC s production levels would increase dramatically to support its reported
reserves. This solution remained in place for the next several years, until January,
2004, notwithstanding the knowledge of EP management that, in fact, production
was not increasing to a level which could support the booked proved reserves.
Brunei. The large volume of debookings is attributable to reserves that
were either uneconomic to develop or had been booked well ahead of any final
investment decision or analogous financial commitment being made, and at a time
when the Shell Guidelines did not specifically require such a commitment prior to
booking. Part of the recategorization was attributable to legacy volumes, which
did not comply as proved reserves and were being debooked gradually to avoid
major swings in the reserves.
* * * * * * * * *
The booking of aggressive reserves and their continued place on Shell s
books were only possible because of certain deficiencies in the Company s
controls. For example, the internal reserves audit function was both understaffed
and undertrained. 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. While the GRA made
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occasional attempts to bring proved reserves into compliance with both SEC rules
and Shell Guidelines, he had neither the power nor facilities to insure such
compliance. Moreover, the GRA has recently speculated that, had he been
aggressive in this effort, his very position would have been at risk:
On the few occasions in my early years where I signaled a conflict with
SEC rules I was called back by [GRC] and by the OUs who argued,
rightly, that the only rules they should be bound by were the Group
guidelines. These are the backbone of our internal controls on reserves.
The spear-point of the SEC reserves auditor s control should therefore
have been on a correct formulation of the Group guidelines. With
hindsight, I should have been more forceful in this respect. It would have
been a clear break with all my predecessors and it would probably have
cost me my job in those days, but I should have.
And, consistent with the views of management described above, he acquiesced in
or attempted to assist Shell in managing , rather than debooking, its nonqualifying
reserves. The moratoria in Australia and Nigeria and his advice not to
de-book the 40% non-compliant Oman reserves are examples of this approach.
However, assuming vigorous efforts made entirely in good faith, a single, part
time, former employee could not constitute an effective check on aggressive
reserve bookings. (See Tab D.)

In that regard, it is important to note that the Shell guidelines:
blurred the distinction between reserves reporting for internal
decision-making and the requirements for regulatory reporting of
proved reserves;
were slow to incorporate SEC staff interpretations and, while
reflecting an increased awareness of SEC rules, occasionally
adopted an expedient of partial compliance;
did not encourage OUs to review existing bookings for continued
compliance and did not adequately address the need for debooking;
and, were not clearly and succinctly written or organized to offer useful
guidance to reservoir engineers in the OUs.

In short, the Shell guidelines were not adequately designed to yield compliant
reporting of proved reserves. (See Tab A.)
Also, the compliance role of the finance function was not effective with
respect to these bookings. For example, Ms. Boynton attended CMD meetings
beginning in 2001 and became a member of CMD in 2003. Her responsibilities
were different than other members of CMD; she had direct responsibility to
14
ensure that the Company s financial disclosures to the market and to regulators
were correct. Ms. Boynton took virtually no action, prior to the initiation of
Project Rockford, to inquire independently into the underlying facts relating to the
aggressive bookings . Rather, she relied upon the checks and balances of
Shell s representation and assurance process and the work of its independent
external auditors to ensure compliance. Specifically, she reports that she was
reassured that EP was focused upon the issues and that year-end reserve reporting
was a strenuous process closely monitored by financial executives in whom she
had faith. At the same time, Ms. Boynton s ability to act effectively in a
compliance function was somewhat impaired because, until recently, none of the
business units CFOs reported to her. For this and other reasons, on the issue of
reserves, it may be that her responsibility exceeded her authority.

The external checks on reserves abuses were also frustrated.
Specifically, Shell s outside directors and GAC were not presented with the
information that would have allowed them to identify or to address the issue. A
specific example of this failure occurred as late as October, 2003; after it had
requested a briefing on the topic of proved reserves, the GAC was not provided
with critical, current information
an unfavorable audit report relating to Nigeria
and a significant decrease in the reserve offset supposedly available due to fuel
and flare .
Mr. van de Vijver, in March 22, 2004 correspondence, excuses his own
conduct by suggesting that either Shell s culture or Sir Philip and Ms. Boynton
frustrated his efforts at disclosure:
Throughout this entire process, my attempts to bring the
reserve issues to management s attention were met with
resistance. The atmosphere between myself and the
Chairman became gradually more tense as I identified
issues in EP.
