Royal Dutch Shell Plc Annual Report and Form 20-F for year ending December 31, 2006
Extract from page 135
Included in legal provisions at December 31, 2006 is $0.5 billion in respect of a class action for alleged losses relating to the 2004 recategorisation of certain hydrocarbon reserves (see Note 32).
(Extracts from pages 146 to 148 inclusive , includes Note 32)
Shell Oil Company (including subsidiaries and affiliates, referred to collectively as SOC), along with numerous other defendants, has been sued by public and quasi-public water purveyors, as well as governmental entities, alleging responsibility for groundwater contamination caused by releases of gasoline containing oxygenate additives. Most of these suits assert various theories of liability, including product liability, and seek to recover actual damages, including clean-up costs. Some assert claims for punitive damages. As of December 31, 2006, there were approximately 69 pending suits by such plaintiffs that asserted claims against SOC and many other defendants (including major energy and refining companies). In 19 of the suits, plaintiffs allege aggregate compensatory damages of approximately $1.25 billion and aggregate punitive damages of approximately $3.35 billion. No amount of monetary damages has been claimed in the other 50 suits. Management of the Shell Group considers the amounts set forth by plaintiffs in these pleadings to be highly speculative and not an appropriate basis on which to determine a reasonable estimate of the amount of the loss that may be ultimately incurred, for the reasons described below. Therefore, no financial provisions have been established for this group of cases. From time to time, individual oxygenate matters are resolved and provisions are taken when appropriate. Reasons for the determination that amounts claimed by plaintiffs in their pleadings are not an appropriate basis on which to ascertain a reasonable estimate of the amount of the loss that may ultimately may be incurred can be summarised as follows:
• While the majority of the cases have been consolidated for pre-trial proceedings in the United States District Court for the Southern District of New York, there are several cases pending in other jurisdictions throughout the USA. The bases for federal jurisdiction for the consolidated cases have been challenged in the United States Court of Appeals for the Second Circuit. If the Second Circuit were to reject various grounds for federal jurisdiction, some of the consolidated cases could be remanded to their state courts of origin. Most of the cases are at a preliminary stage. In many matters, little discovery has been taken and many critical substantial legal issues remain unresolved. Additionally, given the pendency of cases in varying jurisdictions, there may be inconsistencies in the determinations made in these matters.
• There are significant unresolved legal questions relating to claims asserted in this litigation, including whether punitive damages are available for products liability claims or, if available, the manner in which they might be determined.
• There are significant issues relating to the allocation of any liability among the defendants.
For these reasons, management of the Shell Group is not currently able to estimate a range of reasonably possible losses or minimum loss for this litigation relating to oxygenate additives; however, management of the Shell Group does not currently believe that the outcome of the oxygenate-related litigation pending as of December 31, 2006 will have a material impact on the Shell Group’s financial condition, although such resolutions could have a significant effect on results for the period in which they are recognised.
Dibromochloropropane (DBCP) exposure
A $490 million judgement in favour of 466 plaintiffs was rendered in 2002 by a Nicaraguan court jointly against SOC and three other named defendants (not affiliated with SOC), based upon Nicaraguan Special Law 364, for claimed personal injuries resulting from alleged exposure to dibromochloropropane (DBCP), a pesticide manufactured by SOC prior to 1978, but neither shipped nor sold by SOC to parties in Nicaragua. This law imposes strict liability (in a predetermined amount) on international manufacturers of DBCP and provides that unless a deposit of an amount denominated in Nicaraguan cordobas is made into the Nicaraguan courts, the claims will be submitted to the US courts. The Nicaraguan courts did not, however, give effect to the provision of Special Law 364 that requires submission of the matter to the US courts. Instead, the Nicaraguan court entered judgement against SOC and the other defendants without allowing the presentation of defences. As of December 31, 2006, the Company is aware of nine additional Nicaraguan judgements that have been entered in the collective amount of approximately $1.2 billion in favour of 1,737 plaintiffs jointly against Shell Chemical Company and three other named defendants (not affiliated with
Shell Chemical Company) under facts and circumstances almost identical to those relating to the judgement described above. Additional judgements may be entered.
