Posts from ‘August, 2006’

By Carola Hoyos

Published: August 31 2006 03:00 | Last updated: August 31 2006 03:00

The US Securities and Exchange Commission has decided not to take action against Sir Philip Watts, the ousted chairman of Royal Dutch Shell, the energy group.

The decision ends the regulator’s two-year investigation into the role Sir Philip played in the reserves scandal that cost the Anglo-Dutch energy group its three most senior executives and £8bn of its market value.

Adriaen Morse, counsel at Mayer, Brown, Rowe & Maw, which represented Sir Philip, said: “Sir Philip’s integrity is beyond reproach. The closing of the investigation lays to rest any doubt as to whether Sir Philip acted properly while chairman of Royal Dutch/Shell.”

But others were surprised that the SEC dropped such a high-profile case, during which an independent investigation had uncovered seemingly damning e-mails linking Sir Philip with the incorrect booking of Shell’s reserves with the SEC. Joseph Goldstein, partner at Mayer, Brown, Rowe & Maw, said the report had “created an atmosphere in which Phil did leave Shell. But at the end of the day, and at the end of a very thorough and rigorous investigation of all the facts and circumstances of Shell’s reserves reporting, the lead regulators [the UK's Financial Services Authority and the SEC] decided not to bring any action.”

Robert Turner, who works at Simmons & Simmons and advises UK companies being investigated by the FSA, said: “The main lessons here are about making sure regulators have the evidence to stand these cases up before taking them on, or announcing them, especially given the reputational stakes involved and the sanction levels.”

He added that a regulator dropping an investigation did not necessarily mean the individual or party in question was innocent.

He said: “It has very much to do with evidence and whether or not they have enough evidence and whether that evidence would have been admissible in court.”

Sir Philip has long maintained his innocence but was forced to leave Shell in March 2004 after the company came under heavy pressure from the SEC for wrongly reporting a quarter of its oil and gas reserves.

In the following months the FSA and SEC found Shell guilty of market abuse and fined the company a total of $150m (£80m).

Copyright The Financial Times Limited 2006

By Christopher Hope
(Filed: 31/08/2006)

The Texas explosion investigation, allegations of market rigging and huge oil leaks are making life tough, says Christopher Hope

Some time in the next few months, a clutch of lawyers from Texas are due to arrive at BP’s plush headquarters in London’s St James’s Square looking for the company’s chief executive Lord Browne of Madingley.
  
Lord Browne: to face oil refinery blast questions
 
The lawyers will be armed with tape recorders and a list of questions for Lord Browne about the catastrophic blast at BP’s Texas City oil refinery last year, which killed 15 people and left another 180 injured, resulting in a record $21.3m fine for safety violations.

The arrival of the men from the law firm Brent Coon & Associates at the HQ of Britain’s biggest company will be the most physical reminder yet of the litany of problems facing BP in North America.

They are certainly mounting up. Earlier this week it emerged that the US government had begun criminal and civil investigations into whether BP manipulated crude oil and unleaded petrol markets.

The US’s Commodity Futures Trading Commission (CFTC) has sent subpoenas to BP and energy traders in an inquiry into the alleged manipulation of the over-the-counter crude oil market in 2003 and 2004.

The paper also disclosed details of a separate investigation into the wholesale petrol market by the US Justice Department. The justices are understood to be examining a single day’s trading on the New York Mercantile Exchange in 2002.

These latest investigations are in addition to a third earlier inquiry, disclosed in June, into whether BP had manipulated the market for propane.

Then, BP was accused by the CFTC of driving up the price of bottled and heating gas prices, making an illegal $20m (£11m) profit. BP was accused of manipulating the market for propane in February 2004 after allegedly trying the same tactic in April 2003.

More controversial were tapes released by the commission detailing alleged conversations between BP traders. In one extract, two traders, Dennis Abbott and Cody Claborn, purportedly discussed their positions in the propane market.

Abbott: “How does it feel taking on the whole market, man?”

