By Alfred and John Donovan
We have published below the content of the concluding pages of the transcript of the Financial Services Authority Interview with Sir Philip Watts on 24 June 2004.
This took place soon after Sir Philip was escorted from the Shell Centre in London by a security guard when forced to resign in disgrace after news of the Shell reserves fraud stunned the world. Basically Shell investors had been conned into believing Shell had more hydrocarbon proven reserves than was actually the case.
Under pressure in the interview and giving evidence under caution, Watts branded Walter van de Vijver, Chief Executive of Shell Exploration & Production (EP), as being “a difficult fellow”, a “real personnel issue”, who had to be “carefully managed” and was unsackable. In a further effort to tarnish the reputation of van de Vijver, Watts revealed that prior to the reserves scandal, van de Vijver had been reprimanded by the Shell Committee of Managing Directors.
This was something less than a favourable character reference. Basically Sir Philip deliberately gave the impression that van der Vijver is a deeply flawed individual, yet was allowed to remain as the Chief Executive of a $40 billion Shell division.
We know from the Davis Polk & Wardwell Report that van de Vijver had consistently pressed the position that “reserves booked during Sir Philip’s term as Chief Executive of EP were “aggressive” or “premature”, non-compliant with Shell Guidelines for booking and, implicitly, SEC rules.” Van de Vijver had complained repeatedly to Watts about the premature booking of the reserves.
The acrimony between Watts and van de Vijver was clearly a major factor in the reserves scandal and the demise of the Royal Dutch Shell Group in its dual company guise.
THE FINAL PAGES OF THE TRANSCRIPT
MICHAEL PRANGE: And then it moves on to an email from Walter van de Vijver to Philip Watts which was sent on 9 November 2003, 11.17.and the Subject is “LKH” again. And I’ll read it out for the tape. It says,
“Phil, reference our discussion on reserves on monday 3/11, please find attached the summary on LKH. The issue of LKH is not just a US issue (perhaps you were implying something there?). 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 in the past, aside from the embarrassment of having booked reserves prematurely. Regards, Walter”
Do you recall receiving this email? The-
SIR PHILIP WATTS: Yes.
MICHAEL PRANGE: – one dated 9 November? And can you tell us what your initial reaction to it was?
SIR PHILIP WATTS: My – my initial reaction was — was mixed. First I’m, frankly, shocked and – and baffled. I see this language again, “I’m becoming sick and tired about lying”. I mean, let’s let’s deal with the lying thing in the – in the first instance. If – if I’d have thought he was lying, you know, the – I would’ve really reacted because I’ve – I’ve just gone through a process, as late as – as July – that memo we’ve just discussed, and it talks about the reserves exposure that we talked about. But in that document you find it says no de-booking is – is recommended. Then the thing has come back to CMD on its way to the Group Audit Committee and there’s been a presentation to the Group Audit Committee about it in – in October – later in October. So I have absolutely no reason to think that people are lying about reserves. Frankly with – with – in fact I – I put it in my briefcase because I was about to fly to Switzerland and you reflect about it. Uh, I’ve – I’ve got a problem. Here is the Chief Executive of a $40 billion business who is sending stuff like this. Uh, and as I say I put it into my briefcase. I know I’ve got to – this is not the kind of thing you send an email in response to. This is something I’ve got to think about and decide how I’m going to discuss it with him.
MICHAEL PRANGE: So, what happened next after you put if in your briefcase? Just tell us the story about — tell us how you responded.
SIR PHILIP WATTS: Well, in fact as – as it went in the end I didn’t respond because it was overtaken by events. Uh, I actually got on the plane, went to Switzerland on the Sunday, came back on the Monday in the evening, had a – a day in the office and then flew off to Washington. I had three days in Washington. I — the following weekend we had a – a signing ceremony for the gas contract in Riyadh. So, I actually flew overnight from Washington to Rotterdam climbed on the- the – the new plane with – with fresh pilots – actually Walter and other people that were involved in – in the Saudi business climbed onto the plane too, so it was pretty full, and we went off to Riyadh. That – later that afternoon and in the evening Saudi time, we had the signing ceremony and I climbed on the plane, flew back to the UK overnight and got in that morning to – to Farnborough, I can tell you pretty exhausted. Spent Sunday and then on Monday and Tuesday we had CMD. I’m trying to think of the – think of the dates. It must be the – the 17th and 18th. We had the CMD meeting and at the end of the meeting on the – on the Tuesday, right at the end as we’re preparing to — to leave, he, under ‘Any Other Business’, he informs CMD that he’s got two ‘Unsatisfactory’ audits; one for Nigeria and the other for Oman. My response to that is, “You’d better give us a report on this, Walter”. So, the reserves issue is being a bit overtaken by events.
MICHAEL PRANGE: Just going back to when you were in Saudi, you actually were with Walter but didn’t discuss this. Did you — you met him face-to-face then?