. . . . . . .
It is the responsibility and role of the Chairman and/or the
CFO to alert the Group Audit Committee to business
control weaknesses or external reporting issues. Because
the unspoken rule within the Company is that you are not
supposed to go directly to individual Board members or to
the Group Audit Committee, I had to rely on the
Chairman and the CFO to advise the GAC and assumed
that happened in early December.
In his Note to File of September, 2002, Mr. van de Vijver had conceded that, out
of deference to Sir Philip s position, his internal disclosures of the severity and
magnitude of the reserve dilemma may not have been fully appreciated . In
15
any event, it is clear that essential factual data was denied to the individuals and
entities that might have addressed proved reserve abuses.
After an interim report by DP&W to GAC on March 1, 2004, Sir Philip
and Mr. van de Vijver submitted their resignations to the Shell Board.
Considerations of the tenure of and appropriate assignment for others involved in
the events which resulted in the recategorization are continuing pending review of
the Report and consideration of its findings by the GAC and non-executive
members of Conference.

To address perceived structural and control deficiencies, certain remedial
measures have been proposed (some of which have already been accepted in
response to recommendations made previously in connection with this
investigation):
Rewrite Shell s Guidelines for proved reserves to ensure regulatory
compliance.
Reinforce roles and responsibilities of the Shell personnel involved
in proved reserves on compliance responsibility.
Remove consideration of reserve replacement targets from the
compensation scorecard.
Provide for formal review on an annual basis by CMD and the
GAC of Shell s proved reserve positions.
Reorganize reporting structure to require that the Chief Financial
Officers of Shell s business units report directly to the Group Chief
Financial Officer.
Integrate the Group Legal Director role with CMD, the Boards and
Conference to ensure compliance with all regulatory obligations.
Reinforce the line responsibilities and compliance training for
reserve reporting from local reservoir engineers upwards.
In addition to these changes, it is critical that Shell enforce a culture of
compliance that, regardless of business concerns, all decisions must be made to
insure compliance with regulatory and fiduciary obligations. Management and
employees must recognize that their conduct is required to be in accord with the
highest ethical and legal standards.
16
IV. Index to the Report The Report of Davis Polk & Wardwell to the Shell Group Audit
Committee of March 31, 2004 (the Report ) is divided into the following
sections:
Tab A
Analysis of the Regulatory Framework and the
Shell Guidelines.
Tab B
Tone from the Top : Analysis of the Conduct
of Management with Respect to the Events Leading
to the Recategorization.
Tab C
The Scorecard System and its
Impact on Booking Reserves.
Tab D
Analysis of the Activities of Shell s Group
Reserve Auditor and External Auditors.
Tab E
Findings Concerning Australia (Gorgon).
Tab F
Findings Concerning Nigeria (SPDC).
Tab G
Findings Concerning Oman (PDO).
Tab H
Findings Concerning Brunei (BSP).
Tab I
Proposed Remedial Measures.
Tab J
List of Interviewees.
Davis Polk & Wardwell
MARCH 31, 2004
REPORT OF
DAVIS POLK & WARDWELL
TO
THE SHELL GROUP AUDIT COMMITTEE
TAB I:
PROPOSED REMEDIAL MEASURES
Proposed Remedial Measures
In the course of the investigation, there has been considerable focus upon systems,
procedures and controls at Shell as they relate to proved reserves reporting and disclosures.
Those systems, procedures and controls are informed and influenced by Shell s wider reporting
and disclosure practices and these have also been considered in the course of the investigation
when relevant. The purpose of the investigation was not to consider, and no comment is made
on, issues relating to Shell s group organization and structure or upon the relationships between
the two parent companies and the Group.
The investigation determined that there were several weaknesses in Shell s proved
reserve booking and disclosure controls, including: inadequacies in the Shell Guidelines relied
upon for compliant booking decisions; a lack of appropriate resources and a confusion of roles
and responsibilities in the offices of the Group Reserves Coordinator ( GRC ) and the Group
Reserves Auditor ( GRA ); a failure to provide Shell s Committee of Managing Directors
( CMD ) and the Boards of the parent companies with appropriate information to inform
disclosure judgments; a weakness in the finance function whereby, until recently, Shell s
business CFOs had no reporting responsibility to the Group CFO; unclear lines of responsibility
for booking proved reserves; a lack of understanding of the meaning and importance of certain
disclosure obligations; and, generally, an atmosphere that did not emphasize the paramount
importance of the compliance element of proved reserves decisions.
