San Francisco Chronicle: Shell exec said he was tired of lying; company's finance chief resigns
BETH GARDINER, Associated Press Writer
Monday, April 19, 2004
©2004 Associated Press
(04-19) 11:51 PDT LONDON (AP) --
A top executive of Royal Dutch/Shell Group of Cos. wrote in an e-mail that he was "sick and tired about lying" about the company's inflated oil and gas reserves estimates, an investigation commissioned by Shell reported Monday.
The inquiry found some Shell bosses knew for almost two years the company had publicly overstated the size of its reserves. The shaken oil giant also announced its chief financial officer had stepped down, the latest in a string of high-level casualties since Shell's announcement in January that its confirmed oil and gas holdings were much smaller than claimed.
The company said Monday it has now downgraded a total of 4.85 billion barrels, or about 25 percent of its reserves, from "proven" to less certain categories. That is 700 million barrels more than its previous estimate.
Shell said in January that it was downgrading 3.9 billion barrels, or about 20 percent of its total holdings. A March announcement brought the total downgraded to 4.15 billion barrels.
The disclosures caused a shareholders' uproar and led to a string of resignations. Reserves are an oil company's most valuable asset, and any reclassification into less certain categories is a major concern for investors.
Shares in Shell Transport & Trading Co. fell 0.76 percent Monday to $7.06 on the London Stock Exchange.
"Shell has unquestionably stumbled and has learned a tough lesson," said Lord Oxburgh, chairman of Shell Transport and Trading Co. PLC, the British component of the Anglo-Dutch group.
"The story that has unfolded is not one of which anyone can be proud," Oxburgh said. "Our procedures for booking reserves were seriously flawed. There are explanations, but there can be no excuses."
A summary of an outside investigation into managers' conduct, made public by Shell, said executives in its exploration and production division had exaggerated the size of reserves and failed to act when it became clear the estimates were unrealistic.
Walter van de Vijver complained about the estimates after he took over as chief of the division in June 2001, replacing Sir Philip Watts, who had been promoted to Shell chairman, the summary said.
The report said van de Vijver notified Shell's managing directors in February 2002 that the company's reserve classification rules did not match those of the U.S. Securities and Exchange Commission and that Shell might have overestimated its reserves by 2.3 billion barrels.
"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 wrote in a November 2003 e-mail to Watts, released in the summary.
When legal advisers sent van de Vijver a memo a month later saying Shell should disclose the problems, the report said he responded by e-mail: "This is absolute dynamite, not at all what I expected and needs to be destroyed."
The memo was preserved, the lawyers' report said.
Other correspondence showed executives knew estimates were wrong but did nothing, the investigators found.
Instead, executives attempted to "manage" the problem and "play for time" in hopes that future growth would eventually obviate the need to come clean, the inquiry said. But "this strategy failed -- as business conditions either deteriorated or failed to improve sufficiently to justify historic bookings."
Watts and van de Vijver resigned last month after lawyers at the New York-based Davis, Polk and Wardwell firm gave Shell a preliminary version of their report, prepared with former and current Shell employees.
"It's incredible, really, to think that this kind of thing was going on at the top of a company with a reputation for such conservatism," said Jim Washer, editor of International Petroleum Finance, an industry newsletter. "You don't really expect blatant deceit."
Washer said that by releasing nearly final revisions of its reserve estimates, Shell may have come close to ending concerns about those numbers.
But the damage to the company's reputation could linger, particularly since the SEC, the U.S. Justice Department and European regulators are all investigating, Washer said.
Shell said Judith Boynton quit her post as group chief financial officer but will stay at the company as an adviser at least until June. Oxburgh said Boynton had not been guilty of any financial impropriety.
The lawyers' report said she was responsible for Shell's financial statements and had failed to check the accuracy of the reserve estimates. But it added that her responsibility may have exceeded her authority.
Group controller Tim Morrison will take over as acting chief financial officer, Shell said.
Shell said its auditors had now reviewed 90 percent of oil and gas reserves and any further revisions to the estimates would be small.
It also said it would lower earnings from 2000 through 2003 by an average of slightly more than $100 million, less than 1 percent of its earnings, for each year.
Shell is the world's third-largest public oil company in terms of market capitalization. Standard & Poor's on Monday lowered its long-term ratings of the company to "AA+" from "AAA."
The Davis, Polk report -- which Shell said it would not release in full to avoid interfering with official investigations -- found inadequate oversight within Shell and recommended tightening it.
Chairman Jeroen van der Veer said new controls would be rigorously enforced and subject to far greater scrutiny.
©2004 Associated Press