SIR PHILIP WATTS: Well, with other people. We were on a plane together. This is not … This has now become, in my view, a real personnel issue. He’s a – a very clever, very intelligent, but can be a difficult fellow. We don’t enjoy the best of relationships so that has to be carefully managed. But don’t forget that this guy is a Royal Dutch Crown Prince. He’s young. He might be my successor when I leave in, – as was planned, in 2005, age 60. Even if he’s not my successor and Jeroen Van der Veer takes over, he’s only got 3 years until he’s 60, so Walter’s going to be there anything from 7 to to years in the top position. Now, if you’re Chairman of CMD – primus inter pares – you you don’t have the power to hire or fire. I know that when we – if we raise this thing with him and address him about it – behaviour on sending stuff like this – we’re going to have a difficult confrontation. It’s not the kind of thing that you raise when you’re exhausted or when you’ve only got – certainly not with other people around. You have to have a considered view and – and probably would need to have a conversation with some other people, you know, from the Royal Dutch Board or whatever. This is somebody who has been reprimanded by CMD some years before when he was Chief Executive in the USA before he came and joined CMD. So this is not the kind of thing I’m going to do lightly. Now, we’re there in Saudi Arabia. I can tell you what I did for most of that day, I slept and organised a – a call to wake me up Saudi time, 5.00pm in the evening to get ready for all these ceremonies – this was no time to address anything.
MICHAEL PRANGE: On – on the 17th and 18th is when you say the -the events overtook i.e. the – the ‘Unsatisfactory’ audit reports. In the period between the 9th and the 17th and the 18th, given the seriousness of the email, and you had to sort of form some view and you – t think you said you’d need to speak to other people. Did you speak to anyone anyone else about it –
SIR PHILIP WATTS: No.
MICHAEL PRANGE: – in the intervening period? And why was that?
SIR PHILIP WATTS: As I said, if I’d have thought he was lying I would’ve done something very quickly but I just didn’t feel that that was the case and that was the view I took at that time.
ZULFIQUAR RAMZAN: What – what view did you take then? What – what was your perception of the words he’s used here, like the words, -I’m becoming sick and tired about lying about the extent of our reserves issues”. How – how did you perceive them?
SIR PHILIP WATTS: I think I’ve just explained what I thought about lying. That I didn’t think he was lying because I had a track record of – of meetings and written documents and going to the Group Audit Committee and the like. Uh, so my view was this was some hyperbole. Does that answer your question?
ZULFIQUAR RAMZAM: Okay.
MICHAEL PRANGE: So, so in the seven days after you received this, before events overtook it, did you have a view of what you were going to do? I mean, or were you just going to let matters lie? I mean, I think we’ve got a seven-day period before events overtake. I just wondered what conclusion you’d come to and what you were going to do about this email-
SIR PHILIP WATTS: I – I –
MICHAEL PRANGE: – in that period
SIR PHILIP WATTS: I frankly had had a very hectic time but my mind would be working towards how we would address it with him but that would need to be done rather carefully.
ZULFIQUAR RAMZAN: Well, he’s making quite serious statements here. The language he uses. I mean, we haven’t seen another email before this using the same sort of language. Did that bring any concern to you at this point in time?
SIR PHILIP WATTS; Well, as I said, I was shocked, baffled, concerned.
ZULFIQUAR RAMZAN: I mean, this guy is – I mean, as you say, he’s the Chief Executive of
a global business.
SIR PHILIP WATTS: I’ve got a big personnel problem on my hands.
MICHAEL PRANGE: Do you want to ask any questions? The next tab is tab 9 and before-‘ before I read it out I just want to state that we don’t believe, it was sent to you but we’re just going to ask you whether you’ve seen the attached document anyway. The actual lab 9 was sent from Frank Coopman to Brian Ward on the 2 December 2003 at 6.56 and its subject is “Proved Reserves” It says, ‘Please do not copy or forward this note” and the note is entitled “Script for Walter”. This script for Walter is passed around various people and there is correspondence in labs 10 and 11 but you’re – you’re not — or don’t appear to be on any of these email lists. I was just wondering if you could have a look at the Script for Walter on Proved Reserves position at tab 9 and and tell us if – if you if you saw that document at any time around December 2003.
SIR PHILIP WATTS: I did not see the document around the dates that are here in early December.
MICHAEL PRANGE: Did – did anyone mention its existence to you, that you recall?
SIR PHILIP WATTS: Its existence was mentioned to me by Judy Boynton and she gave me a copy at the end of December. I’m not absolutely certain of – of the dates but it was some time at the end of December.
MICHAEL PRANGE: In what context did she give you the copy? Was it during a meeting, or email, or …? And why did she give it to you?
SIR PHILIP WATTS: I think it- it came out of a – a discussion and a reference where she – she mentioned a – a – a document and then she gave me a copy. I – I can’t – this December and January was a most incredibly hectic time and as you can imagine there were many conversations and with the best will in the world I can’t reconstruct all of that. But as I say I got a copy late in – in December.
