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Regulators dig deeper into Royal Dutch/Shell’s problems

Financial Times: Regulators dig deeper into Royal Dutch/Shell’s problems

“The SEC is scathing about Shell’s advice to investors that it had changed its mathematics, saying in its 1998 annual report only that estimation methods “have been refined”.

By Carola Hoyos, Adrian Michaels and Andrew Parker

Published: August 25 2004 03:00

Posted 26 August 04

US and UK regulators yesterday went several steps further than Royal Dutch/ Shell in their dissection of what went wrong at the oil group.

The Anglo-Dutch group had already presented in April the main findings of an internal investigation into its reserves debacle.

That report had been heavy on its criticism of dismissed senior executives – Walter van de Vijver, the former head of exploration, and Sir Philip Watts, former chairman. But it had been less fulsome on the detail of how the company had been engaged in accounting manoeuvres since 1997-98, including the administering of an internal audit function that was riddled with flaws.

The reports of the US Securities and Exchange Commission and the UK Financial Services Authority appear to delve deeper into the origins of the problems.

“In 1998 Shell revised its internal [reserve] guidelines,” the SEC’s legal papers state, referring to a new technical methodology used to determine how much of the reserves in “mature” fields could be classified as “proved” and therefore likely to be fully exploited.

“This guideline revision added substantial volumes to Shell’s reported proved reserves. For instance, nearly 40 per cent of the total proved reserves Shell added in 1998 resulted from this guideline revision.”

The SEC is scathing about Shell’s advice to investors that it had changed its mathematics, saying in its 1998 annual report only that estimation methods “have been refined”.

A central figure, though named only by job title in the regulators’ papers, is Anton Barendregt, the group reserves auditor.

“Shell’s decentralised system required an effective internal reserves audit function,” both regulators write. “Shell had engaged as [group reserves auditor] a retired Shell petroleum engineer – who worked only part-time and was provided limited resources and no staff – to audit its vast worldwide operations.”

Mr Barendregt, the SEC says, “failed to act independently”, sometimes being more upbeat about reserves than local management. “At other times, solely to support booking proved reserves for otherwise uneconomic projects, he advised local management to submit development plans unlikely ever to be executed.”

He visited each operating unit only once every four or more years and did not issue a single unsatisfactory notice on whether any unit’s reserves met guidelines.

But Mr Barendregt is portrayed also as someone trying to operate as well as possible in a bad system, repeating concerns about reserves in three of his internal annual reports from 2000 without prompting the company to write-down reserves.

The FSA says his report on 1999 reserves, dated February 2000, states that there were licence expiry problems that were jeopardising reserve viability. Proved reserve figures could be supported only through “significant aspirational upturns”.

The management of the exploration division, the SEC says, “forcefully rejected” ideas that its reserve replacement ratio – a key figure that can sway investor sentiment – for 1999 should be 37 per cent, “and instead caused Shell to report a 56 per cent RRR for that year”.

The SEC’s report in some way clears the company’s non-executive directors, including the group audit committee, saying they were not provided with the right information. Instead the blame for slow reactions is mostly put on some of the senior executives no longer with the company. Again, they are named only by job title in the legal papers.

By the end of 2001, the regulators state in agreement with the company’s own investigation, Shell’s failure to debook reserves had been identified as inconsistent with SEC rules.

But the SEC expresses exasperation in its complaint. “By the summer of 2003, Shell’s analysis of reserves exposures had progressed but still no de-bookings were recommended.”

Andrew Procter, director of enforcement at the FSA, echoed this view: “The FSA views timely and accurate disclosure to shareholders as fundamental to maintaining the integrity of the UK’s financial markets.”

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