The Scotsman: Shell admits reserve 'lies'

MARTIN FLANAGAN CITY EDITOR

Tue 20 Apr 2004

STORM-tossed Shell yesterday ousted its chief financial officer, announced its third reserves downgrade in three months and admitted it had lied to investors in one of the biggest City scandals in two decades.

The group also said it would speed up a review of its disliked Anglo-Dutch corporate structure, in a move widely seen as a sop to disgruntled institutional investors.

Shell’s shares closed down 3p at 389.5p.

The oil giant confirmed the ousting of Judy Boynton as chief financial officer following the previous sacking of chairman Sir Philip Watts and the head of exploration and production, Walter van de Vijver, in the wake of the scandal.

Boynton is being retained as an adviser for now, but is expected to leave with a big payoff after the annual meeting in June.

Shell said yesterday that it was lowering its estimates of its proved reserves for the third time in as many months.

A third marginal downgrade means the total cuts to the group’s recorded reserves for 2002 will now be 4.35 billion barrels lower than originally thought.

There is also a further reduction of 500 million barrels for last year, taking the total shortfall to 4.85 billion barrels - almost one billion barrels more than detailed in January’s initial shock warning that sent Shell’s shares tumbling.

The impact on earnings from these changes averages $100 million (£55.4m) for each year since 2000, Shell said. It came as the company yesterday released the results of an internal probe into the oil and gas reserves shortfall - showing senior directors had knowingly hidden it from investors for years.

The report also showed that internal audits on booking reserves were undertaken by a single former Shell employee who worked on a part-time basis.

The report quoted a September 2002 note by van de Vijver in which he said: "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. Unfortunately, we are struggling on all key criteria."

Despite this damning note, the report revealed that van de Vijver had tried from 2001 to 2003 to rectify the discrepancy between previously booked reserves and guidelines set out by the Securities and Exchange Commission, the US regulator.

In November 2003 he told then chairman of managing directors Phil Watts he was "sick and tired about lying about the extent of our reserves issues because of far too aggressive/optimistic bookings". The lawyers were particularly damning of Watts, who ran the exploration and production division from 1997 to 2001 - the period in which the mis-bookings were made.

The report said "there was a perception that Sir Philip’s own success could be attributed, in part, to his ability to meet or exceed reserve expectations".

It added: "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... this strategy failed."

Jeroen van der Veer, Shell’s new chairman, said yesterday he felt the report drew a line "under the uncertainties that have surrounded the status of our reserves since 9 January".

The company said it had full confidence in the current management team and had concluded "none of them bore material responsibility" for the reserves issue.

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