Claborn: “Whew. It’s pretty big man.”

Abbott: “Dude, you’re the entire [expletive] propane market!” Abbott goes on to express some concerns, but they are brushed aside by Mark Radley, their manager.

Radley: “Don’t worry about it, it’s the first two days of the month. Plenty of lead time for people to think that barrels will emerge and take a short position.”

Abbott: “No, it’s cool. I dig it, it just, sometimes it’s hard, it just feels hard to take on the whole market sometimes.”

It does not stop there. In Washington, congressmen are starting an investigation into BP’s troubled Prudhoe Bay field in Alaska next week. In March, more than 200,000 gallons of oil spilled from one pipe. Earlier this month, oil prices surged after BP had to partly shut down one of the fields because of corrosion problems.

This inquiry by the House energy and commerce committee, which begins on September 7, wants to examine whether BP failed to inspect and maintain the pipeline properly until it was ordered to do so by regulators.

This drip, drip, drip of bad news from the US is starting to affect sentiment towards BP on the London stock market where £1 of every £6 paid in dividends to UK pension funds comes from BP.

One fund manager controlling around 1pc of the stock said he was concerned that the problems could hint at a wider malaise. “You would be concerned by a succession of issues which appear to be cropping up. That is syptomatic, but of what problems – we don’t know,” he said.

Another major investor told The Daily Telegraph: “Are they are a series of individual problems or is there a systemic problem? You do suspect from the problems at the refinery and Prudhoe that there may be underinvestment.

“BP has been operating at full capacity and so it might be difficult to shut down a refinery when petrol is selling for £1 a litre.

“There is this feeling that they have not been doing all they needed to do in terms of capex. It is not that they have not got enough money.”

A BP spokesman said: “We routinely assist regulators and other authorities in their requests to understand the facts related to our businesses. Having said that, we do not comment on the specifics of these requests or the agencies that make them.”

For its part, BP does not believe there is any link between the various problems hitting the company in the US. Rather, the problems are emerging because of the current regulatory focus in America on BP’s operations in the wake of the Texas City blast last year.

One person familiar with the company said: “BP is under incredible scrutiny. Everybody in the US is trying to take a pot-shot. There is no connection between these things – they are all in different parts of BP run by different people and management. They are not linked.”

On Texas City, the company is appealing the decision by a Texas judge to allow the lawyers to question Lord Browne and another executive director, John Manzoni.

Industry sources question whether quizzing Lord Browne is a crude attempt to pressure the oil-and-gas giant to settle the case.

One source asked: “What does John Browne know about the detailed plans for Texas City?” Other more junior managers with greater knowledge of the refinery have already been deposed.

BP sources acknowledge concerns in the City about underinvestment. While this might have been the case when oil was trading at $10 a barrel in the 1990s, investment has been increased since then. BP invested $14bn to $15bn in capital expenditure in each of the past two years.

At Prudhoe Bay, sources privately question whether the company was “pigging” or checking the pipes frequently enough. BP engineers are puzzling over why the corrosion affected only parts of the pipes in which the flow of oil had slowed.

Robert Malone, the 54-year-old Texan brought in as chief of BP’s Americas business, has embarked on a whistle-stop tour of the US facilities to review the state of operations. He was appointed in July, having won a reputation as an effective manager of the trans-Alaskan pipeline in the late 1990s.

It all adds up to a dreadful summer for Lord Browne, who this time last month was at the centre of a tussle with his chairman Peter Sutherland about when he should retire from the oil giant. He is now proposing to step down at the end of 2008.

Speaking at the company’s half-year results, Lord Browne tried to defuse the alleged row. “It would have been better if July had been cancelled,” he joked. He will probably add August to that list now, too.

EXTRACT: He was able to show that he relied on Shell’s reserves reporting process which was transparent and involved experts who believed it to comply with SEC rules; that he relied on Shell’s external auditors who followed procedure, reviewed relevant reserves and did not object to Shell’s proved reserves submissions to the SEC; and finally Shell’s reserves booking was discussed openly with other management including the group audit committee. Case dismissed.

