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9/11 Terror Attack and the Shell Reserves Scandal

By John Donovan

On Friday we published an article revealing Shell internal email correspondence, which provided proof that three weeks after the 9/11 terrorist attack on the USA, Shell executives were considering how Shell could exploit the horrific event for commercial reasons.

As can be seen from the correspondence, the objective was to “buy us a bit of time” in dealing with “production growth” … and “reserves replacement…” Both are key factors in assessing the value of an oil company. Shell was increasingly vulnerable to criticism on both issues.

I was so stunned by the content of some of the emails that I published them without making any comment in case I had misinterpreted what was being said.  I wanted to see whether others shared my analysis and reaction. 

The subject being discussed by Shell executives was the possibility of exploiting the “tragic event” to buy time with the markets and introduce some “flexibility” (scope for lying?) into “our story” – the “story” being pitched to analysts/investors.

“This approach buys us time and flexibility, and reduces the “obvious doggy factor” in our story just a little.”

An indication of the mindset behind what was being contemplated can be deduced from a question posed and answered by Shell executive Aidan McKay:

Q: Will a real world tragic event in any way influence the stories we are telling investors….? A: Depends on the degree of truth in the stories being told…..? Remember Pinoccio…..!

McKay pointed out the risk of getting “caught out for telling IR stories (in a transparent world) and what the likely punishments will be!

(“IR” abbreviation for Investor Relations.)

Mr Mckay was prophetic. Shell did get caught out doing precisely that and was punished accordingly by the U.S. Securities & Exchange Commission and the UK Financial Services Authority for “fooling the markets” in a huge securities fraud involving the over-booking of proven reserves. The email correspondence mentions the ‘rate at which we can “book” proven reserves. Shell senior executives including the Group Chairman, Sir Philip Watts, and the CEO of Shell EP, Walter van de Vijver, the “Walter” mentioned in one email, were forced to resign in the face of multiple class action lawsuits and a firestorm of media stories hugely damaging to Shell’s reputation.

One of the major focuses of attention in the investigation of the reserves scandal was Shell’s use of a retired former Shell employee, Anton Barendregt, on a part-time basis, as the “independent” Group Reserves Auditor. 

There is some further interesting email correspondence once again involving Aidan McKay. It relates to the role of Anton Barendregt, already generating internal controversy.

It took place in January 2001, four years before news of the reserves scandal broke.  Mr McKay makes the point that Shell could use contractors to act as reserves auditors, or we have an “independent ex-Shell consultant.”

Another participant, Mark Leonard states in reference to Anton Barendregt: “So, he is not strictly a Shell employee, but he probably knows the ins and outs and tricks of booking reserves…”

The implication from the comments being that Mr Barendregt was not independent, but viewed by some members of Shell management as a tame in-house auditor.

Some Shell executives involved in the correspondence mention “disquiet” and “concerns” over the mistaken belief by Shell operating units that Barendregt was still a Shell employee, “not our outside auditor.”

This is an extract from an email from Richard Sears, VP Shell Deepwater Services (now a consulting professor):

“I’m not surprised that Shell OU’s are open with him because everybody thinks he works for Shell, not our outside auditor. I’m very uncomfortable with him being present during working meetings. The nature of the discussions are not really appropriate, and they go far beyond being open (openness I have no problem with). Through the series of meetings on Angola Block 18 he was usually an active participant, going so far as to be editing minutes written by the asset to EPG. He seems to blur the lines quite between insider and objective auditor, and in the meetings I was aware of, he made no attempt to identify his parentage so as to avoid any confusion.”

As can be seen, another Shell executive, John Bell, seems to question the prudence of Richard Sears putting his reservations into print. 

Frank Coopman, CFO of Shell International EP, later conceded that Mr Barendregt was in fact not completely independent“.

The scorecard system introduced by Shell in the mid-nineties linked bonuses for employees and directors to the achievement of proven reserves targets. This proved to be a disastrous move that undermined the integrity of reserves reporting, encouraging what became known as aggressive reserves bookings. It is clear from the Davis Polk & Wardell Report on the reserves scandal that “The Group’s practice of including RRR or similar targets in scorecards, particularly OU scorecards, came under persistent criticism from the Group Reserves Auditor, Anton Barendregt. (see page 137 of 202 of the overall document, not any of the numbering displayed on individual pages)

There is evidence that Mr Barendregt warned Shell senior management of his concerns many times (examples), but to no avail. He was up against greed generated by the scorecard system and related infighting at the very top of the Royal Dutch Shell Group resulting in the infamous email from Van de Vijver to Sir Philip Watts declaring that he was “sick and tired of lying” about the company’s oil and gas reserves. Van de Vijver also had a penchant for destroying incriminating emails which led him to send an email to Frank Coopman saying:

“This is absolute dynamite, not at all what I expected and needs to be destroyed!”

According to an article published by The Daily Telegraph in April 2004, under the headline “Memos expose Shell’s years of lying“, the company had hoped to “manage” the problem by “playing for time”.

That was what the 9/11 Shell correspondence was all about.

If any of the individuals involved in any of the email correspondence wish to comment, we will happily publish their comments here on an unedited basis. The same applies to Royal Dutch Shell Plc.

THE PLAYERS

Aidan McKay: Senior Executive Shell EP – The Hague

Lorin Brass: Member of EP Executive Committee. Head of Strategy Planning and Business Development for Shell EP. Reporting of oil and gas reserves fell under his supervision.

John J Bell: Head of Shell Global Planning and Strategy Team

Mark Leonard: Director of Shell Deepwater Services, Director at Shell E&P International Ventures

Remco Aalbers: Shell Group Reserves Coordinator

Richard Sears: Retired from Royal Dutch Shell in 2009, where for more than 32 years he contributed to and led exploration and development projects on six continents.

Ceri Powell Shell executive (currently Executive Vice President, Exploration International, Royal Dutch Shell)

Alf C Thorkildsen: Treasurer and controller of Shell Global EP business

Robert Sprague: Director of Shell EP International BV

Dominique Gardy: Chief Financial Officer Shell International Exploration & Production

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