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The Shell Show, a tragicomedy in an unlimited number of parts

FROM OUR AUGUST 2004 SHELL NEWS ARCHIVE

The Daily Telegraph: The landslide bringing down Shell grandees

The SEC and FSA reports, however, go back to the previous regime, when Sir Mark Moody-Stuart was chairman.”: Even Shell fell for the “group bonding” mumbo-jumbo, and he was videoed stumbling blindfold around head office during one such session, talking of his desire to “encourage the creativity of people” around him. He seems to have succeeded.”

(Filed: 28/08/2004)

The Securities & Exchange Commission has announced its intention to pin the reserves scandal on individuals, writes James Moore

The Shell Show, a tragicomedy in an unlimited number of parts, featured a powerful double act this week.

On Tuesday America’s Securities and Exchange Commission and the Financial Services Authority both gave the company a good kicking for wrongly booking billions of barrels of oil and gas reserves as “proven”.

Now Harold Degenhardt, the director of the Securities & Exchange Commission’s office in Fort Worth, Texas, is hard at work on the sequel. “What people need to focus on is that companies only act through people,” he says.

“That means that people are responsible and it is part of our job to ensure that the people responsible at the company are appropriately dealt with. We will look at people within and outside the company to determine who may have a role.

“Once we have made that determination we will make a recommendation to our commission here and then we will bring appropriate actions.”

Well, it’s a clear warning all right, aimed at some of the most senior businessmen in the land, both retired and still active. The SEC can fine and confiscate cash deemed to have been made through illegal actions. It can also disbar directors, which could make life much less agreeable for the former Shell executives who have spread out into boardrooms everywhere.

Neither the SEC nor the FSA named individuals in their reports which explained the reasons for their respective $120m (£67m) and £17m fines against Shell, but they hardly needed to.

Their reports go back much further than the report which Shell itself commissioned from US law firm Davis Polk & Wardwell, and by implication, embrace those former executives. The FSA dates the company’s mis-stating of proven oil reserves back to 1998, following the adoption of a new policy over reserve booking the previous year, initially in four countries.

Shell had felt that its reserve booking policy was too cautious compared to competitors. Its reserve replacement ratio (RRR), a key indicator for judging whether an oil company is growing or shrinking, had for several years lagged behind its rivals. Executives were cast in a poor light when presenting Shell’s figures to the City.

The date is significant because the Davis Polk report dates the problem back only to 2001, when the SEC published guidance on booking reserves.

That report concentrated on Sir Philip Watts and Walter van de Vijver, respectively former chairman of Shell’s committee of managing directors and former head of exploration and production. It disclosed e-mail exchanges between the two, including one in which Van de Vijver pronounced himself “sick and tired of lying” about Shell’s reserves.

The SEC and FSA reports, however, go back to the previous regime, when Sir Mark Moody-Stuart was chairman. Still a non-executive at Shell, he is now chairman of Anglo American, the natural resources group, and a non executive director of HSBC.

Moody-Stuart, a Shell man for nearly 40 years, took the traditional route to the top, through foreign postings and Exploration & Production. He became chairman of the committee of managing directors in 1997.

Even Shell fell for the “group bonding” mumbo-jumbo, and he was videoed stumbling blindfold around head office during one such session, talking of his desire to “encourage the creativity of people” around him.

He seems to have succeeded. The reports reveal that the new policy formulated in 1997 put a truly creative interpretation on the expression “proven oil and gas reserves”.

In 1998 the company set up four “value creation teams” to find radical ways of improving the exploration and production business.

Their May 1998 paper, “Creating Value Through Entrepreneurial Management of Hydrocarbon Resource Values” recommended revisions to Shell’s reserve booking guidelines. According to the SEC some 40pc of the total proven reserves Shell added in 1998 resulted from these revisions.

The only indication to the outside world of this sea-change was a single line in its 1998 annual report: “Estimation methods have been refined during 1998.”

The FSA and SEC reports say Shell executives were repeatedly warned reserve booking was awry. The SEC blames Shell’s failure to correct the overstatement of reserves on “its desire to create and maintain the appearace of a strong RRR.”

It also lambasts a lack of “effective internal controls”, pointing out that the company failed to restate reserves in 2001, when it was clear that its previous statements violated SEC guidelines. Shell’s rules prohibited “reserves de-booking” in “all but the most extreme circumstances”.

As a result, the books showed 550m barrels of proved reserves in Australia’s Gorgon offshore gas field, despite the lack of a contract to sell the gas, a development plan or a final investment decision. Inside the company, it obviously looked like a “dodgy” booking.

Others followed, culminating in the devastating e-mail to Watts from Van de Vijver. At a press conference in February, the latter produced the truth – a chart suggesting that questionable bookings went back as far as 1994.

In 2001, when Watts replaced Moody-Stuart as chairman, it was a surprise departure from the tradition of alternating the top job between the British and Dutch sides of the company.

The Davis Polk report explains why: “There was a perception Sir Philip’s own success could be attributed, in part, to his ability to meet or exceed reserve expectations.” He and Van de Vijver are now spending time with their lawyers.

If Moody-Stuart was the one at the helm when the Shell tanker first started to veer seriously off course, he is not the only one on the bridge to have gone on to another top job. Paul Skinner, another Shell lifer, joined the board as head of oil products in 2000. He is now chairman of Rio Tinto and a director of Standard Chartered Bank.

Given Shell’s introverted culture, it’s no surprise the new top man was on the committee of managing directors throughout the dodgy bookings. Jeroen van der Veer was promoted in 1997. He has talked much of the need for Shell to put its reserving difficulties behind it.

Nor can the Shell non-executives be described as new blood. Lord Oxburgh, now chairman, was appointed in 1996, while the Saudi Arabian Temour Alizera joined a year later, followed by Dr Eileen Buttle. Royal Dutch chairman Aad Jacobs has been on the supervisory board since 1998, while Jonkheer Aarnout Loudon was appointed in 1997.

That year, The Guardian ran a critical article, drawing a response from Moody-Stuart: “We at Shell believe it is possible, and desirable, to run a profitable business without sacrificing values for profit.”

Yesterday, he was referring calls back to Shell’s press office. It’s not a tactic which he is likely to be able to pursue for long.

RELATED TELEGRAPH ARTICLE:

Shell faces revolt over pay policy

By Lachlan Johnston: 12:01AM BST 14 Apr 2003

Shell has become the latest target of the National Association of Pension Funds, with the shareholder activist opposing the oil giant’s pay policy and the election of non-executive director Mark Moody-Stuart. (Shown right)

The re-election of Mr Moody-Stuart is being opposed on the grounds that as a former group managing director of Shell, he is not independent.

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