Posts Tagged ‘Oil Reserves Scandal’

The court was used once before in a similar case launched in 2007 against Royal Dutch Shell, when investors resolved their claims for €316 million with the oil giant.

(January 25, 2012)  –  The first class action lawsuit settlement to be approved for shareholders based outside the United States, since the Supreme Court tightened rules about international investors seeking redress through its legal system in 2010, has thrown a lifeline to asset owners suspicious of corporate fraud.

A case brought by international pension schemes, endowments and other large investors against Swiss reinsurer Converium Holding (now Scor Holding (Switzerland)), was settled out of court with damages of over $58 million being approved for distribution by the Amsterdam Court of Appeal last week.

The court was used once before in a similar case launched in 2007 against Royal Dutch Shell, when investors resolved their claims for €316 million with the oil giant.

FULL ARTICLE

From a Shell Insider: “…Malcolm Brinded is certainly lying when he states that he did not know”: Mon 20 Feb 2006 04:27 AM EST

Mr Donovan

After reading some contributions to your site of insiders it made me decide to share something with you and your readers. Perhaps you see it fit to publish, I have no other avenue to vent my frustration and very deep anger.

Of late the networks have highlighted the treatment of prisoners by Americans in their prisons for presumed terrorists. At least to me it has become very clear that there has been a fundamental flaw in the command structure of the armed forces. And I am cynical enough to believe this flaw was designed and knowingly created by the ‘brass’ and top politicians.

They first brainwashed the soldiers (mostly non professionals and reservists who only joined the army to have medical insurance and get an education) via direct messages and via the various media that are under their control to prepare them psychologically to commit acts that most of them would never dream of doing in a normal life, whether or not these acts comply with the Geneva Convention. I am a mere engineer and not a psychologist so I am out of my depth here. But I am convinced that if you repeat messages time and again that your enemies are all evil terrorists, people will start to believe this, especially if they are in an elevated state of stress such as a war in Iraq. Next the brass (from the president down) says that no stone must be left unturned to get the truth out of the prisoners to defend the nation of good citizens and god fearing Americans, and the foundation is laid to get excesses. To top it off you put reserve personnel in charge of these prisons and interrogation and on purpose do not arrange for extra controls to check how things go, and you have disasters in the making.

Praise the interrogators if they come up with some ‘confessions’ beaten out of prisoners, real or simply made up, remove anyone that wants to say that this is wrong, and the result is very easy to predict. No instructions to do bad things will be on paper so the brass can always blame the little guys at the coalface. They overstepped and need to be punished. And you hand out severe prison sentences to simple soldiers who thought they were merely following orders. I guess this happens in all wars and if you quickly score a victory, it can all be covered up many years, enough to erase the tracks of the real culprits. The winner takes all and is right!

However, in this era of digital cameras and internet, there are fewer secrets. Images can be circulated globally and instantly. And then there is real trouble and on a global scale. It is totally beyond me that the advisors to the president and top brass did not see this coming. I leave that to psychologists to analyze and explain.

Why this long story and what does it have to do with Shell?

The whole reserves problem as well as the extremely poor project management that Shell is experiencing the last few years is almost a carbon copy of what happened to the armed forces. Great changes, such as the large reorganisation started by Herkstroeter in 1994, created great stress in the workforce. These changes were considered unnecessary by Bob Sprague, one of the cleverest people who ever worked for Shell. But initially this was still fairly positive stress and it led to a feeling of freedom and desire to conquer and improve the world. Remember, at that time we were the biggest and the best oil company and had been since the mid 70s! So there was still a lot of latent know-how and professionalism around, which the company cannibalised in creating a ‘new Shell’ with ‘self managing teams’, ‘Olympic targets’, ‘unleashing talent’ and other trendy nonsense. It even led to record profits in one year, I believe it was 1997.

