Shell's Chairman Philip Watts reassures employees

Jan. 21, 2004
Royal Dutch/Shell Group Chairman Philip Watts has written a letter to employees, reassuring them that there is no evidence of any wrongdoing involved in the company's recent reserves revision.

By OGJ editors
HOUSTON, Jan. 21 -- Royal Dutch/Shell Group Chairman Philip Watts has written a letter to employees, reassuring them that there is no evidence of any wrongdoing involved in the company's recent reserves revision.

"It is important to bear in mind that this recategorization was the result of our own internal processes. Based on those reviews, I believe that individuals concerned worked in good faith to the interpretations in use when the bookings were made, following proper processes, and that there is no evidence of any misconduct," Watts wrote in a letter to staff that was dated Jan. 16 and posted on the company's website.

On Jan. 9, Shell announced that it had overestimated its proved oil and natural gas reserves by 3.9 billion boe, or 20% (OGJ, Jan. 19, 2004, p. 28). Some shareholders criticized Watts for not participating in a conference call with investors and reporters that day.

"Despite our desire and best efforts to be as open and transparent as possible, there are constraints on the content and timing of our disclosures. Before the announcement, we initiated contact with the US Securities and Exchange Commission on the recategorization, which is ongoing as you would expect," Watts said in his letter.

He asked employees to be "patient and understanding as we seek to balance the interests of our many stakeholders against the legal and regulatory requirements to which we must adhere."

Previously, Shell had said that Watts declined comment on the reserves revision because the company was in a "closed" period pending its financial results report on Feb. 5.

Deutsche Bank comments
Shell's reserves revision "has thrown the spotlight on one of the sector's most important, but in many ways opaque, measures," said a research note from Deutsche Bank AG analysts Caroline Cook and J.J. Traynor.

Other companies will be risk only if they made a genuine mistake that the SEC detects or if they took reserves estimates for a project directly from Shell as the operator and that number has now changed, Cook and Traynor said.

But the analysts also said that other companies' exposure to Shell's estimates is "probably less than expected." They believe that "the chance of significant contagion from the adoption of Shell's new reserves estimates across the larger oils is likely to be low."

In addition, companies could find themselves at risk if they decide to change their reserves booking policy.

"Shell appears to have switched to [a] very prescriptive approach to proven booking�the capex for a large field development must have been formally approved," Cook and Traynor said.

"A wholesale switch could trigger downgrades elsewhere, but unless accompanied by persistent over optimism across the reserves bases, [it] should not match the scale of Shell's move," they noted.

Questions for BP
BP PLC booked reserves at an average 211%/year for 2000-02, which was almost double its own 10-year growth history and double its rival ExxonMobil Corp., Cook and Traynor said. BP's net reserves additions for 2000-02 were 8.9 billion boe.

"That booking rate matched the growth targets that BP had set at the time. Given that those production growth targets have now been invalidated, we believe that it is legitimate to challenge BP on the quality of its reserves books across this period," Cook and Traynor said.

"Undoubtedly, BP's growth portfolio has improved, especially in the deep water, LNG, and the Caspian. However, how much has already been booked from BP's new core areas, and what timeframes have been assumed? Can BP sustain that booking rate," Cook and Traynor asked.

A BP spokeswoman in New York has said that BP was not revising its reserves.