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The New York Times: Shell Says It Overstated Profits by $276M

The New York Times: Shell Says It Overstated Profits by $276M: “profits.. exaggerated..”; “inappropriate accounting..”-“resulted in profits being embellished”


Published: July 2, 2004

Posted 3 July 03

WASHINGTON (AP) — The Royal/Dutch Shell Group said Friday that the overstatement of its proven oil and gas reserves resulted in profits being exaggerated by $276 million, and that “inappropriate” accounting in other areas resulted in profits being embellished by an additional $156 million.

The revision followed an embarrassing series of disclosures that in total reduced the company’s reported reserves by nearly one-quarter and led to the departure of several top executives.

The biggest downward revision was for 2002, when the faulty accounting resulted in profits being overstated by $208 million. In 2001 the reduction was $56 million, in 2000 it was $122 million and prior to 2000 it was $46 million.

The company disclosed the overstated profits in a filing with the Securities and Exchange Commission late Friday, explaining that in addition to the problematic reserves accounting it had also made errors in the way it accounted for exploration costs, certain gas contracts and the earnings per share of its parent companies.

However, because of a change announced Friday in the way Royal/Dutch Shell will now account for its inventories of oil and gas, the energy giant said its net income for 2002 was actually higher than previously reported at $9.72 billion, up from $9.42 billion it reported February 2003.

The accounting overhaul caused Royal/Dutch Shell’s 2001 net income to drop to $10.35 billion, down from $10.85 billion it reported in February 2002, while its 2000 net income increased slightly to $12.87 billion, up from $12.7 billion reported in early 2001.

In a string of four restatements that started in January, Shell downgraded its proven reserves by 4.47 billion barrels, or 23 percent.

Proven reserves are the amount of oil and gas a company expects to commercially pump to the surface. They are a crucial measure for investors of an oil company’s performance and future value.

The reserves overstatement led to the resignations of chairman Philip Watts, head of exploration and production Walter van de Vijver, and chief financial officer Judy Boynton. It also drew the attention of regulators in the United States and Europe.

On Monday the leaders of Royal Dutch/Shell asked shareholders for forgiveness and time to revamp the Anglo-Dutch oil giant.

Shell has an unusual, bi-national structure in which Royal Dutch Petroleum Co. of the Netherlands controls 60 percent of the group and Britain’s Shell Transport & Trading Co. PLC holds the remaining 40 percent.

Investors and analysts alike have blamed this cumbersome structure for the breakdown in governance that led to significant overstatements of the company’s oil and gas reserves.

Shell’s restatement was released after the close of U.S. markets. Shares of Royal Dutch Petroleum closed up 11 cents at $51.72 on the New York Stock Exchange, where shares of Shell Transport finished 13 cents higher at $44.65.

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