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CHRIS FINLAYSON AND THE ROYAL DUTCH SHELL RESERVES SCANDAL

“With regards to the reserves fraud, Mr Finlayson was either part of the cover-up, or negligent in his fiduciary duties as a senior Shell executive, supposedly protecting the interests of investors”; “That should be of great concern to investors in BG Group. Surely the company could have found a new CEO untainted by scandal?”

John Donovan

In January 2004 news broke about the Shell reserves fraud. These examples from hundreds of news reports speak for themselves:

Daily Telegraph: Shell drops ‘bombshell’ on reserves: 9 Jan 2004
The Times: How Shell blew a hole in a 100-year reputation: 10 Jan 2004
The West Australian: Investors howl for Shell’s blood: 12 Jan 2004

Shell executives, led by then chairman Sir Philip Watts, who has recently repented by becoming the Rev. Sir Philip Watts, admitted they had repeatedly lied to investors about the true level of Shell’s oil and gas reserves. Shell senior management had engaged in a massive cover-up to fool the market i.e. deceive its own shareholders. Shell admitted that it had misled investors.

Chris Finlayson knew about the concerns over Shell hydrocarbon reserves at least two years before that concern was shared with the public.

Following the bombshell dropped in January 2004, Shell internal emails revealed that Shell executive directors were “sick and tired about lying at Shell”. A trail of emails reveals depths of deceit at the heart of Shell. The Independent described the situation as “Lies, cover-ups, fat cats and an oil giant in crisis.”

Mr Finlayson was either part of the cover-up, and/or was negligent in his fiduciary duties as a senior Shell executive.

Shell’s credit rating was cut on more than one occasion and record breaking fines were imposed on the company by the U.S. Securities & Exchange Commission and the UK Financial Services Authority. Shell was also hit by class action lawsuits. We played a role in the U.S. and expanded global action, supplying insider information. Eight Royal Dutch Shell companies collectively sued a former Shell Production Geologist Dr John Huong over information we published. He was buried in injunctions and threats of imprisonment for blowing the whistle internally on the deliberate deception being perpetrated on Shell investors.

During the litigation it was revealed to an incredulous world that the integrity of Shell’s reserves filings rested on auditing work undertaken by a non-independent retired former Shell employee, Mr Anton A. Barendregt, WORKING PART-TIME. 

His video-taped deposition running to 965 pages contains evidence that Mr Finlayson was aware from at least May 2002 of alarm bells ringing over reserve issues. At the time, Finlayson was Managing Director of Brunei Shell Petroluem SDN BHD.

Extract from page 372

Although the total volume of “legacy” reserves has decreased substantially in the past few years the continued presence of ‘legacy reserves’ remains an area of concern. These are undeveloped reserves which had historically been booked in reservoirs and for which no clear actives had been identified (in line with then current practice). These reserves should be addressed at the first available opportunity, while striving to avoid major reserves swings.

Mr Finlayson was number 2 on the circulation list of the confidential memo from Barendregt dated 5 May 2002.

He was number three on another confidential memo circulated by Barendregt on 23 September 2003. The heading was “PROVED RESERVES PROCESS AUDIT – SPDC (NIGERIA), 18·19 Sept 2003.” This time Finlayson was Managing Director of Shell Petroleum Development Company of Nigeria.

Extract from page 745

The audit finding is therefore that the present status of SPDC’s proved oil reserves is unsatisfactory.

Another confidential memo (page 755) from Barendregt a few days later (30 Sept 2003) contains the most damning evidence of all with a warning “that the portfolio of proved reserves per 1.1.2003 has been overstated due to insufficient maturity in the underlying future projects.” It goes on to state: “The audit finding is therefore that the present status of SPDC’s proved oil reserves is unsatisfactory”… and described the SPDC’s oil reserves as being “inflated.”

Finlayson was again number 3 on the circulation list. 

The quickest way to find these pages is to run a search for “Finlayson” in the deposition

Concern about legacy reserves of Brunei Shell Petroleum was also expressed by Barendregt in another confidential memo on the same subject dated 31 May 2002.

An article published by The New York Times in March 2004 contained a reference to Mr Finlayson, which further reflects on his credibility.

He had now become Chairman of all Shell companies in Nigeria.

Extract

Nigeria has also tried to be more publicly accountable on its handling of the oil industry. President Olusegun Obasanjo won praise last year when he promised that his country would publicly report its oil revenue. He also called for each oil company to publish its payments to governments, but some American companies and the Bush administration oppose such detailed reporting.

