Jeroen van der Veer and the Shell reserves fraud
By John Donovan
This is an updated version of an article first published on 5 November 2007 under the headline “Court document revelations damage Shell CEO, Jeroen van der Veer.”
In January 2004, news broke of a multibillion dollar scandal at the Royal Dutch Shell Group relating to its proven oil and gas reserves, the most important measure of an oil company’s stock market value. Shell’s reserves had been overstated by more than 20%. Four further downgrades followed, reducing Shell’s proven reserves by nearly a third.
The fallout from the scandal was considerable and continues to this day as is evident from the related article:
When news of the scandal broke, Shell share values plunged. Shell lost its triple-A rating and was eventually fined $150 million by the financial regulators. It has settled a number of U.S. class actions and optimistically set aside $500 in the hope of settling the remaining litigation. Some $400 million of that sum has now been earmarked to cover claims brought by Non-American holders of qualified Shell shares. Separate litigation by U.S. Shell shareholders may cost even more to settle. With earlier settlements and fines, the overall cost in monetary terms will likely amount to over $1 billion. The cost in regard to reputational damage is incalculable.
The immediate shock at the realisation investors could no longer be sure of Shell soon turned to speculation about which Shell directors were responsible for the debacle. After initial information of the background to the scandal began to emerge, Group Chairman Sir Philip Watts and Walter van de Vijver, the Chief Executive of Shell Exploration and Production, were forced to resign, followed by Judith Boynton, the Group Chief Financial Officer.
There was speculation in the news media about the involvement of Jeroen van der Veer, a Group Managing Director. Recently published court documents relating to the remaining litigation arising from the scandal throws more light on his involvement. This is not an unimportant matter bearing in mind that van der Veer is now Chief Executive of Royal Dutch Shell Plc.
Much of the information set out is taken from an expanded summary of a report by Davis Polk & Wardwell (DP & W), a New York law firm commissioned by Shell to investigate and supply their findings in a report to the Shell Group Audit Committee. A link to the expanded D P & W Report dated 31 March 2004 which now runs to 202 pages, all marked “Highly Confidential”, and now published for the first time on the open Internet, can be found later in this article.
The D P & W Report revealed that van de Vijver notified Shell’s managing directors in February 2002, including van der Veer, that the company’s reserve classification rules did not match those of the U.S. Securities and Exchange Commission and that Shell might have overestimated its reserves by 2.3 billion barrels.
The following are extracts from the report:
February 2002 “Note for Information to CMD”
The first document that raised potential reserves compliance issues to the attention of the CMD was a Note for Information for CMD, dated February 11,2002. This document, entitled “EP Hydrocarbon Resources Update 1/2002,” was submitted by van de Vijver and distributed in advance of the February 19,2002 CMD meeting to all CMD members…
The February 11, 2002 Note for Information contained a section entitled “Exposures,” which stated as follows:
“Securities and Exchange Commission (SEC) Alignment
Recently the SEC issued clarifications that make it apparent that the Group guidelines for booking Proved Reserves are no longer fully aligned with the SEC roles. This may expose some 1.000 mIn boe of legacy reserves bookings (e.g., Gorgon, Ormen Lange, Angola and Waddenzee) where potential environmental, political or commercial ‘showstoppers’ exist.
End of License
In Oman PDO, Abu Dhabi and Nigeria SPDC (18% of EP’s current production) no further proved reserves can be booked since it is no longer ‘reasonably certain’ that the proved reserves will be produced within license. The overall exposure should the OU business plans not transpire is 1,300 mln boe. Work has begun to address this important issue.” (Emphasis added.)
Thus, the Note warned that legacy proved reserve exposures due to clarifications of the SEC definitions and license issues combined were as high as 2.3 billion boe.
Within two months of this Note being circulated to CMD, Shell filed its 2001 Annual Report on Form 20-F with the SEC.
While CMD member van der Veer does not recall seeing the Note at the time, he surmised in his interview of March 19, 2004 that a discussion of “potential exposures” likely suggested a need for further investigation and potential action by the individual CMD member with responsibility and expertise in the area, in this case van de Vijver.
With respect to his consideration of the reserves issues at the time he signed the Royal Dutch Petroleum Company Annual Report on Form 20-F for 2001. Jeroen van der Veer stated that he relied on the comprehensive system of cascading assurances and certifications, including the certifications that would be given by EP. Van der Veer indicated that he viewed proved reserves disclosures as a technical matter under the control of EP and he relied on EP management to address those issues.