Set forth below are certain recommendations for consideration by Shell s Group Audit
Committee to respond to the issues encountered during the investigation and to improve Shell s
systems, procedures and controls to remedy the problems discovered in the investigation.
2
Shell has already announced that certain remedial measures will be taken in response to
the preliminary findings and recommendations of the investigation. The previously announced
measures include the following:
Global EP Reserves Committee. In order to improve consistency of standards
across Shell s operations globally, a committee was established in 2003 to be the
forum for approving the booking of proved reserves and providing oversight and
challenge to the reserves reporting process. This committee should also be
equally focused on a review of existing bookings, not just new proposals for
bookings. The Shell Guidelines were inadequate in their failure to ensure
appropriate review was given to the existing reserve base, not just first time
bookings. The Reserves Committee should be attended by an internal lawyer
with expertise in the area of applicable securities law disclosure requirements.
Overhaul of the Shell Guidelines. As described more fully in Tab A not only
were the Shell Guidelines non-compliant with the SEC s proved reserve
definitions in key areas, but even assuming they had been compliant, they lacked
clarity necessary to facilitate compliance: The Guidelines should be amended as
follows:
remove any remaining areas of non-compliance with SEC definitions,
using the assistance of independent petroleum engineers and counsel;
reduce the length of the guidelines to produce a more user-friendly manual
for petroleum engineers, finance staff and other relevant parties with clear
3
language concerning the criteria for booking and de-booking, using the
assistance of independent petroleum engineers and counsel;
require that any annual update of the Guidelines be performed as early in
the year as possible so as to allow engineers to understand the implications
of any changes well in advance of the year end reserves submissions;
stipulate that an annual update to the Guidelines need only be conducted if
necessary to address any changes in the SEC s proved reserve definitions
or interpretations or any new aspect of Shell s operations (e.g., new
technology, new geographic area, new contract structures) that raise novel
regulatory interpretation issues; and
ensure that, within the single set of guidelines, the distinctions between
regulatory proved reserves, on the one hand, and Shell s internal
classifications, on the other (e.g., expectation reserves, scope for recovery)
are clearly stated.
Overhaul of the Office of Group Reserves Coordinator. Given the technical
and compliance elements of reserves determination, Shell has recognized that the
GRC should not report to business planning or strategy executives but to the Head
of Technology within EP. More staff will be employed to resource the vital
function of the GRC and they will be authorized to use independent petroleum
engineers as they deem necessary, including for the systematic training of
engineers in the field. Further, the role and responsibility of the GRC should be
redefined in a manner akin to that of a financial controller, with no ambiguity that
4
the GRC will be responsible for the overhaul and ongoing maintenance and
application of the Shell Guidelines as described above. As such, the GRC should
be responsible for identifying and resolving difficult areas of interpretation with
the Reserves Committee and internal and external auditors. The GRC should also
be responsible for identifying training needs and facilitating training sessions
from both a technical and regulatory perspective. Finally, the GRC should be
instructed to liaise closely with internal legal staff who can provide support on
forming disclosure judgments on the basis of technical compliance and/or
materiality.
Overhaul of the Office of Group Reserves Auditor. More staff will also be
dedicated to this function so that the audit cycle of the Group s reserves can be
made more frequent and each audit can be made more rigorous. The GRA and its
staff will now report to the Group Chief Internal Auditor to increase the
independence of the GRA function.
Removal of Reserves from Scorecards. Whether the actual financial impact of
reserves on any individual s scorecard in any given year was material is
irrelevant. The perception arose that this was an important influence on behavior
and, in order to reinforce the necessity for compliant reserves bookings, reserves
should be removed from scorecards for the time being. Following
implementation of a more robust control environment for the booking of proved
reserves and a period of satisfactory operation of the improved controls, it may be
that incentives for reserve replacement can be re-introduced in some manner but it
5
should be designed on a basis that is aligned with the long-term nature of the
reserve replacement challenge.