Transparency International, a research and advocacy group based in Berlin, which helped organize the news conference for President Obasanjo, said that Chris Finlayson, chairman of the Shell companies in Nigeria, attended the event and welcomed the president’s announcement.

A month later, Shell’s senior management recommended that details of its reserve problems and bonus negotiations with Nigeria be kept confidential.

With regards to the reserves fraud, Mr Finlayson was either part of the cover-up, or negligent in his fiduciary duties as a senior Shell executive, supposedly protecting the interests of investors.

He had advance warning in writing, but like other Shell executives, participated in the cover-up and deception.

That should be of great concern to investors in BG Group. Surely the company could have found a new CEO untainted by scandal?

More articles and evidence about Mr Finlayson and his time at Shell will follow in coming days.

ARTICLE ENDS: PLEASE NOTE THAT ALL OF THE ABOVE INFORMATION WAS SUPPLIED ON MONDAY 17 DECEMBER 2012 TO BG GROUP & SHELL. THERE HAS BEEN NO CHALLENGE TO THE ACCURACY OF WHAT IS STATED NOR TO THE AUTHENTICITY OF CITED EVIDENCE.

Additional Background Information

UK Financial Services Authority Report (confirms £17 million fine imposed on Shell).

We have provided a selection of press reports confirming the importance of Shell Nigerian reserves in the securities fraud. The most informative is the Financial Times article published on 24 April 2004 under the headline: Nigeria holds the clue to group’s wrongly booked reserves debacle

The first three paragraphs:

About one-third of the reserves Royal Dutch/Shell wrongly booked with the US Securities and Exchange Commission lay in Nigeria.

How the European energy group booked many of the same fields with the Nigerian government might shed more light on how it became embroiled in one of its most damaging scandals.

Shell relied on revisions in data, rather than new discoveries of oil and gas, to raise its proved reserves in Nigeria in the past three years, documents showed.

A selection of further news reports are provided below.

Additional information about the significance of the reserves in Brunei and Nigeria can be found in:

1. The Davis Polk & Wardell Report to the Shell Group Audit Committee dated 31 March 2004, comprising 202 searchable pages, each marked “Highly Confidential”

2. U.S. Securities & Exchange Commission Report (Confirms time period in which overstatement of Shell Nigerian reserves took place, which included when Mr. Finlayson was in control).

3. An amended compliant – Civil Action 04431 filed in the Federal District Court of New Jersey.

AMENDED COMPLAINT FILED 13 SEPT 2004 BY BERNSTEIN LIEBHARD & LIFSHITZ LLP, LEAD PLAINTIFF LAWYERS IN A U.S. CLASS ACTION LAWSUIT FILED AGAINST ROYAL DUTCH/SHELL

Please note that the Amended Complaint runs to some 250 pages (approx) and is split into the following PDF files, parts 1 to 8:

Part 1
Part 2
Part 3
Part 4
Part 5
Part 6
Part 7
Part 8

Extracts from numbered paragraphs as indicated

171. On January 31, 2003, Barendregt wrote another “confidential” memorandum that he circulated to senior Shell Group executives (in the EP unit), as well as to KPMG and PwC. As with his January 2002 memorandum, KPMG and PwC received the memorandum. The January 2003 memorandum reviewed the prior year’s reserves estimates. Like the January 2002 memorandum, Barendregt’s January 2003 memorandum warned that the Shell Group’s guidelines for booking reserves did not comport with SEC guidelines in all instances and raised questions about the integrity of the Companies’ overall reserves-reporting system. Moreover, according to the FSA, Barendregt “considered areas where there was an issue with product license constraints.” In Nigeria, for example, Barendregt concluded that the Group had overstated proved reserves by approximately 20%, or 600 million boe.

91. The GRA’s lack of independence permitted the Shell Group’s classification of reserves associated with a project to remain as proved, and, as the SEC found, “facilitated the booking of questionable reserves … and contributed to Shell’s maintenance of increasingly questionable bookings (such as Gorgon and certain legacy bookings in Brunei) well after they should have been de-booked.”

221. By early 2002, according to the SEC, “other Shell reserves personnel, including the Group Reserves Coordinator, had raised concerns within EP that SPDC’s reported proved reserves could not be produced within existing license constraints.”