But by then the company was getting (with the explicit knowledge of the top brass) into the hands of people who were only motivated by personal rewards, and who smelled their chance. None of that ‘Enterprise First’ stuff. It was ‘Me first’ and all the snouts were in the trough and nobody wanted to take their snout out of the trough. Anyone complaining or making remarks that things were not right was publicly destroyed and removed. And those with their snouts in the trough started to make promises and ever more ridiculous demands. When Watts came to power (he actually stole that job at the time with his gorilla talk and behaviour) the pigs were truly feeding. Explicit instructions to cook the books or ‘err on the high side’ were hardly given in written form or were at least well disguised. It was said and whispered in meetings, conferences and workshops and personal discussions during the annual staff evaluation time. There were clear instructions to aim for the impossible with those stretched targets and anyone who said he could go even further or higher was handsomely rewarded with promotions or fat bonuses.

Brinded was a real champion of this, he was #2 and later MD in Shell Expro and I believe they missed their business targets for 7 years in a row under his reign!

So, the foundation was laid and Watts started his circus with new and bigger promises every year. And then it became unsustainable and the truth came out. We have internet, everyone knows what has happened and why it happened.

But to prove that in a court of law will be very difficult. And with the vast profits created by high oil prices, the top brass can buy all the time they need and hire the most expensive lawyers to keep them out of prison. All paid for with the shareholders’ money.

To illustrate how difficult it will be to prove, consider the following story. I recently confronted a colleague who works on the Sakhalin project and told him that I had known that the project would be severely over budget in early May 2005. The word was out and a figure of $15.5 billion was being suggested by project managers from Sakhalin. How come, I asked him, that Malcolm Brinded and Jeroen van der Veer claim they did not know? The answer was very simple: Brinded was told there were severe problems and his response was: ‘give me a report as soon as you have the exact details and know precisely how much and what’. This led to a further delay and a week after the deal with Gazprom was announced, out came the surprise statement of the $20 billion and enormous time overrun. But there are probably no documents showing that Malcolm Brinded and Jeroen van der Veer knew. They are genuinely clever people. But in my simple world, the boss should know how his most expensive project is progressing, even if it is not exact all the time. So, Malcolm Brinded is certainly lying when he states that he did not know. He means he had no formal report.

And Jeroen van der Veer should step down because he either knew and lied or he did not know and that is just as bad for someone in his position.

I apologise for this longish note but it helped to reduce my anger. I hope others will follow and you will publish this on your great site. I think the top echelons in Shell by now know there are no secrets anymore.

RELATED ARTICLES

Offshore workers died as a result of a “Touch F*** All” safety regime at Shell, 25 Jul 2007

Royal Dutch Shell Fat Cat Malcolm Brinded: Big Brain but no scruples

“Shell has paid all the right taxes and strongly denies having engaged in any fraudulent activity, especially smuggling, as this is very much against its business principles…”

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 Shell’s 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 Shell’s 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.

Kind regards,

Iain Percival

COMMENT ENDS

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”)

EXTRACT

Paragraph 5.

In 1998 Shell created five Value Creation Teams (‘VCTs”) to find radical new ways to improve Shell’s 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 Shell’s hydrocarbon reserves. A paper dated May 1998 entitled “Creating value through Entrepreneurial Management of Hydrocarbon Resource Values” made a number of recommendations including changing Shell’s reserves guidelines. On 16 September 1998 the revised guidelines were issued to Shell’s operating units. These revised guidelines resulted in an overstatement of Shell’s 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. The”cascade 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 Group’s 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, Shell’s RRR performance significantly exceeded 100%. During these years Shell’s proved reserves were significantly boosted, not by exploration and development activity, but rather by significant modification to Shell’s 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 Shell’s 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 Shell’s approach to booking proved developed reserves was more conservative than its competitors’, and that Shell’s 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 Team’s 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.

RELATED ARTICLES

THE NEW YORK TIMES: At Shell, New Accounting and Rosier Oil Outlook: 12 March 2004

Extract

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 group’s 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.

PRESS STATEMENT BY FINANCIAL SERVICES AUTHORITY: FSA fines Shell £17,000,000 for market abuse

The Robert Gordon University: Iain Recognised for Mentoring Work

Shell is very different from Enron. We were criticized for that some time ago and I’m glad we have a absolutely rock-solid way we do business. And, if you read our annual report, you read our footnotes and all the details, everything is in there. It’s all completely transparent, as far as Shell is concerned.