JULY 2002 “NOTE”
A ‘Note for Discussion’ entitled “Reserves Outlook” was presented to the CMD, including Jeroen van der Veer, on July 22, 2002 by the EP Director of Strategy and Planning and New Business Development, Lonn Brass.
While this Note was described as a “comprehensive note” on the reserves position in EP, it failed to address the SEC compliance questions that had been expressly raised in the February 11, 2002 “Note for Information”. Nor did the July 2002 Note address the SEC’s proved reserve definitions or its central requirement of “reasonable certainty.” Instead, the Note described a plan for “managing” the reserves issue commercially through the acceleration of bookings that would be certain in future years but which were less than certain in 2002. “Managing” the reserves would also involve acceleration of the maturity of some projects that had been prematurely booked, negotiation of Iicense extensions and strategic acquisition activity.
However the D P & W Report concluded “…in light of the production challenges that existed in some of the regions with exposed reserves – such as Oman and Nigeria – it would have been very unlikely that reserves issues could be timely “managed” through production growth.”
In a section entitled “Historical Context,” the July 2002 Note stated: “With the benefit of hindsight, some of the organic revisions made in recent years now appear somewhat aggressive:” In an attachment to the July 2002 note, van de Vijver and his EP team included a list of operating units that had potential “reserves exposures”, entitled “Hydrocarbon Resource Challenges”.
Minutes of July 2002, CMD Meeting
The minutes from the July 22/23 1002 CMD meeting also noted the observation that “any reserves booked had to be approved by the Group Controller” and that these “also had to pass both an internal and external audit check.” In fact, however, there was no audit process outside of EP for proved reserves, with the exception of the Group Deputy Controller, whose involvement was limited to receipt of a year-end report and participation in an annual meeting to discuss that report. Furthermore, the internal reserves audit function at Shell consisted of a retired Shell employee working on a 90 days per year contract who visited major properties only once every four years. (See Tab D.) Finally, the minutes of this CMD meeting recorded that: “It was also recognised that some booking practices had been too aggressive in the past.” Extract from the Minutes of a Meeting of the Committee of Managing Directors, CMD No. 2526,22/23 July, 2002, at 23
In his March 19, 2004 interview with D P & W investigators, Van der Veer
“did not recall any discussion at the July 2002 CMD meeting concerning the propriety of any bookings…”
September 2002 – “Caught in, the Box”- “EP Delivery Note” (from pages 25/26 of DPW Report)
A few months after the July 22, 2002 CMD meeting, van de Vijver personally prepared a document he captioned “EP Delivery” Note circulated to the CMD. It described the “dilemma’s facing EP and the uncomfortable situation EP was in with obvious implications for the Group overall. Van de Vijver described EP as being “caught in the box” and stated the following:
“Given the external visibility of our issues (lean organic development portfolio funnel, RRR low, F&D unit costs rising), the market can only be “fooled” if 1) credibility of the company is high, 2) medium and long- term portfolio refreshment is real and/or 3) positive trends can be shown on key indicators.â Unfortunately [we are struggling on all key criteria (“caught in the box”).
As to the cause of the described dilemma, van de Vijver blamed the “caught in the box” problem on (i) an “unchallenged EP CBC [Watts) campaign to make everything look as good as possible (1999/2001)”, (ii) “fear of challenge culture” and (iii) “aggressive/premature reserves bookings (topdown instructions).”
When asked to explain his references in the EP Delivery Note to the market being “fooled” and to “aggressive booking in 1997-2000,” van de Vijver stated that during this time he was trying to ensure that the real condition of the business was understood.
In his March 2004 interview by D P & W investigators, Jeroen van der Veer recalled the “caught in the box” phrase as being employed in connection with van de Vijver’s continuous efforts to extract more funding for EP projects, at the expense of other business units such as Chemicals and Oil Products. Van der Veer also stated that he did not get the impression that van de Vijver was concerned about any deception of the market.