222. Thereafter, according to the SEC, “EP management continued to review the technical and commercial maturity of SPDC’s reserves. After completing the initial phase of its work in September 2003, the EP review team concluded that there was an approximately 750 million boe ‘gap’ between the reported proved reserves and those supported by projects in the business plans.” Also in September 2003, the GRA reported the results of his just-completed audit of SPDC’s proved reserves, concluding that “there can be no doubt that the portfolio of proved oil reserves per [January 1,2003] has been overstated due to insufficient maturity in the underlying future projects.” As noted by the SEC, the GRA indicated that “the ‘precise’ amount of de-booking required was dependent on additional reviews already underway by EP.”

223. By November 2003, the EP review team completed the second phase of its work. As noted by the SEC, “[i]t confirmed the earlier findings of a 750 million boe ‘gap’ and added another 800 million boe of proved reserves that were not sufficiently mature under Shell guidelines.

224. Management also decided that it would conceal the reserves problem from the investing public. As noted in the news media, the December 8th Report recommended that “any debooking of proved reserves” in Nigeria should “not be identified publicly with Nigeria,” but classified under a wider geographic area. Accordingly, in February 2004, the Shell Group reported reserve information about Nigeria in the context of its African operations, which it said accounted for 1.5 billion barrels of the revision. The Shell Group has operations in several African countries, including Libya and Egypt, but, as reported in THE NEW YORK TIMES on March 19, 2004, Nigeria is the only country listed in a “potential reserves exposure catalog” that was distributed to senior executives late last year.

Searchable Transcript of Financial Services Authority Interview with Sir Philip Watts: 24 June 2004: 75 pages – every page marked “CONFIDENTIAL”

Extract from page 3

Right, okay. We’re going to move on to now pretty much the announcements that were made by Shell, both in January and April. I’d like, if I may, to start with some background to that in April the announcements referred to four specific areas: Gorgon in Australia, Oman, Nigeria and Brunei, all of which required reserves to be de-booked. I was just wondering if perhaps you could tell us your recollection of the original bookings of each of those?

MORE RELATED NEWS ARTICLES

Financial Times: Nigeria hitch caused Shell cuts

Extracts

Sir Philip Watts, Shell chairman, is due on Thursday to give a full explanation of why the world’s third largest listed oil company was forced to cut its proved oil and natural gas reserves by 20 per cent, the largest adjustment having been made in Nigeria and Australia. Investors slashed 8-10 per cent off Shell’s share price after the admission and called for Sir Philip’s resignation.

Chris Finlayson, chairman and managing director of Shell Petroleum Development Company of Nigeria, would not comment on the reasons for the reclassification, but did acknowledge there had been delays in natural gas investments critical to exploiting Nigeria’s oil fields. “The primary constraint is the level of spending the government is willing to put in. To put in an integrated gas and oil development is more expensive than a simple oil development. In essentially a capital-constrained environment, with a limit on the funding going into the industry, clearly [that] does constrain how much you can do,” he said.

The Independent: Shell chief faces Nigerian challenge (Reference to Watts)

Extract

He is under pressure to resign following Shell’s shock announcement last month that its proven reserves had been cut by 20 per cent after it discovered that massive over-booking of oil and gas finds had taken place between 1996 and 2002. Half of the 3.9 billion barrel reduction in reserves concerns fields in Australia and Nigeria, where Shell has controversially had a presence for more than 20 years.

The Guardian: Shell plans 20% job cuts in Nigeria: Wednesday March 17, 2004

Shell is threatening to cut 1,000 jobs in Nigeria, one of the countries at the centre of the company’s “lost” reserves scandal.

Shell and other foreign operators are facing demands for hundreds of millions of dollars to be repaid to the Nigerian government over the way it used a reserves addition bonus scheme. This was a fiscal arrangement that ran from 1991 to 2000 and offered generous incentives for companies to invest in oil and gas.

The New York Times: Shell Withheld Reserves Data to Aid Nigeria: March 19, 2004

Extracts

WASHINGTON, March 18 — The Royal Dutch/Shell Group has kept secret important details of its sharp reduction in oil and gas reserves, particularly in Nigeria, for fear of damaging its business relationship with the government there and the Nigerians’ desire to produce more oil, internal company documents show.