Sir Phillip Watts, Group Chairman, Royal Dutch Shell Group

By John Donovan

During a Bloomberg interview in 2002, with the then Group Chairman of Royal Dutch Shell, Sir Phillip Watts, reference was made to the core Royal Dutch Shell business principle of complete transparency.

The following is an extract from his exchange with Guy Collins of Bloomberg on 8 February 2002: -

COLLINS: I want to ask you about Enron and any parallels there. Do you have any off balance sheet liabilities? Do you have trigger mechanisms in place that make you vulnerable to changes in the share price or credit ratings?

WATTS: Shell is very different from Enron. We were criticized for that some time ago and I’m glad we have a absolutely rock-solid way we do business. And, if you read our annual report, you read our footnotes and all the details, everything is in there. It’s all completely transparent, as far as Shell is concerned.

The reality was very far removed from the pledges of transparency.

On 9 November 2003 Royal Dutch Shell Group Managing Director/Boss of Exploration & Production, van de Vijver, sent the following infamous email to the Group Chairman, Sir Philip Watts complaining that he was: –

becoming sick and tired about lying about the extent of our reserves issues and the downward revisions that need to be done because of far too aggressive/optimistic bookings.

The Shell reserves scandal burst into the public domain in January 2004. Links to a selection of news reports are provided below. Sir Phillip and van de Vijver were forced to resign.

They did not suffer financially. Shell directors are Teflon protected by contracts which stipulate that they are bailed out by Shell shareholder funds even if they cheat shareholders by engaging in outright lies, deception and cover-up, as happened in the reserves scandal. The disgraced Sir Philip Watts ended up with a package worth over $18 million (USD) to help cushion his sudden departure from the company.

THE ROYAL DUTCH SHELL RESERVES FRAUD UNFOLDS IN NEWS HEADLINES

Daily Telegraph: Shell drops ‘bombshell’ on reserves: 9 January 2004

The Times: How Shell blew a hole in a 100-year reputation: 10 January 2004

The West Australian: Investors howl for Shell’s blood: 12 January 2004

London Evening Standard: Shell bosses lied to the City: 19 April 2004

(Former executives, led by ex-chairman Sir Philip Watts, admitted they had repeatedly lied to investors about the true level of Shell’s oil and gas reserves.)

Houston Chronicle: ‘Sick and tired about lying’ at Shell: 19 April 2004

Bloomberg: Shell Loses AAA Credit Rating: 19 April 2004

Shell bosses ‘fooled the market’: 19 April 2004

The Guardian: Trail of emails reveals depths of deceit at the heart of Shell: 20 April 2004

The Guardian: Shell admits it misled investors: 20 April 2004

The Independent: Lies, cover-ups, fat cats and an oil giant in crisis: 20 April 2004

The Scotsman: Shell admits reserve ‘lies’: 20 April 2004

The Scotsman: Shell implodes as e-mails provide damning evidence: 20 April 2004

The Times: Deceitful Shell ‘needs ten years’ to rebuild exploration business: 20 April 2004

Financial Times: Observer Column: Shell-shocked: Corporate slogans consigned to the dustbin of history no. 94: “You can be sure of Shell.”: 20 April 2004

Minneapolis Star Tribune: Dutch/Shell Group exec was ‘sick and tired’ of lying: 20 April 2004

Daily Telegraph: Memos expose Shell’s years of lying: 8 May 2004

The Scotsman: Shell’s reputation left in tatters: 21 April 2004

TheStarOnline: Shell report exposes lies, CFO sacked: 21 April 2004

Daily Telegraph: Shell suffers second cut to credit rating: 21 April 2004

Daily Telegraph: Sacked Shell boss ‘escorted from HQ’: 22 April 2004

The Times: A very British kind of scandal: why Shell is no Enron: 23 April 2004

Daily Telegraph: Shell’s lies over reserves spark FSA investigation: 24 April 2004

Times: “Shell is a disreputable company in need of a strong injection of ethics”: 25 April 2004 “

(“an audience with Sir Phillip Watts”)

The Mail On Sunday: Shell’s top bosses named in £8 billion lawsuit after being spared the sack: 25 April 2004

Daily Mail: Shell attacked from all sides: 26 April 2004

(OIL giant Shell urgently needs to embark on a damage limitation offensive with investors before regulatory probes and lawsuits send the crisis spiralling out of control.)