On Friday, February 7, 2003, Sir Philip Watts, the then Group Chairman of the Royal Dutch Shell Group and his fellow members of the Committee of Royal Dutch Shell Group Managing Directors (the CMD) made a presentation to financial analysts in New York City. The other CMD members present were Paul Skinner, Walter van de Vijver, Malcolm Brinded and Jeroen van der Veer. The Group Chief Financial Officer Judy Boynton was also in attendance.
During the Question & Answer session, Frederick Leuffer of Bear, Stearns & Co directed a question about Shell’s hydrocarbon reserves to Walter van de Vijver, the then Chief Executive of Shell Exploration & Production (EP). In reference to Shell’s reserve assets, Van de Vijver said: “… we should not forget that we have these assets in our portfolio that a lot of the competition would die for but that we do not talk too much about them.” (Extract from Page 35 of the document accessible via the link below which provides a record of the New York presentation, including the Q & A).
Far from being assets that rival oil companies would “die for”, Shell’s proven oil and gas reserves did not exist to the degree claimed. Eleven months later Shell announced a downgrading of 3.9 billion barrels, or over 20 percent of its total holdings to a world shocked by the news of the scandal, described as one of the biggest corporate frauds in history.
Confidential Royal Dutch Shell internal documents published on the so called anti-Shell website royaldutchshellplc.com prove that at the time Walter van de Vijver gave his extravagantly false response to Frederick Leuffer in the presence of other members of the CMD, including Jeroen van der Veer and Malcolm Brinded, all chose to remain silent although already aware of a question mark over the reserves issue. As a consequence, many people would conclude that they were accomplices in the fraud.
At a mid-February 2003 meeting of the CMD, attended by van der Veer, the EP CFO, Frank Coopman, presented EP’s 2002 Business Appraisal in connection with CMD’s review of Shell’s annual results for 2002. After reviewing a draft of the minutes of this CMD meeting, van de Vijver e-mailed Brass, Pay and Coopman to voice his objection to the inclusion of draft language which characterized the external messages given on reserves replacement as “unduly pessimistic”:
Van de Vijver stated:
“We know we have been walking a fine line recently on external messages:”
However, within two months of the EP CEO’s admission in the above-described e-mail to members of his team that Shell was walking a “fine line” with respect to reserves disclosure (and the forwarding of that e-mail to the Shell Group Chairman), Shell submitted its annual report on Form 20-F to the SEC without further inquiry. Watts, van der Veer, and Boynton each signed, for the first time, certifications that the Group’s financial reporting was complete and accurate, pursuant to recently enacted Sarbanes-Oxley Act requirements.
On 31 March 2003, acting in his then capacity as President and Managing Director of N.V. NV Koninklijke Nederlandsche Petroleum Maatschappij (Royal Dutch Petroleum), van der Veer signed a Form 20F 2002 declaration filed with the U.S. Securities & Exchange Commission (the SEC). The declaration was countersigned by Walter van de Vijver, also a Managing Director of the company. The âShellâ Transport and Trading Company version of the Form 20-F was signed by Sir Philip Watts in his capacity as Chairman and Managing Director of the UK arm of the Royal Dutch Shell Group. These three were the only Shell directors to sign the fateful declarations which contained fraudulent figures for Shell’s proven oil and gas reserves. The declarations were supported by ‘consents’ signed by independent accountants KPMG Accountants N.V. (The Hague) and PricewaterhouseCoopers LLP London.
In the Form 20-F Declaration, Shell drew to the attention of the SEC Shell’s much vaunted code of ethics, the Statement of General Business Principles in which management pledges honesty and transparency in all of Shell’s dealings. The inclusion of several paragraphs focused on the SGBP was designed to impress the SEC by boosting confidence and trust in the high integrity of Shell management and in turn, the credibility of the information disclosed in the return, including the most important element, the statement of Shell’s hydrocarbon reserves. The trust turned out to be misplaced.
An analysis of Shell internal documents posted in the last few days on the open Internet confirm that all three of the Shell Group Managing Directors who signed the declarations dated 31 March 2003 had been aware for some time of a crisis in relation to Shell’s reserves. However they still put their names and reputation behind the claimed amount of reserve assets.
Based on the infamous email correspondence between Watts and van de Vijver it is beyond doubt that they were both fully aware of the lies which had been pedalled on the subject. For example, on November 9, 2003, after receiving what he considered an unfairly critical performance review from Watts, van de Vijver e-mailed to Sir Philip that:
“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.”