Improved Visibility and Accounting of Reserves Issues by Senior
Management and Directors. Going forward, the CMD will collectively approve
the reserve bookings/de-bookings taken by the EP business. Following that, a
review of the overall outcome will be considered by Shell s Group Audit
Committee. At each stage, it will be critical to inform the decisions and
consideration of CMD and Shell s Group Audit Committee, respectively, with
information regarding the more judgmental elements of the year-end decisions
made by EP. This information will be important to breaking down internal
materiality filters and it will be essential to have appropriate internal legal
expertise involved at each step to ensure pertinent information is identified and
disseminated.
Enhanced Accountability of Business CFOs to Group CFO. This
reorganization is essential to improving the ability of the Group CFO to have
effective oversight of financial issues relating to the business units. It will also
enable the CFO, in turn, to inform colleagues and directors of important
disclosure issues, as required.
Further remedial measures that should be considered are as follows:
Clarification of Roles and Responsibilities of the GRA and the GRC. The
investigation has uncovered that, at times, there was an insufficient demarcation
of the role of the GRA from the EP business. It should be made clear that the
GRA and GRC must retain a respectful separation and independence so as to
6
allow the GRA to challenge GRC and EP decisions more effectively as parts of
the Group internal audit function.
Strengthening of Line Responsibilities for Reserve Reporting. The
investigation has found evidence of diminished responsibility for line reporting of
reserves figures, especially in joint ventures where the SEC definition of proved
reserves was not important to local interests. The line authorities and
accountabilities should be reinforced as follows:
ensure that the local Chief Reservoir Engineer is responsible for ensuring
that reserves bookings/de-bookings are compliant with SEC rules as set
forth in compliant Shell Guidelines and that any booking/de-booking
decisions are only made with appropriate, auditable documentation and
after completion of the appropriate challenge processes;
ensure that the local CEO and CFO assume business and financial
responsibilities, respectively, for the decisions of their Chief Reservoir
Engineer; and continue the upwards cascade of reserves booking/de-booking decision
responsibilities ultimately via the GRC to the EP CFO and Technology
Director before endorsement by CMD and review by Shell s Group Audit
Committee.
Enhancement of the Legal Function. Part of the control failures leading to the
January 9, 2004 reserve recategorization was an inadequate understanding of the
application and meaning of the SEC s proved reserve disclosure rules as they
7
relate to Shell. Potentially material disclosure and compliance issues were being
raised at CMD without the discussion being advised by a lawyer with securities
law disclosure or corporate governance expertise. The visibility of the internal
legal function at the highest levels should be increased and this should start by
providing for attendance by Shell s Legal Director at meetings of CMD,
Conference and the parent company Boards. Similarly, the General Counsel of
the various businesses, who attend the executive committee meetings of those
businesses, should have an aim of identifying disclosure issues for consideration
at a higher level. Furthermore, to remove any reporting ambiguities, all lawyers
at Shell, including the Corporate Secretaries of the parent companies, should
unambiguously report to Shell s Legal Director. This should be capable of
implementation in a manner consistent with applicable law. With improved
visibility and an enhanced awareness of the need for compliance, the legal
function should actively identify training needs in areas of disclosure, reporting
obligations and corporate governance and devise training programs to address
those needs.
Disclosure Committee. Shell s existing Disclosure Committee should be
enhanced to require that the Group Legal Director be a member and serious
consideration should be given to making him or her the chairperson. The
Disclosure Committee should also have quarterly access to CMD to assess the
adequacy of Shell s disclosures and ensure CMD s awareness and approval of
those disclosures. The Disclosure Committee should be designed to focus
primarily on the content of disclosure to ensure accuracy, completeness and
8
consistency with other Shell disclosures and should not merely exist to ensure
proper processes have been followed. The Disclosure Committee should be
enabled to focus on the substantive content of Shell s disclosures through access
to all relevant information analyzed by the businesses to reach their disclosure
judgments.
Reduction of Job Rotation. Several control failures could be attributed to the
short tenure of certain individuals in key functions. While it is important for
numerous reasons to expose people in a company as large as Shell to different
experiences, rotations should be reduced from those witnessed in EP over the
period investigated and, upon rotation, complete and detailed handover notes
should form the basis for a formal transfer.
Document Retention Policy. A consistent policy needs to be agreed and
effectively disseminated and implemented.
Culture of Compliance. In order to create a culture of compliance, it is essential
that Shell s senior management emphasize to all employees that integrity and
compliance concerns must be raised with the internal audit or legal functions, and
must be investigated thoroughly and openly, regardless of who is involved. This
policy should be communicated forcefully and frequently.

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