Sunday Telegraph: Why Shell's three resignations are the first of many

By Robert Peston, Sunday City Editor (Filed: 25/04/2004)

Even in its bowdlerised version, the report by US lawyers to Shell's audit committee is a shocker. It's about how and why this wounded oil giant overstated its "proven" reserves of oil by a breathtaking $144bn (£81bn) at today's prices or 29 per cent (the margin of exaggeration has crept up from a disgraceful 25 per cent in January).

The sums involved are so large that they are almost incomprehensible. But it was this extract which challenged my grasp on reality: "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."

Even so, this unidentified chap - who had to singlehandedly check whether Shell really did own $639bn of oil - was aware that Shell's reserve disclosures were not compliant with the requirements of the only regulator that matters, the Securities and Exchange Commission. But he feared that pressing for SEC standards "would probably have cost me my job".

Anyway, year after year Shell told its shareholders that it was finding new oil at a rate that made up for the oil it was taking out of the ground. It was falsely claiming a success every bit as misleading as the balance sheet manipulation of Enron or the earnings manipulation of WorldCom.

Unlike them, Shell may not actually be bust. But - unlike those Johnny-come-latelies of the 1990s bubble - it has squandered goodwill and a reputation for business excellence built up over a century. The disgrace is as profound.

So it is laughable that almost any member of Royal Dutch/Shell's top boards - whether executive or non-executive - should survive the debacle. If they were not complicit in the scandal, then they were incompetent for failing to spot the systemic malaise. The three executives that have already been ousted are a trend, not an end.

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