July/August 2003 – Reports to CMD
On July 22, 2003, a Note for Discussion entitled EP Reserves Outlook was presented to the CMD including van der Veer.Â The cover memorandum attached to the Note stated as follows:
“The issue of RRR is receiving a very high level of attention. Given the external profile we should not disclose the very confidential information contained in the note: This Note, like the earlier July 2002 Note, discussed Shell’s reserves.
The Note included the following discussion:
“The Potential Reserves Exposure Catalogue has been updated (Appendix C). Of the Group’s 19350 million boe proved reserves, some 1040 million boe (5%) is currently considered to be potentially at risk…. Gorgon remains the largest single potential exposure (560 million boe).” (Emphasis added.)
On December 18, 2003, van de Vijver e-mailed a colleague:
“We are heading towards a watershed reputational disaster…”
On January 9, 2004, Shell announced that it would re-categorize approximately 3.9 billion boe of its reported proved reserves.
Despite acknowledgment that the reserves issues were long-standing, during a Press and Analysts Conference on February 5, 2004, van de Vijver described the past explanations given by Shell for the reserves situation as “cover stories”.
With respect to van deer Veers consideration of the reserves issues at the time he signed the Royal Dutch Petroleum Company Annual Report on Form 20-F for 2002 and accompanying Sarbanes-Oxley certification, he repeated the response he had given in relation to the 2001 Form 20-F. Namely that he had relied on the comprehensive system of cascading assurances and certifications, including the certifications that would be given by E.P. He indicated that he viewed proved reserves disclosures as a technical matter under the control of EP and he relied on EP management to address those issues.
There is no evidence that Jeroen van der Veer was implicated to the same degree as Watts and van de Vijver. However, while he was not the executive in charge of the division responsible for hydrocarbon reserves, the newly published Shell internal documents provide evidence that at best he was grossly negligent and in breach of his judiciary duties. He also has a convenient memory.
As can be seen there were many warning signals over a long period. The most cursory check by van der Veer would have discovered the incredible truth that the whole audit procedure for Shell’s reserves – the asset which underpinned the financial wealth and health of the entire Royal Dutch Shell Group – ultimately relied on an elderly retired former Shell employee working part time on a 90 days per year contract who visited major properties only once every four years. The less charitably minded who read the relevant documents may draw the conclusion that van der Veer was complicit in fooling investors and financial analysts for a long period and ultimately, the SEC, when he recklessly put his signature to the Form 20-F Reports despite being aware of the question mark over reserves. What is beyond doubt is that the fundamentally important reserves information stated in the Form F-20 2002 Report, which was signed by van der Veer as being truthful, was in fact false.
Although Sir Philip Watts, the main culprit in the reserves fraud was compelled to resign, he walked away with a severance package/pension pot reportedly amounting to around $18.5 million.
Jeroen van der Veer ignored the warning signals until it was too late and remained silent when van de Vijver lied to financial analysts in his presence. He subsequently put his name to a fraudulent declaration to the SEC. Instead of being censured, he was appointed to take over from Watts as the boss of bosses at Royal Dutch Shell, where he now reigns supreme.
The age of voluntary resignation being the honourable response after being exposed as a participant in a major scandal has apparently passed. Nowadays the wrongdoers are richly rewarded.
Many passages of the above article are taken verbatim from the Davis Polk & Wardwell Report to the Shell Group Audit Committee dated 31 March 2004: link immediately below:
Annual Report on Form 20F 2002 Royal Dutch Petroleum Company and The “Shell” Transport and Trading Company, Public Limited Company filed with the United States Securities & Exchange Commission: Filed in March 2003: Every page in discovery document marked “FOIA Confidential Treatment Requested”: Believed to be request for exemption from U.S. Freedom of Information Act. Contained fraudulent declaration of oil and gas reserves signed by Jeroen van der Veer and countersigned by “Independent Accountants”: filed 10 months before news of reserves scandal broke.
Form 20F Return in 5 Parts
Part 1 (31 pages)
Part 2 (31 Pages)
Part 3 (41 Pages)
Part 4 (41 Pages)
Part 5 (39 Pages)
The following are extracts from an Amended Complaint filed on 13 Sept 2004 by Bernstein Liebhard & Lifshitz LLP, against The Royal Dutch Petroleum Company, The “Shell” Transport and Trading Company PLC, current & former “Shell” directors and others. There is some overlap with the extracts from the D P & W Report.
