US and UK regulators Aug. 24 confirmed a $150 million settlement with Royal Dutch/Shell Group that the company first disclosed in July.
The US Securities and Exchange Commission and its UK counterpart, the Financial Services Authority, declined to comment on the matter in July but finally broke their silence (OGJ Online, July 29, 2004).
An Aug. 24 SEC statement alleged that Shell overstated proved reserves reported in its 2002 Form 20-F by 23%, equaling about 4.47 billion boe. The SEC order further concluded that Shell overstated its future cash flows in the same filing by $6.6 billion. Shell later corrected that and other overstatements in an amended filing on July 2; the correction reflected the years 1997-2002.
Commenting on the SEC enforcement action, Harold F. Degenhardt, administrator of SEC's Fort Worth office, said, "Shell's overstatements of its oil reserves, which occurred over an extended period, mandate a strong enforcement response, including imposition of significant civil penalties, to deter Shell and others from engaging in similar misconduct."
SEC said it coordinated its investigation closely with the FSA and the Autoriteit Financiële Markten, the primary financial market regulator in the Netherlands. The agency in its statement did not address whether it will update the way oil companies must book reserves, but some industry observers feel SEC may be forced to tackle the question sooner rather than later if some of the industry's harshest critics in Congress get their way.
Shell statement
Shell settled without admitting or denying SEC's or FSA's findings and conclusions. Company officials also stressed their cooperation with authorities over the matter.
Jeroen van der Veer, chairman of Shell's committee of managing directors, said, "Shell has worked hard over the past months to improve its systems and controls and implement other remedial measures to prevent any recurrence of these unfortunate events."
Regulators said civil and criminal investigations of specific individuals connected with the reserve exaggerations are still pending; no timetable has been given when possible indictments may happen.
Meanwhile, SEC officials called Shell's overstatement of proved reserves, and its delay in correcting the overstatement, "reckless." Regulators also suggested that Shell was warned several times by government officials that its reserve estimates were overly optimistic, but the company ignored them.
"Indeed, Shell was warned on several occasions prior to the fall of 2003 that reported proved reserves potentially were overstated and, in such critical operating areas as Nigeria and Oman, depended upon unrealistic production forecasts," SEC said.
"In each case, Shell either rejected the warnings as immaterial or unduly pessimistic or attempted to "manage" the potential exposure by, for example, delaying debooking of improperly recorded proved reserves until new, offsetting proved reserves bookings materialized."