THE ARTICLE

Business comment
By Damian Reece

(Filed: 31/08/2006)

Just as Sir Philip , the erstwhile chairman of Shell, announces to the world that investigations against him have now been closed without charges being brought after the oil giant’s 2004 reserves scandal, the legal noose is tightening around Shell’s great rival BP.

The past two years or more have seen big oil in big trouble for one reason or another. Shell, having eaten tons of corporate humble pie since admitting it had mis-stated its crucial oil reserves number, has recently let BP take a monopoly position on bad news.

BP is now facing a string of damaging investigations, from the safety of its oil refinery in Texas that had a fatal explosion last year, to environmental damage caused by corroding pipelines in Prudhoe Bay, to allegations of market manipulation of crude oil and unleaded petrol markets, which come with both criminal and civil proceedings.

The issues that faced Shell in 2004 and which precipitated Sir Philip’s resignation are different to the raft of allegations now being beaten off by BP. But while still only allegations, BP is in danger of being engulfed in a series of issues that could prove as damaging to its reputation as that faced by Shell.

Lord Browne, the previously untouchable BP chief executive, has finally succumbed to those jealous gods who rule the markets.

Hubris seems to have struck again. A nasty skirmish with BP’s chairman, Peter Sutherland, during the summer over Lord Browne’s retirement date now seems the least of the great man’s worries.

His final two years as BP chief executive will now surely be permanently dogged by the allegations that have blown up in the US against the company and which have now dragged the former Sun King of British business into a rising quagmire of claim and counter claim.

Still, Sir Philip Watts has managed to emerge from an oil industry scandal unscathed judging by the upbeat and victorious nature of his statement yesterday, issued through his lawyers.

The Securities & and Exchange Commission in Washington has decided not to take any action against Sir Philip, nine months after the UK’s equivalent watchdog, the FSA, came to the same conclusion.

As Sir Philip said yesterday: “I am extremely pleased that the US authorities have closed the investigation. As I have stated from the beginning, I have acted in good faith throughout and I had every reason to believe that all at Shell acted properly and in good faith when disclosing proved reserves.”

Of course, it had all looked pretty grim for Sir Philip and the other executives who resigned at the time, given what Shell was saying back in April 2004.

Having received an external report into the reserves furore, Aad Jacobs and Lord Oxburgh, chairmen of Shell’s parent company boards, said: “The report to the general audit committee 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.”

What Shell was always careful to avoid was apportioning blame and blame is certainly what Sir Philip has avoided. Chief executives around the world will be agog to know how Sir Philip has managed to see that justice was done in his case.

Helpfully, in his statement yesterday he set out the basis of his defence which will become required reading for any chief executive keen to disprove individual responsibility.

He was able to show that he relied on Shell’s reserves reporting process which was transparent and involved experts who believed it to comply with SEC rules; that he relied on Shell’s external auditors who followed procedure, reviewed relevant reserves and did not object to Shell’s proved reserves submissions to the SEC; and finally Shell’s reserves booking was discussed openly with other management including the group audit committee. Case dismissed.

By Alistair Osborne, Business Editor

(Filed: 31/08/2006)

After a two-year investigation, SEC tells Sir Philip Watts it won’t take any action regarding oil reserves overbooking scandal.

America’s financial regulator has decided not to take any action against former Shell chairman Sir Philip Watts over the oil and gas reserves overbooking scandal in 2004, which cost him his job and plunged the group into crisis.
  
Former Shell chairman Sir Philip Watts
 
The Securities and Exchange Commission told Sir Philip’s lawyers yesterday that it had closed its two-year investigation into his role in the debacle, which saw Shell overstate its proven oil and gas by 23pc, or 4.47bn barrels.

America’s financial watchdog has also ended its inquiry into the roles of ex-finance director Judy Boynton and former exploration and production chief Walter van de Vijver. He was the author of a famous email complaining that he was “becoming sick and tired about lying about the extent of our reserves issues”.

