Simon Henry was at the heart of what was going on, conveying reserves data to the market while dealing with colleagues engaged in the fraud. We have to assume that none of them confided in him and that he was an innocent dupe. He was asking questions about accuracy of the reserves information, but some investors may feel that he should have been rather more inquisitive given the gathering warning signals of which he was acutely aware, that were already reaching the markets. Perhaps he did know, but was in a state of denial about what was going on? That seems to have been the case even after news of the reserves scandal made headlines around the world.
Shell was given advance sight of this article and the opportunity to point out any factual inaccuracy.
By John Donovan
In March 2002, Simon Henry, the current Chief Financial Officer of Royal Dutch Shell Plc was head of Investor Relations for the Royal Dutch Shell Group.
Mr Henry was responsible for gathering reserves data and ensuring the quality/accuracy of the data before it was disclosed to analysts and investors. It turned out that some of the data was not only inaccurate, but also fraudulent.
As I have previously pointed out, Mr Henry was warned early in 2003 about a reserves booking “time bomb.” This was a year before news of the fraud broke in a media firestorm that quickly engulfed Sir Philip Watts, Walter van de Vijver and Judith Boyton, the three most senior executive directors at Shell. All were forced to resign.
Simon Henry had dealt with all three constantly, on a first names basis, on various issues of interest to analysts and investors, including proven reserves. Mr Henry has testified in a related U.S. Class Action that “The only consistent measure available to anybody looking at the industry is proved reserves.”
As a result of the reserves fraud, Mr Henry also found himself being interrogated under oath by the U.S. Securities and Exchange Commission.
This is a link to the relevant section of his deposition, pages 203 to 213 inclusive (the page numbers in blue at the top right hand corner of each page) plus the first page of the deposition. The issue of booking Shell Nigerian hydrocarbon reserves, which featured prominently in the subsequent scandal, was the subject of the email correspondence being discussed in the section.
This correspondence, from March 2002, conclusively and repeatedly proves that Mr Henry was well aware at that time, nearly two years before the scandal became public knowledge, that the booking of Shell reserves was already a “very sensitive” issue in the market.
For example, the interrogator quoted from an extract of an email Mr Henry sent in relation to the booking of reserves with Mr Henry saying: “This is a very sensitive point in the market at the moment and it would be sad to score an own goal on such a positive announcement for the group.” Mr Henry confirmed that he had conveyed that same warning to Judith Boynton and Phil Watts.
Mr Henry seems to have been concerned that the “positive announcement” in relation to two LNG trains supplying Nigerian gas to Southern Europe and the USA, might trigger unwelcome questions from Shell investors over the booking of related reserves, thus resulting in an “own goal.” It was abundantly clear from Mr Henry’s testimony that the markets were already spooked about Shell’s reserves situation. One “knowledgeable” analyst had already been “pestering” Shell Investor Relations in New York with questions about the booking of gas reserves.
The relevant “own goal” email correspondence
Shell was subsequently found guilty of fooling the markets.
Simon Henry was at the heart of what was going on, conveying reserves data to the market while dealing with colleagues engaged in the fraud. We have to assume that none of them confided in him and that he was an innocent dupe. He was asking questions about accuracy of the reserves information, but some investors may feel that he should have been rather more inquisitive given the gathering warning signals of which he was acutely aware, that were already reaching the markets.
Perhaps he did know, but was in a state of denial about what was going on? That seems to have been the case even after news of the reserves scandal made headlines around the world.
Mr Henry was trust into the spotlight on 10 January 2004 to face the music instead of Sir Philip Watts and Judy Boyton. He fielded and dodged awkward questions from analysts and reporters and tried hard to downplay what had happened. He was quoted in an article in The Independent as saying that none of the executives involved would be disciplined.
By 25 January 2004 Mr Henry was insisting that Shell had acted in good faith in respect of the reserves bookings.
By May 2004, he was still downplaying the catastrophic event, which brought an end to the 100 year partnership between Royal Dutch and Shell Transport & Trading as two separate companies, resulted in the forced resignations of Watts, Van de Vijver and Boyton, generated a flood of class action lawsuits, investigations and massive fines from the financial regulators.
Thus there was a huge gap between the delusional rhetoric spouted by Mr Henry and the actual reality of the situation, with investors howling for Shell’s blood.
His prophetic forebodings proved to be right. Shell did score a spectacular humiliating own goal.
I have supplied links to the relevant section of the deposition and the related email correspondence so that everything can be read in context and readers can draw their own conclusions after also checking out the above links to news reports in 2004.
The importance of Shell Nigerian reserves in the reserves scandal can be confirmed by running a search under “Nigeria” in the Davis Polk & Wardwell Report – link below.