Daily Telegraph: Shell gives Watts a £1m golden farewell: 23 May 2004

Daily Telegraph: Shell slices still more off proven reserves: 25 May 2004

Daily Telegraph: Watts’ pension pot tops £10m: 28 May 2004

fin24: Shell directors under fire: 20 June 2004

Extract: “The report came just a day after Dutch paper NRC Handelsblad quoted a former executive of one of the oil group’s subsidiaries as saying half of the company’s 400 most senior managers were aware of the problem.”

London Evening Standard: Shell ‘has lied for 10 years’: 26 June 2004

Sadistic sacking of a Royal Dutch Shell whistleblower: 27 October 2010

Shell Closes Book on 2004 Reserves Scandal as Claims Deadline Passes: 5 November 2010

ShellNews.net webpage containing links to thousands of pages of U.S. court documents and reports relating to the U.S. consolidated class action in respect of the Shell Reserves Fraud

Two years on from the biggest shareholder revolt on pay the London market has seen and things are getting back to normal at Royal Dutch Shell.

Shell had its moment back in 2004 with its reserves scandal but from 2005 embarked on a reconstruction involving a big increase in investment. Photo: GETTY IMAGES

By Damian Reece, Head of Business 6:10AM GMT 16 Mar 2011

AMSTERDAM

Royal Dutch Shell PLC said Wednesday a major oil sands project in Canada is now producing 100,000 barrels per day, nearly doubling the company’s production from the unconventional source.

The Jackpine Mine project has been five years in the building and cost an estimated $2 billion. With it on line, total production by the Shell-operated Athabasca Oil Sands Project has increased to a quarter of a million barrels per day. Shell’s total production was 3.11 million barrels of oil and equvalents per day in the second quarter.

Oil sands contain an extremely dense form of oil known as bitumen that companies have only recently been able to exploit profitably. Bitumen from both the Jackpine Mine and Shell’s existing Muskeg River Mine are processed at the same plant near Edmonton, Canada, which is now approaching capacity, Shell said.

Shell has invested heavily in new production capacity throughout the downturn after an accounting scandal in 2004 forced it to slash proven reserves. The company’s production has been declining for nearly a decade but Shell expects it to rise more than 10 percent by 2012 from 2009 levels.

SOURCE ARTICLE

THE WALL STREET JOURNAL

MAY 29, 2009, 9:53 A.M. ET

Edited Press Release

AMSTERDAM (Dow Jones)–The Stichting Shell Reserves Compensation Foundation Today announces Friday that the Amsterdam Court of Appeals has declared the Non-U.S. Settlement Agreement concerning the recategorisation by Royal Dutch Shell PLC (RDSB.LN) of certain of its oil and gas reserves binding.

The agreement provides relief in the amount of US$352.6 million to qualifying non-U.S. shareholders who bought Shell shares on any stock exchange outside the United States from 8 April 1999 through 18 March 2004.

The settlement amount includes a US$12.5 million payment which is to be distributed equally to all shareholders who submit a valid claim for relief, regardless of the number of shares held by the person or entity submitting a claim.

In addition to the US$352.6 million, an amount of US$28.4 million was made available to align the relief available under the Non-U.S. Settlement Agreement with the relief available under the U.S. Settlement. Shell furthermore agreed to pay interest as per 1 April 2008.

Parties to this agreement are Shell, institutional investors Stichting Pensioensfonds ABP and PGGM (on behalf of Stichting Pensioenfonds Zorg en Welzijn), the Vereniging van Effectenbezitters (VEB, the Dutch investors association representing individual shareholders in the Netherlands and similar organisations) and the Stichting Shell Reserves Compensation Foundation (the Foundation).

WSJ ARTICLE

In August 2005 Schulman, Bershad and his partners on the East Coast firm now known as Milberg secured a $90 million settlement for investors in Shell. They had sued the company and its directors, including former chairman Sir Philip Watts, over the oil reserves scandal.