[A] It is the opinion of management of the Shell Group that Nicaraguan DBCP judgements are unenforceable in a US court based on a United States District Court opinion finding that the Nicaraguan court did not have jurisdiction to enter judgement against SOC and that the judgement is unenforceable in the USA.
[B] Several requests for Exequatur were filed in 2004 with the Tribunal Supremo de Justicia (the Venezuelan Supreme Court) to enforce Nicaraguan judgements. The petitions imply that judgements can be satisfied with assets of Shell Venezuela, S.A., which was neither a party to the Nicaraguan judgement nor a subsidiary of SOC, against whom the Exequatur was filed. The petitions are pending before the Tribunal Supremo de Justicia.
No financial provisions have been established for these judgements or related claims.
Recategorisation of hydrocarbon reserves
A consolidated shareholder class action pending in the US District Court for New Jersey alleges losses related to the 2004 recategorisations of certain hydrocarbon reserves. Lead plaintiffs are the Pennsylvania State Employees’ Retirement System and the Pennsylvania Public School Employees’ Retirement System. Following dismissal of a number of original defendants, the remaining defendants are: Royal Dutch Petroleum Company (now merged into Shell Petroleum N.V.), The “Shell” Transport and Trading Company, plc (the companies are referred to collectively as Shell), Sir Philip Watts, Judith Boynton, PricewaterhouseCoopers LLP, KPMG Accountants N.V., and KPMG International. On January 6, 2006, certain Dutch pension funds, and German and Luxembourg institutional shareholders filed two related actions that have been consolidated with the existing class action for pre-trial purposes.
The preliminary motion phase of the litigation has been completed, an amended complaint has been filed and answered by the defendants, and discovery has commenced. The District Court will hold hearings in June 2007 on plaintiffs’ motion for class certification, on whether the federal securities laws apply to the claims of non-US putative class members who purchased Shell’s securities on foreign markets, and on various summary judgement motions to be filed by Shell.
The class actions and individual cases are at an early stage and subject to substantial uncertainties concerning the outcome of material factual and legal issues relating to the litigation. In addition, potential damages, if any, in a fully litigated securities class action would depend on the losses caused by the alleged wrongful conduct that would be demonstrated by individual class members in their purchases and sales of Shell shares during the relevant class period. During 2006, management of the Shell Group have established a $500 million provision in respect of this litigation. The provision is included in the Corporate segment.
Various subsidiaries and affiliates of the Shell Group (collectively referred to as Shell Nigeria) face lawsuits and claims in Nigeria. While it is the opinion of the Shell Group that none meet financial and legal criteria for disclosure, there have been occasions when cultural and political factors have played a significant role in unprecedented outcomes in the lower and intermediate courts. Similarly, certain Nigerian state and federal legislative bodies have, in the opinion of the Shell Group, exceeded their constitutional authority and have ruled on disputes between private litigants and Shell Nigeria. Included are claims alleging environmental contamination, protection of the rights of indigenous groups and unfair business dealings with Nigerian companies. While the Shell Group believes that decisions contrary to Nigerian law will be ultimately corrected by the Nigerian Supreme Court, these circumstances make the outcome of some litigation difficult to predict.
Shell Group companies are subject to a number of other loss contingencies arising out of litigation and claims brought by governmental and private parties, which are handled in the ordinary course of business. While immaterial to the financial condition or results of the Shell Group, noteworthy in 2006 were various antitrust regulatory investigations, several of which resulted in the imposition of fines on Shell Group companies, and a civil arbitration brought by BP France (related in part to antitrust issues) seeking damages against a Shell Group subsidiary and affiliate. The operations and earnings of Shell Group companies continue, from time to time, to be affected to varying degrees by political, legislative, fiscal and regulatory developments, including those relating to the protection of the environment and indigenous groups, in the countries in which they operate. The industries in which Shell Group companies are engaged are also subject to physical risks of various types. The nature and frequency of these developments and events, not all of which are covered by insurance, as well as their effect on future operations and earnings, are unpredictable.