The Scotsman: wipes 7.5% off shares

JAMES DOW

10 Jan 04

OUTRAGED investors in Shell were questioning the future of chairman Sir Philip Watts last night, after the company admitted it had overstated its proven oil and gas reserves by a colossal 3.9 billion barrels, or 20 per cent of its global total.

Shell shocked the City - and wiped 7.5 per cent off its shares - when it announced the results of an unexpected internal review. It said 2.7 billion barrels of oil and 1.2 billion barrels of gas that it previously claimed were "proven" - meaning they had a 90 per cent chance of recovery from the ground - should have been classified as "probable" or "possible".

The energy giant insisted this would have "no material effect" on its 2003 results, due in three weeks. But analysts said it raised fears about the company’s future financial health. The shares dived 30p to 371p.

Concerns that other oil companies would feel forced to launch similar reviews knocked shares across the sector. BP, which cut its Russian reserve estimates last summer, shed 2 per cent to 434p.

Shell attempted to smooth the waters in a tense, hour-long conference call with City investors. But they were unimpressed. David Cumming, head of UK equities at Standard Life Investments, demanded to know why Shell chairman Sir Philip Watts had not made himself personally available to explain the overstatement.

Cumming said: "Given his [Sir Philip’s] relevance to upstream development during the period the reserves were booked, do you not feel it changes his position, or standing, within the group?"

Simon Henry, head of investor relations for Shell, replied: "I would just say we reported our review as soon as possible." Cummings answered: "I think analysts and investors will require further explanation."

Shell stressed that defining "proven" reserves was a subjective matter, given the standards of the US Securities and Exchange Commission. Henry said the original classification was made by "people acting in good faith at the time... exercising their best judgment".

But Merrill Lynch’s Alastair Syme told Shell he was "amazed" it had booked some of its liquid natural gas reserves in Australia. JJ Traynor, chief oil analyst at Deutsche Bank in Edinburgh, questioned whether Shell had employed an external auditor to check its estimates. The company admitted it had not.

Given its admission that billions of barrels of oil and gas will be more difficult to pump, analysts speculated Shell’s capital expenditure could be forced up.

Henry insisted there would be no effect in 2004-05, saying its budget had already been committed. He also said Shell’s cash flow would not be hurt, adding that asset depreciation on its balance sheet would be affected "by tens of millions of dollars, which at a group level is not significant".

However, when investors challenged Henry to repeat the company’s previous prediction that oil and gas production will grow on average by 3 per cent per year in 2000-07, he declined.

The company also refused to reveal if any of the re-classified reserves are in the North Sea. It is understood any change there would be small, but Shell would only say the bulk of adjustments concern reserves in Nigeria and Australia. Further details may be disclosed at its results announcement on 5 February.

http://www.business.scotsman.com/index.cfm?id=30122004

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