In a report prepared for its Group Audit Committee (GAC), Royal Dutch/Shell Group outlined how its former top executives knew and argued about a reserves reporting problem for 1 1/2 years before informing the public.
In addition, a reserves recategorization review resulted in Shell announcing a total proved reserves reduction of 4.35 billion boe for 2002 and 500 million boe for 2003. This marks the major's third downward oil and natural gas reserves revision this year.
Shell also announced Apr. 19 that Group Chief Financial Officer Judith Boynton resigned from that position. She will, however, continue as an employee. Tim Morrison, group controller since July 2002, was appointed acting group CFO.
A company review of corporate governance, which was announced Mar. 18, will be accelerated, and an update on its progress is slated for June 28, Shell said.
Reserves reporting problems
A lengthy report to the GAC said that former Chairman Philip Watts and Walter van de Vijver, then CEO of exploration and production, had disagreed about the handling of reserves figures. Watts was Van de Vijver's predecessor as E&P chair.
Numerous documents outline a continuing dialogue between Watts and Van de Vijver. The two executives resigned earlier this year (OGJ, Mar. 22, 2004, p. 31). At the time of his resignation, Van de Vijver was group managing director and a member of Royal Dutch Petroleum's board.
In a Nov. 9, 2003, e-mail to Watts, Van de Vijver said, "I am becoming sick and tired about lying about the extent of our reserves issues and the downward revisions that need to be done because of far too aggressive-optimistic bookings."
The report concluded that Watts and Van de Vijver "were alert to the differences between the information concerning reserves that had been transmitted to the public, 'external,' and the information known to some members of management, 'internal.'"
On Feb. 11, 2002, Van de Vijver forwarded a Note for Information warning to the Committee of Managing Directors (CMD), saying that proved reserve exposures were as much as 2.3 billion boe because of noncompliance with US Securities and Exchange Commission guidelines.
Shell's reaction
The boards of Shell parent companies accepted the GAC findings on the reserves reductions. The impact on net income averages about $100 million/year, which is less than 1% of aftertax net earnings for 2000-03, the company said.
"The report to the GAC revealed disturbing deficiencies in our past reserves reporting practices and the manner in which Shell dealt with those issues. We have accepted these difficult findings in full and have taken vigorous action," said the chairs of the Shell parent-company boards.
Shell has implemented "a new regime for reserves accounting and compliance, monitored by external consults," the statement said. "We believe this deals with our past mistakes and sets a new standard for the future. Shell simply cannot allow this to happen again."
The statement confirmed the group's "complete and unreserved confidence in the leadership of Jeroen van der Veer as the new chairman of the CMD." It added that Shell expects to "reengage with its stakeholders and reestablish confidence in our behavior as a business and employer."
Reserves, credit rating
Shell said it completed an extensive review of its world reserves portfolio, conducted with the assistance of Ryder Scott Co. LP, Houston. Shell hired Ryder Scott in March.
"The closing balances for the 2002 and 2003 proved reserves are therefore approximately 15 billion boe and 14.5 billion [boe], respectively," the review said.
Shell first announced a downward revision of proved oil and gas reserves by 3.9 billion boe, or 20% (OGJ Online, Jan. 9, 2004).
The initial reserves revision involved 2002 figures. On Mar. 18, Shell announced a second recategorization (OGJ, Apr. 5, 2004, p. 36).
The latest reserves review examined nearly 300 fields, accounting for 90% of Shell's global reserves. This included "virtually all fields above 10 million bbl and also addressing those fields in associated companies," Shell said. "This brings the company's reserve replacement ratio for 2003 to around 60% and its reserve life at the end of 2003 to 1 1/2 years."
Standard & Poor's Ratings Services, New York, lowered its long-term ratings on Royal Dutch/Shell Group to AA+ from AAA. The downgrade also involves the group's fully owned subsidiaries Shell Oil Co., Shell Petroleum NV, and Shell Petroleum Co.
These ratings remain on credit watch with negative implications, where they were placed on Jan. 9, S&P said.
Emmanuel Dubois-Pelerin, S&P credit analyst, said the audit report on the company's past booking process "highlights areas of durably weak corporate governance, with significant digressions from SEC rules."
Although Shell's reserves and reserve life indicators were only modestly affected on a proved-developed basis, Dubois-Pelerin said, "A successful upstream division, notably in exploration, is key to an integrated oil and gas company's creditworthiness."