By Brian O’Connor,
23 January 2004 

DISSIDENT Shell investors are seeking a shake-up in the complex structure of the board and its committees. One result may be that an outside chairman is appointed when Sir Philip Watts steps down. 

This would be a revolution for Shell, but big investors are in a revolutionary mood.  

Though most boards now have a full-time chief executive and a part-time chairman, the UK company Shell Transport has traditionally had an executive chairman. So too has its sister company Royal Dutch Petroleum. 

A powerful committee of managing directors straddles both groups and is chaired by one of these two chairmen - currently Sir Philip. 

Shell is famed for its committees. But outside investors are now adamant that something must change at the group. 

Sir Philip defiantly set out his plans to present the 2003 results on 5 February. He will front a long session with the media and City analysts. 

Shell recognises that big investors remain angry and this will be a crucial test. To complicate matters, Shell faces a demand for big tax repayments in Nigeria. 

Big investors have sought a meeting with senior independent director Lord Oxburgh. Members of the Association of British Insurers, who own at least 25% of Shell Transport, have expressed their concern. 

Oxburgh, 69, a distinguished scientist, appears to have resisted calls for change and has backed Sir Philip.

By Geoff Foster

22 January 2004

RUMOURS were rife that Sir Philip Watts might make a sudden departure. The chairman of Shell has never been everyone’s cup of tea. He further blotted his copybook by failing to turn up to answer analysts’ and investors’ questions about the oil giant’s shock admission that it has cut its proven reserve estimates by 20%.

Some £3bn was wiped off its share price, but Sir Philip was nowhere to be seen.

Shell firmed 4 1/4p to 365 1/2p yesterday on hefty turnover of 73m as dealers heard that major shareholder Legal & General was pressing for a change. Some suggested his departure could even be confirmed when the group reports annual results on 6 February. If not then, the word is that April’s AGM will certainly be his last.

Sir Philip took a lot of flak after shelling out £3.5bn for Enterprise Oil in April 2002. His chairmanship is due to run until mid-2005, but some investors and fund managers - disappointed by poor production and reserves growth - now believe he should not go the distance.

Thu 22 January, 2004 10:29

DAVOS, Switzerland (Reuters) - Royal Dutch/Shell boss Phil Watts, facing shareholder wrath after the company’s downgrade of its oil and gas reserves, has cancelled an appearance at the World Economic Forum.

“He’s not coming,” said a Shell spokesman in the Swiss ski resort of Davos on Thursday. “You will understand that the schedules of chief executives are very busy and constantly changing.”

Watts, chairman of Shell’s Committee of Managing Directors, had been due to take part in a discussion on Thursday on “how business boosts development” at the annual gathering of political and business leaders.

BP BP.L Chief Executive John Browne, Watts’ counterpart at Shell’s main European rival, dropped out of the event before it began. Both companies are due to report 2004 results early next month.

By HEATHER TIMMONS

January 22, 2004

LONDON, Jan. 21 - Shell’s surprise cut in its reserve estimate this month may be a sign that the uniquely structured company needs to reconfigure itself, some investors and analysts are saying.

Attention has been focused on Sir Philip B. Watts, who led the unit in question before becoming chairman in 2001, but also on Shell’s two-headed structure. Ultimately, most investors doubt that Sir Philip, who will leave his post next year, will step down or be forced out. But the time may be right for Shell to reconsider its overall operating structure, some investors are saying.

Shell, one of the world’s top oil and gas producers, is unusual in that it is made up of two separate holding companies, the Royal Dutch Petroleum Company in the Netherlands, and the Shell Transport and Trading Company in Britain. The latter owns 40 percent of the total group, the former 60 percent. Both have separate boards, with no overlapping executives.

Groups of investors have been lobbying the company for a meeting to explain the Jan. 9 announcement of a drastic cut in estimates, which removed 3.9 billion barrels from proven reserves. So far, Shell has declined to provide any further information, citing a company quiet period before it announces its year-end results on Feb. 5.

In a note to employees posted on the company’s Web site, Sir Philip acknowledged that there was “significant concern and, in some quarters, outrage” because of the reduction in the estimate. But, he said, “there are constraints on the timing and content of our disclosures.” The company contacted the Securities and Exchange Commission before the Jan. 9 disclosure and is in ongoing talks with the regulator, the note said.

The absence of information has led investors to try to find their own answers on why the discrepancy occurred, and offer solutions to make sure it does not happen again.

Critics say that Shell’s separate boards mean less governance, not more. “We think there is a case for revisiting the high-level corporate structure of the company,” said Robert Talbut, chief investment officer at Isis Asset Management, which controls $95 billion in assets, including shares of Shell Transport. It is time to “look again as to whether there is sufficient independent oversight of executive management,” Mr. Talbut said.

Shell disputes the notion that the company’s overall structure has anything to do with the change in reserve estimates. The heads of the two operating units meet regularly to make decisions about day-to-day operations, the company said.

“The fact that it is a two-parent group does not impact on decision-making at an operational level,” said Simon Buerk, a spokesman for Shell.

But most investors agree there is little upside to Shell’s complicated structure.

“In a difficult operating environment, complex corporate structures begin to encourage incorrect decision-making,” said Louis Gargour, a managing director with RAB Capital Management in London, who recently sold short bonds of Shell subsidiaries, essentially making a bet the bonds would lose value.

The Royal Dutch/Shell Group of Companies was created in 1907. In the face of rising competition, Shell, which started in 1833 as a London seashell peddler and over time transformed itself into an import-export business focused on oil, combined with Royal Dutch, an oil drilling and transport company.