Paragraph 363: The 2000 Annual Reports also contain information about the Companies corporate-governance and internal-controls. Both van der Veer, in his message from the President, and Moody-Stuart, in his message from the Chairman, underscored the Companies purported commitment to “transparency”: “We are committed to transparency, and to developing and integrating our reporting on how Shell companies fulfil their responsibilities.”
Paragraph 357: In or about March 2001, Royal Dutch issued its Annual Report and Accounts 2000 (the “2000 RD Annual Report”), and Shell Transport issued its “Annual Report and Accounts 2000” (the “2000 ST Annual Report” and, together with the 2000 RD Annual Report, the “2000 Annual Reports”). Defendant van der Veer signed the 2000 RD Annual Report on March 14, 2001, and Defendant Moody-Stuart signed the 2000 ST Annual Report on March 15, 2001.
Paragraph 358: The 2000 Annual Reports set forth numerous materially false or misleading statements concerning proved hydrocarbon reserves.
Paragraph 390: In or about March 2002, Royal Dutch issued its “Annual Report and Accounts 2001” (the “2001 RD Annual Report”), and Shell Transport issued its “Annual Report and Accounts 2001” (the “2001 ST Annual Report” and, together with the 2001 RD Annual Report, the “2001 Annual Reports”. Defendant van der Veer signed the 2001 RD Annual Report on March 13, 2002, and Defendant Watts signed the 2001 ST Annual Report on March 14, 2002.
Paragraph 391: The 2001 Annual Reports set forth numerous materially false or misleading statements concerning proved hydrocarbon reserves.
Paragraph 372: On April 12, 2001, the Companies filed with the SEC their Annual Report on Form 20-F for the year ended December 31, 2000 ((the ‘2000 20-F’, signed by Defendant Jeroen van der Veer for Royal Dutch, and by Defendant Mark Moody-Stuart for Shell Transport.
Last sentence from paragraph 373: In this same section, the 2000 20-F repeats verbatim the materially false and misleading language from the 1999 20-F concerning replacement ratios quoted in paragraph 340, above.
Paragraph 403: On April 12, 2002, the Companies filed with the SEC their Annual Report on Form 20-F for the year ended December 31, 2001 (the ‘2001 20-F’), signed by Defendant Jeroen van der Veer for Royal Dutch, and by Defendant Philip Watts for Shell Transport.
Paragraph 406: As Defendants knew or were reckless in not knowing, that statements in the previous three paragraphs concerning the figures for proved developed ans undeveloped reserves (at year end), proved hydrocarbon reserves replacement ratios, the reasons given for additions to proved reserves, and the exclusion from reported reserves of volumes attributable to discoveries ‘which are not at present considered proved’ were materially false and misleading when made for the reason given in 302 and the paragraphs cited therein.
Paragraph 436: The 2002 Annual Reports also contain information about the Companies corporate-governance and internal-controls efforts. Both van der Veer, in his message from the President, and Watts, in his message from the Chairman, underscored the Companies purported commitment to the values of “honesty” and “integrity”, and to “having strong corporate governance” and “committing to transparency.”
Paragraph 429: In or about March 2003, Royal Dutch issued its “Annual Report and Accounts 2002” (the “2002 RD Annual Report”, and Shell Transport issued its “Annual Report and Accounts 2002” (the “2002 ST Annual Report”, and together with the 2002 RD Annual Report, the “2002 Annual Report”). Defendant van der Veer signed the 2002 RD Annual Report on March 5, 2003, and Defendant Watts signed the 2002 ST Annual Report on March 6, 2003.
Paragraph 430: The 2002 Annual Report set forth numerous materially false or misleading statements concerning proved hydrocarbon reserves.
Paragraph 454: The 2002 20-F includes certifications required by the Sarbanes-Oxley Act of 2002. The certification of Defendant Jeroen van der Veer, then President and Managing Director of Royal Dutch, states, inter alia:
1. I have reviewed this annual report on Form 20-F of the Royal Dutch Petroleum Company (N.V. Koninklijke Nederlandsche Maatschappij);
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report¦(Emphasis added.)
The complete Amended Complaint filed on 13 Sept 2004 from which these extracts are taken can be viewed via the link below: