The Sunday Times (UK): Agenda: Paul Durman: Reserves woes are still not over at united Shell: “Amid the euphoria over the creation of the new company last week, most people missed a worrying statement from Malcolm Brinded, head of exploration and development. The continuing uncertainty over the true level of the company’s reserves” (ShellNews.net)

October 31, 2004

LORD KERR is such a wag. Last week the Shell director who led the work on the oil giant’s dramatic corporate restructuring quipped that the company had received lots of free advice from journalists on what form the revamp should take.

It’s no joking matter. A lot of time and money could have been saved if Shell’s board had grasped the nettle early in the debacle over the company’s reserves.

In January, when Shell was still in full denial, claiming its problem was with individuals, not structure, we wrote this: “Shell needs to introduce a unitary board, an independent non-executive chairman and one chief executive. If Sir Philip Watts (then chief executive) wants to keep his job, he needs to seize the initiative and go for a wide-ranging shake-up.” Watts didn’t go for it, and he did lose his job.

There were signs on Thursday that Shell’s maddening myopia when it comes to the bleeding obvious is still not completely cured. Lord Oxburgh and his fellow directors hailed the changes as “a great day” — conveniently skipping over the fact that the day would never have arrived if they had not been goaded into action by six months of crisis and relentless shareholder pressure.

It is this culture, the automatic assumption that everything Shell does must be right just because it is Shell, that will be Jeroen van der Veer’s biggest challenge in his new role as chief executive of the merged Royal Dutch Shell.

But perhaps I’m being churlish. Abolishing 100 years of corporate history in the form of Shell’s unique twin-company structure takes courage, and the directors have in the end shown that. They and their advisers are also to be commended for coming up with a clever structure that preserves the tax status of the British and Dutch shareholders — the latter group including the Dutch royal family.

Amid the euphoria over the creation of the new company last week, most people missed a worrying statement from Malcolm Brinded, head of exploration and development. The continuing uncertainty over the true level of the company’s reserves — Shell had to raise doubts over another 900m barrels last week, and warned of the possibility of more problems to come — meant that it could no longer stand by its previous guidance on reserve- replacement rates.

Reserve replacement may sound a bit arcane, but it’s a basic measurement of how well an oil company is safeguarding its future by finding new oilfields to replace its exhausted ones.

Brinded said the current guidance for this year of replacing 60%-80% of reserves was no longer valid, and another forecast would not be ready until February.

But he insisted that Shell would still hit 100% over the next four years, but the obvious implication is that the final figure could be under 60%. When an oil company can’t find oil — and isn’t even too sure about the stuff it has found — it’s time to start worrying.