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Shell ‘knew of reserves overstatement in 2000’

Financial Times: Shell ‘knew of reserves overstatement in 2000’

“two years earlier than previously reported by the company’s own investigation into the reporting scandal.”

By Carola Hoyos, Adrian Michaels and Andrew Parker

Published: August 24 2004

Royal Dutch/Shell, the Anglo-Dutch energy group, abused market regulations because it wanted to maintain the appearance of a strong oil and gas reserves base, US and UK regulators concluded on Tuesday.

Shell’s reserves auditors warned the company as early as January 2000 that its reserves figures may have been overstated, four years before executives admitted mistakes in public and two years earlier than previously reported by the company’s own investigation into the reporting scandal.

The UK’s Financial Services Authority and the US Securities and Exchange Commission on Tuesday issued their findings into wrongdoing at the company that led Shell in January to admit it had wrongly booked 20 per cent of its oil and natural gas reserves with the SEC.

The scandal prompted the resignation of three top executives, investigations by US, UK and Dutch regulators, a criminal probe by the US Department of Justice and a flurry of lawsuits by disgruntled investors.

The findings are neither admitted nor denied by the company, as is usual in civil investigations. Both regulators stressed that investigations continue. No individuals have yet been accused of wrongdoing. In addition the US’s criminal probe may yet bring charges, although legal experts in the US have said they thought it unlikely the company would settle with the SEC if it thought the Justice Department may prosecute the company as a whole.

The fines agreed as announced last month are $126m with the SEC and £17m with the FSA. Part of the SEC money goes towards developing an internal compliance programme.

The regulators’ reports outline the motivations that Shell had in changing its accounting practices moves that led to the improperly booked reserves. The company is portrayed as slow to admit and rectify the problems.

As early as 1997, Shell implemented new guidelines in some countries to maximise oil reserves bookings. In September 1998 the revised guidelines were issued to Shell’s operating units. “These guidelines resulted in an overstatement of Shell’s proved reserves of 940m b/d for the two years ended 31 December 1999,” the regulators found.

Shell’s aggressiveness in trying to meet analysts expectations for reserves replacement, a key indicator of the health of any oil company, became even clearer in 2000. In January of that year, an internal presentation showed that Shell had replaced only 37 per cent of its used reserves with new ones in 1999. This finding was rejected and in April Shell announced a replacement rate of 56 per cent, the regulators found.

Jeroen van der Veer, Shell’s chairman, said on Tuesday: “The conclusion of the FSA’s and SEC’s investigations into Shell represents another significant step for Shell in putting the reserves issues behind us.”

JJ Traynor, analyst at Deutsche Bank, said: “The big question remains the success or failure of the various [private] lawsuits against Shell and I don’t think the FSA and SEC settlements really change that.”

The FSA added: “Were it not for Shell’s cooperation, the level of the financial penalty would have been significantly higher.”

Additional reporting by James Boxell in London

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