COMMENT ADDED ON 1 APRIL 2011
FROM IAIN PERCIVAL (RIGHT), RETIRED GLOBAL CHIEF PETROLEUM ENGINEER OF SHELL INTERNATIONAL (Iain retired from Shell in 2006 after 33 years of service.)
John in your posting dated 31 March 2011 You can be sure of Shell the biggest confidence trick in history, you wrote
when Shell so-called value creation teams, were already engaged in activities leading to the falsification of Shells oil and gas reserves and one of the biggest investor frauds in history.
I wish to correct any impression the team members were in any way conducting themselves in any other way than as competent, dedicated technical professionals conducing a root and branch examination of the huge volume of hydrocarbons in Shells resource portfolio categorized as Scope for Recovery. The aim of the exercise was to identify activities & projects which could (I emphasise the word could) lead to booking volumes of hydrocarbons as Expectation volumes, not proved, and only if there was a reasonable level of certainty the projects would go ahead. The outcome of the Value Creation initiative was a complete change in the way the company goes about generating hydrocarbon development concepts, designing and executing well programmes, defining and executing major engineering projects and optimizing the way facilities are operated and maintained. The current suite of E&P Global Processes, operating standards, learning & development programmes, best practice sharing / knowledge management owe their existence to the pioneering work conducted by the Shell technical professionals who worked in the Value Creation Teams.
The implication that the Value Creation work led to the falsification of hydrocarbon reserves and investor fraud is false. The work has led to value generation for investors in Shell resulting from increased efficiency in the use of capital and increased effectiveness of the technical staff in their daily work.
I remain immensely proud to have been associated with the value creation effort and the implementation of the subsequent changes to how we did our work.
REPLY BY JOHN DONOVAN
I have supplied below some information from independent sources on the issue raised by Iain Percival.
CLICK ON THIS LINK TO READ FINANCIAL SERVICES AUTHORITY REPORT ON SHELL RESERVES SCANDAL: http://www.fsa.gov.uk/pubs/final/shell_24aug04.pdf (August 2004 — £17 MILLION FINE FOR MARKET ABUSE)
In 1998 Shell created five Value Creation Teams (VCTs) to find radical new ways to improve Shells Exploration and Production business (EP) profitability and reputation and hence aid growth in the EP business. One VCT was tasked with creating the maximum value from Shells hydrocarbon reserves. A paper dated May 1998 entitled Creating value through Entrepreneurial Management of Hydrocarbon Resource Values made a number of recommendations including changing Shells reserves guidelines. On 16 September 1998 the revised guidelines were issued to Shells operating units. These revised guidelines resulted in an overstatement of Shells proved reserves of 940 million boe for the two years ended 31 December 1999.
Below is a link to the REPORT OF DAVIS POLK & WARDELL TO THE SHELL GROUP AUDIT COMMITTEE: EXECUTIVE SUMMARY dated 31 March 2004. Every page of the 202 page report is marked HIGHLY CONFIDENTIAL
I invite readers to download the report and run a search on value creation team and read the information on the related ten pages. I will provide a few extracts here, but recommend that the entire 10 pages are read so the information can be seen in context.
From page 32 (or Court numbering — page 52 of 202)
The Value Creation Team prepared a report for EP BusCom that was widely distributed within EP entitled Creating Value through Entrepreneurial Management of Hydrocarbon Resource Volumes.
From pages 45 & 46 (Using Court numbering — pages 66 and 67 of 202)
In 1998 and 1999, a diagram known as the cascade model developed by the Value Creation Team appeared in the Guidelines. Thecascade model illustrated the migration of volumes between resource categories during the development life cycle. In the diagram, undeveloped reserves appeared before final investment decision or FID (although the diagram does not make clear whether these volumes include proved undeveloped reserves).
Beginning in 1993, the Guidelines also introduced the concept of commercial viability (or later,commercial maturity) as a counterpart to technical maturity. As explained in the 1996 Guidelines, commercial viability implied that the project would yield an expected positive net present value (NPV) based on advised Group reference criteria for commerciality. Such viability was adequate for the inclusion of reserves, even though a more robust demonstration of economic viability (i.e., positive NPV under a number of technical risk downside scenarios) was necessary to obtain investment approval. In other words, it appears that the Guidelines permitted the booking of reserves (whether proved or expectation) with respect to projects that would not survive the Groups capital allocation process, again a result that appears to fall short of reasonable certainty.
Pages 7 & 8 (or Court numbering — 86 & 87 of 202)
C. Revisions to the Shell Guidelines — Volume Value Creation Team
In each of 1997 and 1998, Shells RRR performance significantly exceeded 100%. During these years Shells proved reserves were significantly boosted, not by exploration and development activity, but rather by significant modification to Shells methodologies for booking proved developed reserves. This change was at least partly the result of a review that was conducted under the auspices of a Hydrocarbon Resource Volume Value Creation Team (the Value Creation Team) within EP that was, in turn, established as part of Shells Leadership and Performance LEAP Focused Results Delivery Project. Similar to the relaxation in standards for booking proved gas reserves in 1990, this initiative was driven by the perception that Shells approach to booking proved developed reserves was more conservative than its competitors, and that Shells reserves were therefore not maximizing value.
Footnote of page 4 (or Court numbering page 83 of 202)
It should be noted that the main increases in proved reserves resulting from the Value Creation Teams revised Guidelines in 1997/1998 (See Section II C, below) related to proved developed reserves. Such proved developed reserves did not make up a significant portion of the reserves recategorization announced on January 9, 2004.
THE NEW YORK TIMES: At Shell, New Accounting and Rosier Oil Outlook: 12 March 2004
The problems at Royal Dutch/Shell can be traced to the first half of the 1990?s, when executives and investors began to grow concerned that the groups reserves were not keeping pace with production. Their concern led them in 1997 to instruct the leadership and performance group, known within the company as LEAP, to create value through entrepreneurial management of hydrocarbon resource volumes, according to one company document.