MICHAEL PRANGE: And – and what was your reaction to it when you got it?
SIR PHILIP WATTS: To say the least, real surprise, because she – not she – I – I realised that things had been going on with a degree of – of precision of which I was unaware.
SAMANTHA GRIFFIN: When you were – when you were shown the document, were you shown any of the email traffic that went with it, or were you just shown the – the document?
SIR PHILIP WATTS: I – I’m just looking at the
JOSEPH GOLDSTEIN: Are you referring to tab 10?
SAMANTHA GRIFFIN: Yes, if you look in — tab 9 is the original document and then 10, 11 and 12 are all reactions to that document.
MICHAEL PRANGE: “I’ll just read out what they are for the tape. Tab 10 is an original message from Judith Boynton on 2 December 2003 at 7.55 to Walter van de Vijver, subject, “Reserves”. And also tab 10 contains a response from Walter van de Vijver on 2 December 2003 at 9.57, while tab 11 contains an email from Frank Coopman on 2 December 2003 a17.12 to Walter van de Vijver and also it contains the response from Walter van de Vijver on 2 December 2003 to Frank Coopman.
SIR PHILIP WATTS: I -I recollect receiving the script. I – I think there was a message or . two attached to it but what I did not receive was this message that talks about, “This is absolute dynamite”.
MICHAEL PRANGE: Not tab 11.
SIR PHILIP WATTS: That’s tab – tab 10, isn’t it?
JOSEPH GOLDSTEIN: That’s where we have it. Tab 10.
SIR PHILIP WATTS: Anyway, it’s under tab 10 for me and it’s the – this message saying, “This is absolute dynamite”. I did not see that at the time and I didn’t see it for quite a long time until it was presented to me as part of the interview I had with Davis Polk. I did …
MICHAEL PRANGE: I don’t suggest we go through any more of the tabs. I’m aware of the time as well. (inaudible). This can be –
DAVID BLUNT: Can I just ask one question?
MICHAEL PRANGE: Go on.
DAVID BLUNT: You said you were surprised in the precision in the script for Walter. Why was that?
SIR PHILIP WATTS: Well, we’d been informed of two ‘Unsatisfactory’ audits on 18 November. I had asked for a written report to CMD. I knew it was under preparation and that Walter van de Vijver would bring it to CMD. It was a bit later than I’d hoped in — in early December but the reason – one reason for that was that we were heavily engaged in negotiating a deal with – with the Russians and – and the – thing eventually came to CMD on 9 December and that triggered Project Rockford. And we were absolutely in crisis management mode. We were working for a number of weeks with – with massive intensity and addressing all the issues around that, trying to get sufficient definition to make a a proper – not, you know, proper disclosure. And at the end of the month you can imagine when I see this, that people in E&P have you know, got a formal document dated 1 December. I think that would elicit some surprise.
DAVID BLUNT: The surprise is to do with the detail in that document at the beginning of December?
SIR PHILIP WATTS: Yes. People had put together something called, “A script for Walter” on 1 December and we’re doing Project Rockford which is kicked off on 9 December and we’re all beavering away trying to get it finished, not just Nigeria and Oman but we’re treating all the other issues all around the world and – and by the end of December we’re in the last days before making a coherent disclosure, and this existed already.
SAMANTHA GRIFFIN: Okay. I think it’s probably better if I end this tape and well start a new one when we come back as there’s only a few moments.
DAVID BLUNT: Well. Shall we just stop this?
MARTYN HOPPER: I think if we just pause.
SAMANTHA GRIFFIN: Okay. it’s 4,41pm. I’m just going to stop this tape for a moment.
SAMANTHA GRIFFIN: It’s 5.00pm and this is a continuation of tape 7 of our interview with Sir Philip Watts. Again, quickly just to confirm that I haven’t asked you any questions in relation to this matter whilst the tape was switched off and again to remind you, you are still under caution.
SIR PHILIP WATTS: That’s correct.
SAMANTHA GRIFFIN: Okay, we’ve finished all of our questions for the moment. Is there anything that you would like to add?
SIR PHILIP WATTS: No. Thank you.
MARTIN HOPPER: I would just like to add at this point – we’ve covered a great deal of territory in terms of the period of lime that’s been covered during the course of the day. There are obviously an awful lot of documents in existence which haven’t been discussed today. I just want to – to make clear that we would obviously reserve the – the ability to – to comment on those documents and indeed for Phil to comment on them in due course.
SAMANTHA GRIFFIN: Yes. That’s it. lt’s 5.01pm and that is the end of our interview with Sir Philip Walls. Thank you.
EXTRACT FROM TRANSCRIPT ENDS
Link for the searchable full Transcript of the Financial Services Authority Interview with Sir Philip Watts: 24 June 2004: 75 pages – every page marked “CONFIDENTIAL”