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FSA exposes long-running deception by Shell executives

The Times: FSA exposes long-running deception by Shell executives

“raises questions about the role of senior executives who led Shell in the late 1990s, including Sir Mark Moody-Stuart”

By Carl Mortished, International Business Editor

August 25, 2004

THE Shell oil reserves scandal grew yesterday as the Financial Services Authority said that the misreporting of a quarter of Shell’s oil and gas reserves was part of an attempt led from the top over many years to boost its poor exploration performance.

The FSA’s report, which accuses Shell of market abuse in announcing false oil reserve figures from 1998 to 2003, raises questions about the role of senior executives who led Shell in the late 1990s, including Sir Mark Moody-Stuart, chairman of Shell’s committee of managing directors (CMD).

Quoting from company documents, the FSA report says Shell executives were under pressure to boost reserves and were inappropriately incentivised to achieve results. The report also indicates that Shell’s auditors, KPMG and PricewaterhouseCoopers, had doubts about the reserves as early as 1998.

The FSA confirmed the imposition of a £17 million fine, the largest in its history, for misconduct amounting to market abuse, in particular making false or misleading reports “despite indications and warnings from 2000 to 2003 that its proved reserves as announced to the market were false or misleading”.

As the FSA gave its final notice, the US Securities and Exchange Commission confirmed a $120 million (£65 million) penalty against Shell and both regulators hinted that more action may follow against individuals. “Although the FSA’s investigation into the Shell misconduct is now closed, investigations into other aspects are ongoing,” the FSA said.

Referring to an internal presentation in January 2000, the FSA report highlights the concerns of management four years ago that Nigerian reserves figures relied on “unrealistic production forecasts”. That presentation also raised concern about Gorgon, a huge Australian gasfield, a concern shared by KPMG and PricewaterhouseCoopers. The presentation said: “Proved gas volumes in Australia have been a point of challenge by the external auditors . . . for the last two years and incremental booking at present would be hard to support.”

Last night Wall Street lawyers leading American class actions against Shell on behalf of individual investors were amending their complaints against the company after the FSA’s report. Stan Bernstein, senior partner with Bernstein Liebhard & Lifshitz, said: “We will be filing an amended complaint on September 13 taking this class action lawsuit back as far as the law allows us to. The FSA’s charge of market abuse against Shell is not conceded or denied by the group, which has paid its £17 million fine, but evidence set out by the FSA points to a more widespread and institutional malaise in the oil group, emerging back to the mid-1990s.

The FSA said Shell, in 1998, the year the oil price collapsed, set up five “value creation teams” to find radical new ways to improve the profitability and reputation of its exploration and production business. Their advice to alter reserve guidelines led, the FSA said, to a 940 million barrel overstatement of reserves for the two years to December 1999.

After the January 2000 presentation, revealing Shell had replaced just 37 per cent of oil pumped in 1999, it published a figure for 1999 of 56 per cent.

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