The SEC’s decision to drop its investigation comes despite fining Shell $120m (£63m) in July 2004. The SEC declined to comment. Its move comes nine months after Britain’s Financial Services Authority also dropped its investigation into Sir Philip.

By then, the FSA had already fined Shell £17m for breaching “market abuse provisions of the UK’s Financial Services and Markets Act 2000 and the listing rules”. As Shell was forced to admit the extent of its reserves overstatement, its shares plummeted.

Shell accepted both the SEC and FSA fines without admitting any wrongdoing.

Sir Philip said: “After two years of investigation by both the FSA and SEC, review of hundreds of thousands of documents, and sworn testimony of dozens of people, both regulatory authorities have determined to close their investigations without bringing any charges. “I said from the beginning that I acted in good faith throughout and am delighted with the decisions of both the FSA and SEC.”

Some industry observers were surprised that regulators on both sides of the Atlantic, which had been swift to levy fines against the company, failed to find evidence to prosecute any individual.

One leading oil analyst said: “It is puzzling how the company gets fined but nothing gets done against anybody.”

Joseph Goldstein, partner at Mayer, Brown, Rowe & Maw, which represented Sir Philip, said the fines were levied in a “very harsh atmosphere” and added: “The SEC has now joined the FSA in deciding not to charge Sir Philip with any violations of law.

The two regulators made their decisions after conducting rigorous and thorough investigations. Sir Philip is a man of honour whose professional conduct has withstood the most searching inquiry.”

A Shell spokesman said: “We are pleased that the SEC has decided not to pursue this matter further with Sir Philip Watts, Judy Boynton and Walter Van der Vijver.” They received respective pay-offs of £1m, £522,000 and £2.5m.

Sir Philip still faces lawsuits from aggrieved shareholders, which are pursuing class actions against the company and its former directors.

The lead plaintiffs in one case are two Pennsylvania State retirement funds, which have lodged an action in New Jersey. Dutch pension funds and German and Luxembourg institutional shareholders also filed new class actions in the US in January seeking hundreds of millions of dollars.

The reserves scandal triggered a corporate restructuring at Shell bringing together its Dutch and British companies as a single entity.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/08/31/cnoil31.xml

By DOW JONES/THE ASSOCIATED PRESS
Published: August 31, 2006
By Dow Jones/AP

The Securities and Exchange Commission has decided to take no action against Sir Philip Watts, the former chief executive of Royal Dutch Shell, over the 2004 scandal involving the overbooking of oil reserves, the law firm representing him said yesterday.

The S.E.C., which conducted a two-year joint investigation with the British Financial Services Authority, concluded that no action should be taken against Sir Philip, former chairman of Shell’s committee of managing directors, according to a news release by the firm, Mayer, Brown, Rowe & Maw.

The S.E.C. also cleared two other former top Shell executives, Judith Boynton and Walter van de Vijver, Shell confirmed yesterday. An S.E.C. spokesman declined to comment.

Sir Philip is still a defendant in civil litigation related to the reserves scandal, but no longer faces regulatory scrutiny, said his lawyer, Adriaen Morse of Mayer Brown. “As far as we know, there is no government or regulatory interest in him anymore,” Mr. Morse said.

The Justice Department said in June 2005 that it closed a criminal investigation into Shell over the reserves problem.

Shell startled the markets with a series of reserves downgrades in 2004 that reduced its total oil and gas reserves by about one-fourth.

Shell executives, including Sir Philip, expressed dismay about the problem when Shell first disclosed the downgrade in January 2004. But a subsequent investigation showed that he and Mr. van de Vijver, Shell’s exploration and production chief, had been brooding over the issue for months.

The scandal led to the resignations of Sir Philip, Mr. van de Vijver and Ms. Boynton, the chief financial officer. Shell, a British-Dutch conglomerate, also streamlined its corporate structure, compressing into a single corporate entity with one board.

