Regulators face growing scrutiny over how publicly traded oil and natural gas companies book proven reserves, thanks to shareholder lawsuits and election-year politics.
Royal Dutch/Shell Group July 29 announced a settlement with US and UK financial regulators over revisions made to its proved reserves (see related story, p. 29). It admitted no wrongdoing; a US Department of Justice criminal investigation is still pending.
Litigation road
The decision drew an angry response from attorneys representing some of Shell's institutional investors.
Bill Lerach of Lerach Coughlin Stoia & Robbins LLP, which filed a lawsuit against the company June 25 in New Jersey state court, called the Securities and Exchange Commission's decision to end its investigation of Shell short-sighted.
"The settlement involves no admission of wrongdoing and, far worse, includes no promise of changes in the way [Shell] operates. Without significant internal governance reform, there is nothing to keep this disaster from repeating," Lerach said. "We will seek to hold board members and executives personally accountable for this fine as well as the other harm their misconduct has inflicted on [Shell]."
Congress watching
The week before the SEC deal was announced, investment banker Matthew Simmons told a congressional panel that the International Energy Agency is moving in the right direction by calling on the world's key oil producers, both state-owned and publicly traded companies, to produce new mandated reserves data that includes detailed field-by-field production reports.
"The 'Trust Me' era needs to end," he said.
No government officials testified at the July 21 House Financial Services Committee hearing with Simmons. Along with Simmons, the other witnesses, who included accounting professors and financial advisors, acknowledged oil and gas reserves are by definition an estimate and subject to uncertainty. Nevertheless the time has come for industry at a minimum to retool reserves numbers into more complete, uniform data, witnesses suggested.
"Some in the industry argue that small fixes may be all that is needed to improve the usefulness and reliability of reserves data," said Bala Dharan, professor of accounting at Rice University. "However, more likely, there is a larger credibility gap that affects the disclosures of reserves data, and it would require potentially new regulations or at the least new industry action to address the problems."
The hearing was sparked by ongoing inquiries by congressional veteran Rep. John Dingell (D-Mich.) who, as ranking member of the House Energy and Commerce Committee, has tried shaming colleagues and regulators into revising reserves standards. In a July 20 letter to SEC, the Financial Accounting Standards Board, and the Federal Energy Regulatory Commission, Dingell accused regulators and industry of dragging their feet on the issue.
"The time is past for lengthy study. I urge you to undertake a standard-setting project in consultation with the appropriate accounting and energy regulators with all deliberate speed," he said.