The Sunday Telegraph: You can't be sure of Shell
(Filed: 21/03/2004)
'I was surprised and I was disappointed," declared Royal Dutch/Shell's new head of exploration and production, Malcolm Brinded, last week after the oil giant stunned the City by re-stating its reserves for the second time in less than three months.
Brinded, who has only been in the job for two weeks, could well have been speaking for the company's shareholders, who have been left wondering whether they can ever be sure of Shell again.
The disclosure on Thursday that Europe's second-largest oil company had been forced to reduce its estimate of reserves by a further 470m barrels sent shares down over 3 per cent to 361.50p, wiping some £1.5bn off its market capitalisation at one stage. Embarrassingly, it turned out that estimates of the 2003 reserves - given as recently as its annual results on February 5 - were incorrect, mainly in respect to the Ormen Lange field in Norway, which has been reassessed.
No wonder then that both Brinded and Shell's new chairman, Jeroen van der Veer - who was himself only promoted to the top job after his predecessor, Sir Philip Watts, was asked to resign earlier this month - were at pains to appear contrite about recent events.
In stark contrast with its shock announcement of a huge reserve restatement on January 9 when no senior executives were available, Shell went into overdrive last week, fielding all its titular chairmen - van der Veer, Aad Jacobs, the chairman of the Royal Dutch supervisory board, and Lord Oxburgh, the non-executive chairman of Shell Transport & Trading.
But if the impressive line-up was a response to investors' calls for more openness, it was also a clear sign as to just how much recent events have shaken the company to its foundations. In the space of less than three months Royal Dutch/Shell has seen its almost century-old reputation as one of the most conservative, blue-chip groups in the world blown to pieces as revelation after revelation has called into question not just the judgment of its most senior executives - two of whom have already departed - but its complicated corporate structure.
"It's another day, another crisis at Shell. There are only so many surprises investors will take, yet management still seems in denial," was the damning verdict of one US-based analyst.
The latest reserves shock has forced Shell to delay the publication of its annual report, due last Friday, as well as its annual general meeting (which will now take place at the end of June). But although executives on Thursday tried to draw a line underneath recent events by promising a belt-and-braces review of its reserves policy, the company is facing serious allegations on a number of fronts.
On Thursday Shell disclosed that it was the subject of an insider-dealing inquiry in the Netherlands. The inquiry, being undertaken by the Dutch equivalent of the Financial Services Authority, means that Shell is now the subject of at least four separate official investigations.
In addition to the US Securities and Exchange Commission, which began a formal investigation into the reserves downgrade in February, Shell is also being probed by the FSA and Euronext, the continental stock market group.
The FSA is reviewing claims that executives were alerted to problems linked to its reserves in early 2002. It is focusing on whether Shell broke UK stock market listing rules which oblige companies to warn shareholders in good time about developments that could have a significant impact on the share price.
Reports in America last week also suggested that the US Justice Department has begun a criminal investigation into Shell, although van der Veer said on Thursday that he had no knowledge of this beyond the press reports.
Last week van der Veer declared that he had not known about the false reserve bookings. He said: "Did I know about incorrect bookings [of reserves] in SEC returns? No."
However, in a slightly confusing statement, he added: "Until the end of 2003 we had documents in the company that there were exposures to the SEC. The word 'exposure' is not an incorrect booking."
He laid the responsibility for the misbooking of reserves between 1996 and 2002 on the group's Exploration and Production division, which had been run by Watts at the time.
"There is a basic belief in the integrity of your colleagues," he said. "We assumed that E&P was taking care of appropriate reporting."
Shell's executives - both present and past - will get their first real taste of the level of investor disquiet this week. The deadline for the formal filing of class action suits is this Friday and industry analysts are expecting a flurry of suits to be filed.
Whatever the eventual outcome of these class action suits, last week no one was willing to rule out that further heads would have to roll at the company in the coming weeks.
A number of industry executives last week said they were "astounded" that it was only now that Shell was introducing streamlined management procedures so that - for example - finance directors of each separate business would report to the group finance director rather than to their respective business chief executives.
And Shell is also removing reserves bookings from the calculations of annual bonus payments to executives within the E&P division; reserve bookings had previously constituted between 5 per cent and 15 per cent of an individual's bonus.
But for many the issue that goes to the heart of recent events is the glaring fact that Shell is a company in dire need of more oil.
"All the recent events are manifestations of a deeper issue, the depletion issue," says one City analyst. "What you've got is a super-major that is looking at the prospect of going ex-growth and the key question is - where is the growth going to come from?"
Reserves at the company declined throughout the first half of the 1990s because discoveries simply did not keep pace with production. According to reports in the US, Shell's executives were so worried about this that they allowed accounting guidelines used to book reserves to be relaxed, effectively enabling the company to book reserves in fields years before making significant investments to get the oil and gas out of the ground.
Last week Brinded announced that from now on proved reserves reporting would be specifically included in the "assurance process" and disclosure controls review. The new process requires management at all levels of the organisation to provide annual written assurance on a series of reporting and control activities.
Brinded was adamant that the company was experiencing "a real turnaround" on its reserves replacement, but it is still only aiming to replace its reserves by 100 per cent in the next five years, below the 130 per cent rate of its rivals. Although that may look like a slightly dull performance, Royal Dutch/Shell would dearly love to be boring once more.