Sir Philip and others remain defendants in a shareholder suit in federal court in New Jersey. A federal judge has scheduled a three-phase hearing for May 2007 that will focus on Shell’s proposed motion for summary judgment and class certification, among other issues.

 

By Michael Harrison, Business Editor
Published: 31 August 2006

Sir Philip Watts’ two-year battle to clear his name ended in victory for the former Shell chairman yesterday after the US Securities and Exchange Commission decided not to take any action against him over the oil giant’s reserves reporting scandal.

The decision marks the end of all regulatory investigations into Sir Philip’s role in the affair, which led to the biggest corporate shake-up at Shell in the company’s 100-year history.

Last year the Financial Services Authority, the UK regulator, decided not to take any action against the former Shell chairman. The US Justice Department is also understood to have decided not to proceed.

Sir Philip said: “I am extremely pleased the US authorities have closed the investigation. As I have stated from the beginning, I have acted in good faith throughout and I had every reason to believe that Shell acted properly and in good faith when disclosing proved reserves.”

Shell stunned the oil industry and the financial markets in January 2004 by admitting that 4 billion barrels of oil reserves, previously booked as “proven”, had been incorrectly categorised. The scandal led to the ousting of Sir Philip and two other board directors and plunged the company into unprecedented turmoil, ultimately resulting in it abandoning its twin-board and dual-listed status.

A damning report subsequently commissioned by Shell from a US law firm in effect ended Sir Philip’s corporate career by accusing him of deceiving shareholders. In one e-mail sent to Sir Philip, Shell’s former head of exploration, Walter van de Vijver, complained that he was “sick and tired about lying” over the state of the company’s reserves.

Joseph Goldstein, of the Washington law firm Mayer Brown Rowe and Maw, who represented Sir Philip, said he could not comment on what the former Shell chairman might do now. “He is just enjoying the moment.”

Sir Philip Watts’ two-year battle to clear his name ended in victory for the former Shell chairman yesterday after the US Securities and Exchange Commission decided not to take any action against him over the oil giant’s reserves reporting scandal.

The decision marks the end of all regulatory investigations into Sir Philip’s role in the affair, which led to the biggest corporate shake-up at Shell in the company’s 100-year history.

Last year the Financial Services Authority, the UK regulator, decided not to take any action against the former Shell chairman. The US Justice Department is also understood to have decided not to proceed.

Sir Philip said: “I am extremely pleased the US authorities have closed the investigation. As I have stated from the beginning, I have acted in good faith throughout and I had every reason to believe that Shell acted properly and in good faith when disclosing proved reserves.”

Shell stunned the oil industry and the financial markets in January 2004 by admitting that 4 billion barrels of oil reserves, previously booked as “proven”, had been incorrectly categorised. The scandal led to the ousting of Sir Philip and two other board directors and plunged the company into unprecedented turmoil, ultimately resulting in it abandoning its twin-board and dual-listed status.

A damning report subsequently commissioned by Shell from a US law firm in effect ended Sir Philip’s corporate career by accusing him of deceiving shareholders. In one e-mail sent to Sir Philip, Shell’s former head of exploration, Walter van de Vijver, complained that he was “sick and tired about lying” over the state of the company’s reserves.

Joseph Goldstein, of the Washington law firm Mayer Brown Rowe and Maw, who represented Sir Philip, said he could not comment on what the former Shell chairman might do now. “He is just enjoying the moment.”

KARL WEST August 31 2006
 
American regulator the Securities & Exchange Commission yesterday confirmed it will be taking no action against Sir Philip Watts, former Shell chief executive, over the oil reserves overbooking scandal.

Watts and other senior managers were ousted after Shell admitted in early 2004 that it had deceived investors by overstating the size of its oil and gas reserves for years.

The revelation sent shockwaves through the market, hitting the group’s shares and leading to a major loss of investor confidence.

The scandal claimed the scalps of Watts, plus former chief of Shell’s key exploration and production (EP) division, Walter van de Vijver.

