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“But restructure may not be enough after scandal, resignation and fines, reports Robin Pagnamenta”

But restructure may not be enough after scandal, resignation and fines, reports Robin Pagnamenta

JEROEN VAN DE VEER smiled broadly in the cavernous interior of the New York Stock Exchange last week as he rang the opening bell for trading. The bespectacled Royal Dutch/Shell chairman was celebrating the 50th anniversary of the firm’s listing.

For perhaps the first time since his emergency appointment five months ago — after Sir Phil Watts was sacked after a misreported oil reserves scandal — van de Veer must have felt he was being feted rather than assaulted from all sides.

Nevertheless, after one of the ugliest episodes in the company’s history, van de Veer has his work cut out if he is to restore Shell’s tarnished reputation.

That effort edged forward last week when it emerged Shell had reached a preliminary agreement to combine the group’s two management boards, possibly paving the way towards a single united company. Such a move would represent a tectonic shift for the Anglo-Dutch giant, one of the world’s largest companies.

The dual structure dates from 1907, when Royal Dutch Petroleum and Shell Transport & Trading embarked on a joint venture. They maintained separate management and head offices and are listed as different companies on the London and Amsterdam stock exchanges. The company is overseen by a committee of managing directors, though Royal Dutch retains an edge because it controls 60 per cent of the company, compared with Shell’s 40 per cent.

There had been rumblings of dissent about the structure from investors before but Shell began its review in earnest only after it emerged the group had overstated “proven” oil and gas reserves by 23 per cent or 4.5billion barrels.

Much criticism focused on “confusing” corporate governance, particularly when it emerged senior bosses sought to hide the scandal from peers and investors.

The debacle bore a financial cost. In July, Shell agreed to pay £17million to regulator the FSA and $120 million to America’s SEC to settle official investigations.

Regarding structure, van der Veer said in New York: “We are looking at many different options. We rule nothing in and nothing out”. But many independent observers and investors would welcome a change. Robeco, a Dutch asset management group based in Rotterdam, said: “In general we are in favour of transparent and straightforward company structures. . . But we are waiting for concrete proposals from Shell. ”

Another oil industry insider said: “There is relief Shell is actually listening to the market — for too long there was a belief it was too arrogant to make changes.”

A final recommendation is not expected before November and it will be April 2005 before any changes can be approved. Implementation would take several months more.

However, Angus Mcphail, oil analyst at ING Financial Markets, Edinburgh, argues the governance debate obscures the underlying problem and the main reason for concealing misreported reserves.

The real problem is Shell needs more exploration successes and it should be revaluating that side of its business,” he says. “It doesn’t necessarily follow that a unified structure equates to improvements in exploration and production.”

Shell’s record has been dismal in recent years, while rivals BP and ExxonMobil have had a string of fresh discoveries, hence managers felt pressured into concealing the true state of Shell’s reserves. The “reserves replacement ratio” shows how much new oil and gas a firm is discovering as against the amount it pumps out. In 2003 Shell’s was 98 per cent. BP’s was 175 per cent.

To rub salt into the wounds, Shell executives learned this week Cairn Energy, a small Scottish exploration company, had made a fourth oil discovery on a field in India’s Rajasthan region it bought from Shell two years ago for a paltry £4 million. Cairn now believes the concession could be worth hundreds of millions of pounds.

At least Shell can breathe a sigh of relief about one thing. High global oil prices have kept profits — and the group’s share price — bubbling away. With $4 billion profits in the first quarter alone investors can’t complain too much.

Meanwhile, analysts say there is little sign oil prices will fall away any time soon.

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