Report pegs Shell problems on exec battles :: Namibia Internet Gateway cc ::

Articles: Report pegs Shell problems on exec battles

Posted by admin on Tuesday, April 20, 2004 - 02:05 AM

A tense and at times hostile relationship between the two most powerful executives of the Royal Dutch/Shell Group lay at the heart of its problems with overstated oil and gas reserves, according to a summary of an internal inquiry that was made public by the company Monday.
The summary describes pressure that Sir Philip Watts, the chairman of the company from 2001 until last month, exerted on the man who succeeded him as head of exploration and production, Walter van de Vijver, to "leave no stone unturned" to meet the goal of reporting that the company was replacing every barrel pumped out of the ground with a new barrel of reserves. The two men, whom the report called "the most powerful forces in management," resigned in early March, two months after Shell, the third-largest publicly traded oil company, disclosed that it had overstated its reserves by 20 percent, throwing the company into a crisis. The British and Dutch company, which is based in The Hague, is now under investigation by regulators and prosecutors in Europe and the United States. The internal inquiry also found that the company's chief financial officer, Judy Boynton, had been aware of the problems for the past two years but had done nothing to correct them. Boynton was relieved of her duties Monday. The company continued to express confidence in its new chairman, Jeroen van der Veer, even though he also was advised about problems with the reserves two years ago and failed to take any action. Van der Veer was not mentioned in the internal inquiry's findings. Shell revised its reserve figures downward Monday for the third time, by another 300 million barrels. And a few hours after Shell disclosed the conclusions of its inquiry, Standard & Poor's stripped it of the AAA credit rating it had maintained for 14 years. According to the internal inquiry, Watts' order came in May 2002, after van de Vijver began to raise alarms inside the company that the exploration and production unit under Watts might have overstated the company's reserves by as much as 2.3 billion barrels. The tension between the two men boiled over last fall, when Watts gave van de Vijver a negative personnel evaluation, and van de Vijver replied with a blistering e-mail message. "I am becoming sick and tired of lying about the extent of our reserves issues and the downward revisions that need to be done because of far too aggressive/optimistic bookings," van de Vijver said in a November 2003 e-mail message to Watts that was quoted in the report. According to the summary, van de Vijver first raised alarms about the reserve figures in a February 2002 memo to Watts and other executives, and wrote a more explicit note for his files later that year. "Bottomline was that both reserves replacement and production growth were inflated," he wrote in September 2002. "Aggressive/premature reserves bookings provided impression of higher growth rate than realistically possible." But instead of publicly disclosing those concerns, the company embarked on a strategy of trying to "manage" the reserve figures, the inquiry summary said, much the way many other companies in the 1990s had manipulated earnings to make it appear that goals had been met. "EP management's plan was to 'manage' the totality of the reserve position over time, in hopes that problematic reserve bookings could be rendered immaterial by project maturation, license extensions, exploration successes and/or strategic activity," the report said. "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," the report concluded, "this strategy failed -- as business conditions either deteriorated or failed to improve sufficiently to justify historic bookings." Oil and gas reserves, and the rate at which their depletion is replaced with fresh reserves, are a significant barometer of an energy company's financial health. While the accounting treatment of reserves is an art as much as a science, the Securities and Exchange Commission imposes a series of strict rules that govern how companies book them. The company began a systematic review of its reserves late last year, in response to new audits revealing trouble in its operations in Nigeria and Oman. That review led to the first lowering of estimates in January of 3.9 billion barrels. Monday's reduction, by 300 million barrels, brings the amount wiped off Shell's books since January to the equivalent of about 4.35 billion barrels of oil, or 22 percent of the company's previously stated total holdings. Executives said the company would have to restate its earnings downward by about $100 million annually between 2000 and 2003, and that the change amounted to less than 1 percent of its total earnings over that period. The internal report said there was "no common explanation" for overstatements in reserves off the coast of Australia and in Oman, Nigeria and Brunei. Though Shell's new S&P rating of AA(PLUS) is still considered very good, the company will now have to pay more to finance its operations.

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