Watts said yesterday: “I am extremely pleased the US authorities have closed the investigation … I had every reason to believe that all at Shell acted properly and in good faith when disclosing proved reserves.”

The depth of the deception was highlighted in an internal report in which Van de Vijver e-mailed Watts on November 9, 2003, after what he thought was an unfairly critical performance review, saying: “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.”

On December 2, 2003, Van de Vijver also e-mailed a colleague in exploration and production, one of the authors of the bombshell report that confirmed the overstatement, saying: “This is absolute dynamite, not at all what I expected and needs to be destroyed.”

The document was retained, but only after internal counsel intervened.

Last September, Watts had an appeal against the City’s main regulator dismissed by a UK tribunal.

He claimed his reputation had been unfairly impugned by the Financial Services Authority after it ruled in 2004 that the oil major had engaged in “unprecedented misconduct” that resulted in market abuse for which it was fined £17m.

Shell has already paid out tens of millions of dollars to settle lawsuits related to the overbooking scandal.

Additionally, Russia’s environmental watchdog, which has already ordered Shell to stop work on onshore pipelines at the controversial Sakhalin Island project, yesterday said the group needed to redraw the plan.

Industry analysts said the halt, which came as building is already 75% complete, may cause further delays to Shell’s $20bn (£10bn) plan to extract liquefied natural gas from the remote Russian Pacific island.

They also note that increased pressure from Russia comes amid attempts by gas monopoly Gazprom to secure a 25% stake in the project.
 

31 August 2006  
 
LAGOS -(Dow Jones)- Nigeria’s oil minister Wednesday appeared before a House committee to answer questions concerning an alleged underpayment to the government by a unit of Royal Dutch Shell PLC (RDSA), a private television station reported.

Channels TV said that Minister of State for Petroleum Edmund Daukoru presented the Committee on Petroleum a value-for-money audit report that the committee has said is vital to its investigation.

The committee had invited him to testify about an alleged underpayment of $3.2 billion for crude oil shipped by Shell Petroleum Development Co. of Nigeria, or SPDC.

Channels TV reported that Daukoru disclosed an outstanding amount owed by SPDC that was substantially smaller than the $3.2 billion in the report, but he was quoted as saying that “claims will be filed accordingly to recover the money from SPDC.”

Daukoru said SPDC had no intention to cheat the government.

When the issue arose last week, SPDC said in a statement that it “conducts its business in compliance with relevant regulations and the law” and that “during the period in question, no wrong doing was found.”
 
SPDC is a joint venture operated by Shell, which owns 30%, with the Nigerian National Petroleum Co. holding 55%, Total SA (TOT) 10% and Eni SpA (E) unit Agip SpA 5%.

-By Vincent Nwanma, Dow Jones Newswires; 23-4-802-358-4996; vinwanma@beta.linkserve.com

August 31, 2006

Analysis by Patrick Hosking
 
THE worst scandal to hit Shell in its 170-year history came out of the blue one January morning in 2004.

Shell executives confessed in a conference call to amazed City analysts that the company’s reserves of oil and gas had been overstated by 25 per cent. 
 
They admitted that reserves — from Nigeria to Australia to Russia — that had been described as proven were, in fact, much less certain of being exploited. All told, they had exaggerated the company’s energy wealth by 3.9 billion barrels, enough to supply the world for 50 days.

It was a ghastly admission for a blue chip company that had built a reputation for conservative accounting and absolute probity.

It was made worse by the failure of Sir Philip Watts, the executive chairman at the time, to deliver the news in person. Furious investors felt duped and slighted and dumped the shares, and Shell lost 7.5 per cent of its value in minutes.

However, that was only the start of a slow-motion corporate train wreck that lasted for more than 18 months. Even today, after a clearout of senior executives and a restructuring of the cumbersome Anglo-Dutch management structure, Shell continues to suffer.

