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New York Times: Shell to Pay $150 Million in Settlement on Reserves

New York Times: Shell to Pay $150 Million in Settlement on Reserves

“Separately, the Commodity Futures Trading Commission said… Shell’s energy trading unit, Coral Energy Resources, had agreed to pay $30 million to settle accusations that it submitted false price data to publishers”


Published: July 30, 2004

LONDON, July 29 – The Royal Dutch/Shell Group said on Thursday that it had agreed to pay a total of $150 million in fines to settle investigations by American and British securities regulators into its reporting of crude oil and natural gas reserves. The company said in January that it had substantially overstated those reserves.

The agreement eases some of the pressure on Shell, the world’s third-largest publicly held oil company. But Shell still faces a separate criminal investigation into the matter by the United States Justice Department, a continuing regulatory investigation in the Netherlands and several shareholder lawsuits.

Reserves are a closely watched indicator of an energy’s company ability to produce in the future. Since January, Shell has reduced its estimate of proven reserves four times, by a total of about 23 percent, or the equivalent of 4.47 billion barrels. The uproar from investors over the reductions, and over disclosures that senior management knew about the overstatements in 2002 but tried to disguise them, led to the ouster of three of Shell’s top executives.

The company’s second-quarter results, also reported on Thursday, show a company that is struggling to improve the fundamentals of its business, analysts said. High oil prices helped the company increase net income to $4 billion, 54 percent more than the comparable quarter of 2003, but production fell 5 percent to the equivalent of 3.58 million barrels of oil a day. Shell said it expected its production to stay in the range of 3.5 billion to 3.8 billion barrels a day through 2006.

The underlying numbers are “pretty horrendous,” said Neil McMahon, an analyst with Sanford C. Bernstein in London, citing declining production and a low rate of reserve replacement despite record-high capital spending. Costs are also climbing: Shell said on Thursday that it expected to pay $1 more to extract each barrel of oil in 2004 than it did in 2003.

“Clearly we have major challenges to address,” said Malcolm Brinded, Shell’s head of exploration and production, in a presentation to analysts.

Mr. Brinded laid out what he called an aggressive plan to revamp Shell’s exploration and production business, generally considered an oil company’s most important asset, and to cut costs.

Isaac Xenitides, an analyst at Fitch Ratings, said it was fortunate for Shell that its recent problems have come at a flush time for the industry. “The high oil-price cycle gives this company enormous financial flexibility,” Mr. Xenitides said. “This doesn’t create value for shareholders, but it does allow Shell to buy into any project that they think makes sense.”

But Shell’s chairman, Jeroen van der Veer, speaking at The Hague on Thursday, cautioned against pinning too many hopes on dealmaking. Shell “will keep looking at suitable acquisitions along the way,” Mr. van der Veer said, “but we do not expect this to be the silver bullet when oil prices are so high.”

Mr. Van der Veer said Shell was considering selling some assets, including its half-interest in Basell, a joint venture with BASF that makes polypropylene. Analysts estimated that Shell’s stake could fetch more than 2 billion euros ($2.4 billion).

The fine that Shell agreed to pay in Britain, £17 million ($31 million), is the largest that the Financial Services Authority, the chief British market regulator, has ever levied. The company agreed to accept the authority’s conclusion that Shell “breached market abuse provisions” of British securities law.

Shell also agreed to accept a Securities and Exchange Commission finding that it had violated United States laws in its reporting, record-keeping and internal controls, and to pay the agency $120 million in fines.

Mr. van der Veer said Shell saw the settlements as a hopeful step toward putting the reserve issues behind it by the end of the year.

Legal experts said that executives involved could still be fined separately by regulators in both the United States and Britain.

Shell’s former chairman, Sir Philip Watts, and its head of exploration and production, Walter van de Vijver, left the company after the reserve shortfall became public. Internal company memorandums indicated that the two men and other managers were aware of the problem long before investors were told.

“It’s entirely possible there will be fines for individuals,” said John B. Wade III, a lawyer at Dorsey & Whitney in New York. If so, Mr. Wade said, regulators would probably try to make sure that Shell did not pay the fines on the executives’ behalf.

Separately, the Commodity Futures Trading Commission said on Thursday that Shell’s energy trading unit, Coral Energy Resources, had agreed to pay $30 million to settle accusations that it submitted false price data to publishers. The case is part of the commission’s industrywide investigation into suspected manipulation of the energy markets.

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