While Shell has acknowledged that the biggest adjustments in reserves include those in Nigeria, it continues to conceal the extent of its problems. But confidential documents from late last year show Shell concluded that more than 1.5 billion barrels, or 60 percent of its Nigerian reserves, did not meet accounting standards for “proven reserves.”

The Financial Times: Shell plans to squeeze more from Nigerian operation: Published: March 22 2004 4:00

Extract

When Shell made the first of its controversial cuts in declared oil reserves – in January, by 3.9bn barrels – it said a delay in investment in Nigeria was responsible for 1.3bn barrels of that total.

The Financial Times: Nigerian moves come at time of turbulence for Shell: March 22, 2004

Shell’s Nigeria operation came under further scrutiny earlier this year when it was revealed that the country accounted for one third of the company’s January 3.9bn barrel downgrade of its global proven oil reserves. Company officials say the reorganisation is not linked to the reserves downgrade, which stunned investors and led to the departure of Sir Philip Watts.

The Scotsman: Shell announces Nigerian shake-up as ABI talks begin: 23 March 2004

The talks came as Shell confirmed a big shake-up of its Nigerian operations – responsible for about one-third of the four billion-plus barrels of overstated oil reserves that have plunged the company into turmoil and led to the resignation of executive chairman Sir Philip Watts and the head of exploration and development, Walter van de Vijver.

The New York Times: Nigeria Threatens to Halt Shell Production: 26 March 2004

Shell reduced its estimate of reserves in Nigeria by 1.3 billion barrels in January, as part of a larger reclassification of 3.9 billion barrels in worldwide reserves, causing a shareholder uproar that led to the resignations of chairman Sir Philip Watts and its head of exploration and production.

Forbes.com: Nigeria says Shell cut 1.9 bln bbls of its reserves: Reuters, 01.04.04,

VIENNA, April 1 (Reuters) – Royal Dutch/Shell’s oil reserves in Nigeria have fallen by 1.9 billion barrels as part of its shock cut this year, more than earlier thought, the country’s top energy official said on Thursday.

International Herald Tribune: Shell Concealed Extent of Its Problems to Protect Nigeria Partnership.: 10 May 2004

Finally, extracts from a report in the Guardian indicating that the reserves situation was not the only sensitive issue that Mr. Finlayson had to deal with while head of Shell in Nigeria.

http://www.guardian.co.uk/world/2011/oct/03/shell-accused-of-fuelling-nigeria-conflict

First three paragraphs

Shell has fuelled armed conflict in Nigeria by paying hundreds of thousands of dollars to feuding militant groups, according to an investigation by the oil industry watchdog Platform, and a coalition of non-government organisations.

The oil giant is implicated in a decade of human rights abuses in the Niger delta, the study says, claiming that its routine payments exacerbated local violence, in one case leading to the deaths of 60 people and the destruction of an entire town.

Platform’s investigation, which includes testimony from Shell’s own managers, also alleges that government forces hired by Shell perpetrated atrocities against local civilians, including unlawful killings and systematic torture.

Related report by oil industry watchdog Platform: Counting the Cost

Extract

1.3 Oru Sangama

In mid-September 2004, the JTF attacked the village of Oru Sangama using helicopter gunships and speedboats. According to writer and journalist Peter Maass, two civilians were reported killed and many houses were looted and burned to the ground. Soldiers hired by Shell to guard the nearby Soku gas plant were allegedly involved in the attack. Hours beforehand, helicopters evacuated over 200 Shell staff from the company’s facilities in Soku and nearby Ekulama.

The JTF raid was part of a major offensive in 2004, with the stated intention of “flushing out” militants from the creeks of Rivers and Bayelsa State. Amnesty International estimated that in the first three weeks of September 2004 alone, 500 people were killed and thousands more displaced as the JTF indulged in wanton killing sprees. Asari Dokubo, the leader of a major militant group, had used Oru Sangama as a base but the JTF raid on the village failed to apprehend any militants. The JTF’s raid on Oru Sangama was wholly excessive, disproportionate and took the form of collective punishment.

When confronted about Shell’s role in the attack on Oru Sangama, then Director of Shell Nigeria, Chris Finlayson, responded:

“We do obviously request protection when we feel our operations are under threat… We had intelligence that government activity was increasing in the area. We had no idea where the activity was going to be, but we knew that the area around the gas plant was at risk. We took the action of protecting our own staff and flying our people out. But we don’t know what the military are going to do, we don’t know where they’re going to do it.”

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