To the horror of its shareholders, Shell downgraded its reserves estimates four more times. Results were delayed, the original annual report had to be pulped and an atmosphere of panic and recrimination pervaded Shell’s UK headquarters on the South Bank in London.

Senior managers were dismissed. Sir Philip went first, with a £1.06 million payoff and a £469,000-a-year pension, along with Walter van de Vijver, his exploration chief. They were followed by Judy Boynton, the chief financial officer.

Meanwhile, the Financial Services Authority (FSA) in Britain and the US Department of Justice and the US Securities and Exchange Commission started investigations.

What reverberated the most was an explosive e-mail from Mr van de Vijver to Sir Philip, revealed in an external report in April 2004, in which he complained: “I am becoming sick and tired about lying about the extent of our reserves.”

That seemed to support the view that the affair might be more than a simple management cock-up, and that it might involve knowing conspiracy in the senior echelons of Shell. That suspicion was underlined in August 2004 when the FSA and the SEC imposed fines of £17 million and $120 million, respectively, for misconduct and made clear that their investigations into individual culpability were continuing.

Then the tide started to turn for Sir Philip. The Department of Justice abandoned its criminal investigation in July of last year.

The FSA shelved its inquiry into Sir Philip and one other unnamed Shell executive last November, despite a successful initial skirmish with Sir Philip in the Financial Services and Markets Tribunal. Yesterday the SEC closed its investigation into Sir Philip.

Shareholders who bought Shell stock between 1998 and 2004 were, in effect, buying under a false prospectus. Tens of millions of workers whose pension funds invested in the company during that period were unwittingly short- changed, paying inflated prices.

Yet, so far, the UK and US regulators have found that no individuals were seriously culpable; or, at least, they have not been able to amass sufficient evidence if anyone was.

As much as anything, pride probably lies at the heart of the scandal. In the mid-1990s Shell was falling behind its peers in its reserve replacement ratio, a key measure of whether an oil company is growing or shrinking.

Rather than redouble its efforts to find new reserves, Shell opted for the altogether easier method of relaxing the methodology by which it booked reserves.

A favourite riddle of Warren Buffett, a zealot for conservative and honest accounting, goes like this: how many legs does a dog have if you count tails as legs? Answer: four, because tails aren’t legs.

Shell counted tails as legs for years. The failure of regulators to pursue individuals doggedly for that collective failing can only shorten the odds on more egregious tail-counting by other companies in future. Shareholders, be warned.

DOW JONES NEWSWIRES
August 30, 2006 3:32 p.m.

The U.S. Securities and Exchange Commission has decided to take no action against the former Royal Dutch Shell PLC boss over a reserves overbooking scandal, his lawyer said Wednesday.

The SEC conducted a two-year joint investigation with the U.K.’s Financial Services Authority and concluded that no action should be taken against Philip Watts, the former chairman of Shell’s committee of managing directors.

“I am extremely pleased that the U.S. authorities have closed the investigation…. I had every reason to believe that all at Shell acted properly and in good faith when disclosing proved reserves,” Sir Philip was quoted as saying in a statement.

OIL WOES

Sir Philip and other senior managers left the company after the oil major admitted in 2004 that it had been overstating the size of its oil and gas reserves — the amount of energy the company thinks it can pump someday from the ground — for years. The measure is an important barometer for investors.

The FSA dropped its investigation of Sir Philip and Walter van de Vijver, Shell’s former head of exploration and production, last November.

An internal report commissioned by Shell directors and issued in April 2004 put the bulk of the blame for the overstatements on Sir Philip and Mr. van de Vijver. The report faulted them for not adequately disclosing the extent of the company’s reserve problems. Both men have maintained they acted properly.

In August 2004, the FSA fined Shell £17 million ($30 million), citing market abuse stemming from the overstatements. The SEC settled a fraud investigation with the company after Shell agreed to pay $120 million in penalties. Shell didn’t admit or deny wrongdoing.

Write to Dow Jones Newswires editors at asknewswires@dowjones.com