But the combination was not a true merger. The two independent companies remain, with the boards at each heavily made up of either British or Dutch executives.

Changing the dual structure could be difficult. Combining the companies would require a completely new tax structure and an overhaul or combination of both boards, among other complications.

Consideration has been given to merging the companies, one person close to the situation said, but executives have decided against it because it was too complicated.

Shell’s two-company structure is also a handicap to making acquisitions, energy bankers said. Both Royal Dutch and Shell Transport and Trading are required to issue separate bonds and equity, making it cumbersome to raise quick capital, the bankers said.

Consequently, Shell is forced to rely on cash more than its rivals do in making acquisitions - a particularly tough hurdle at a time when merger price tags carry big premiums for higher oil prices, bankers said.

The overall corporate structure may even be at the root of some of the criticism directed at Sir Philip. His performance is being judged against that of his counterpart, Lord Browne, at BP, which has posted strong results. BP has excelled in part because of a string of deals that Lord Brown undertook in recent years, including buying Amoco and investing over $6 billion in Russia.

“Lord Brown has taken certain risks, and moved in a direction that in some cases has been trend-setting,” said Fred Leuffer, an analyst with Bear Stearns in New York.

A different direction may still be in the cards for Shell, if investors have their way. Members of the Association of British Insurers hold 40 percent of Shell Transport and Trading, the British arm of the company, and the reduction in the reserves estimate has the traditionally conservative investors worried.

“Our members are very concerned,” Lucy Butler, a spokeswoman for the insurance group, said, without elaborating.

January 9, 2004

LONDON (AP) - The Royal Dutch/Shell Group is downgrading one-fifth of its proved oil and natural gas reserves after reassessing the prospects of some of its projects.

Shell said Friday it was recategorizing 3.9 billion barrels of oil equivalent from proved reserves to “scope for recovery.” None of Shell’s Canadian reserves were affected by the change. The “scope for recovery” category means that although the same volume of hydrocarbons is believed to be present, the development of the projects is not mature enough for them to qualify as proved reserves.

The international company’s share price tumbled about six per cent in London and Amsterdam after the announcement.

Shares in Shell Canada, 78 per cent owned by Royal Dutch/Shell, slipped 0.9 per cent in Toronto.

Royal Dutch/Shell said the reclassification of reserves followed studies completed in the fourth quarter of 2003.

“A number of countries are affected by the change, with the largest impact in Nigeria and Australia,” the company stated.

“A significant proportion of the recategorization relates to the current status of project maturity.”

Shell said it expected to reclassify the reserves as “proved” as projects proceed, and “There is no material effect on financial statements for any year up to and including 2003.”

Two-thirds of the recategorization involved crude oil and natural gas liquids, and one-third affected natural gas.

Royal Dutch/Shell said it does not expect the recategorization to affect production in the near term.

Following the announcement, Standard and Poor’s Ratings Services placed its AA-plus rating on Shell Canada on credit watch with negative implications, as a result of similar action being taken on the parent company.

“While the negative credit watch suggests the long-term and senior unsecured debt ratings may be lowered, the short-term ratings will not be affected by any future negative ratings revision,” said S&P credit analyst Michelle Dathorne.

“At present, Shell Canada’s long-term and senior unsecured ratings are one notch below its parent company, and we expect a rating differentiation will be maintained.”

Shell Canada, one of Canada’s largest natural gas producers and a major oilsands operator, refines gasoline and sells fuel through a national network of Shell stations.

Its stock (TSX:SHC) closed down 55 cents at $62.35 on the Toronto market.

In London, Shell Transport and Trading Co. fell 6.2 per cent to 376.22 pence.

Shares in the Royal Dutch Petroleum, generally among the most stable issues on the Amsterdam exchange, fell six per cent to 38.94 euros.

© The Canadian Press 2004

http://www.canada.com/national/nationalpost/news/story.html?id=890b047a-ac50-4fa4-927f-f88e1a519bf2

 

Stunned investors promptly began a sell-off that knocked more than 7% off the Anglo-Dutch firm’s share price in both London and Amsterdam.  

Shell said it does not expect the reassement to have any impact on its financial results, as 90% of the reserves involved remain undeveloped. But analysts were unconvinced. Shares in fellow oil firm BP also fell 2%.  

Cautious move  

Shell said it was making a one-off revision of its proven reserves by moving some of them into a category known as “scope for recovery”.  

It expressed confidence that it may be able to add the reserves back to its proven pumpable holdings later, once its is more certain of their commercial viability.  

“It is anticipated that most of these reserves will be re-booked in the proved category over time as field developments mature,” said Shell.  

Meanwhile its 2003 proven reserves statement, which is due out on 6 February, will be lighter by 3.9 billion barrels of oil equivalent than the end-2002 list.  

Investors and oil analysts were startled, and puzzled, by the move.  

Markets stunned  

“It was shocking, to say the least,” the Agence France Presse news agency quoted one oil analyst who did not wish to be named as saying. “They gave no detailed explanation why this has happened.”  

“This reduces the value of the company by 10% using discounted cash flows,” said Richard Brackenhoff, an oil analyst for Kempen & Co.  

Most of the downgraded reserves are in Nigeria and Australia.  

Meanwhile, BP announced a drop in margins at its North American refining and retail operations.  

BP said its refining margins dropped $3.4 a barrel in the final three months of 2003 from $4.59 in the third quarter.  

Story from BBC NEWS:

http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/3382045.stm