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How Simon Henry got it wrong on the repercussions of Royal Dutch Shell reserves fraud

The Independent: Reserves shock wipes £8bn from value of oil giant Shell

By Michael Harrison Business Editor
10 January 2004

Shell, the world’s second biggest oil and gas company, saw £8bn wiped from its market value yesterday after it stunned the industry and the financial markets by cutting its estimate of proven reserves by a fifth.

The disclosure sent shares in the Anglo-Dutch company tumbling by 8 per cent and also hit its UK rival BP, although BP said it had no plans to follow Shell’s lead.

Shell said that after an internal review it had decided to “re-categorise” 3.9 billion barrels of proven reserves as probable reserves or reserves which have “scope for recovery”.

Late last year the US Securities and Exchange Commission approached Shell and several other oil companies about the booking of reserves in the Gulf of Mexico. But Shell denied that this was the trigger for its review and said that less than 10 per cent of the reserves it had recategorised lay in this region.

The company said it had decided to conduct a world-wide review of its booked reserves after a number of one-off reviews of proven reserves in particular fields.

The re-classification is important because an oil company’s proven reserves represent its future value and Shell said that, on this measure, it was now worth 10 per cent less on a discounted cash-flow basis.

However, Shell was adamant the cut in reserves would have no impact on its financial results for 2003, nor would it materially change the volume of oil and gas that the company ultimately expected to recover. “It is anticipated that most of these reserves will be re-booked in the proved category over time as field developments mature,” it added.

The re-classification is, nevertheless, a blow for the credibility of the company and the reputation of its chief executive Sir Philip Watts, who will present Shell’s annual results to the City early next month. Industry sources said the review appeared to have been sparked by the fact that different parts of the Shell global empire adopted different standards when booking reserves. Shell itself hinted this had been the case by saying the recategorisation exercise would bring its global reserve base up to a “common standard of definition”.

Of the 3.9 billion barrels that have been re-categorised, about half had been booked in Australia and Nigeria. Two-thirds are oil reserves and one-third natural gas. Shell said that 90 per cent of the reserves involved were in fields that had yet to be developed.

Simon Henry, Shell’s head of investor relations, said that, nothwithstanding the huge extent to which proven reserves had been over-booked, none of the executives involved would be disciplined. The calculations, relating mainly to reserves booked between 1996 and 2002, had been carried out in “good faith” but now Shell recognised it had to work to tighter specifications.

Analysts were also unnerved by the disclosure that Shell is still failing to replenish its oil and gas reserves at the same rate as they are being depleted. The company said its reserve replacement ratio for 2003 would be in the range of 70-90 per cent. Mark Lanotti of Merrill Lynch cut his rating on Shell from “buy” to “neutral”, saying: “This will be the third consecutive year that Shell’s reserve replacement will be lower than 100 per cent, raising questions over the sustainability of future growth.”

The market was further unsettled by a trading update from BP pointing to lower margins in its US gas marketing and refining businesses in the fourth quarter.

ARTICLE ENDS

Contrary to the comment by Simon Henry, three members of the Royal Dutch Shell board including Shell Chairman, Sir Phillip Watts, were forced to resign as a consequence of the huge amount of negative publicity generated by the fraud and associated incriminating emails.

Associated Legal Document

Shell reserves fraud: Videotaped Deposition of Simon Henry, Executive Vice President Finance, Shell Exploration and Production

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