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Shell knew of error in reserves in 1998

The Scotsman: Shell knew of error in reserves in 1998

“AUDITORS at Royal Dutch/Shell, the British-Dutch energy group, warned the company as early as 1998 that its reserves figures may have been overstated…”


Posted 30 August 04

AUDITORS at Royal Dutch/Shell, the British-Dutch energy group, warned the company as early as 1998 that its reserves figures may have been overstated, six years before executives admitted mistakes in public and two years earlier than previously reported by its own investigation into the reporting scandal.

Yesterday, US and UK regulators revealed that the oil giant has agreed to pay more than US$150 million (£83.7m) in penalties for providing “false and misleading” information, which led to a downwards revision of its proven reserves by 4.47 billion barrels.

The company said that it has settled “without denying or admitting” fixed fines of $120m (£67m) to the US Securities and Exchange Commission (SEC) and £17m to the UK’s Financial Services Authority (FSA). The oil company also agreed to commit an additional £2.8m to an internal compliance programme.

“Shell has worked hard over the past months to improve its systems and controls and implement other remedial measures to prevent any recurrence of these unfortunate events,” said Jeroen van der Veer, Shell’s chairman.

“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 and continuing our efforts to regain the confidence and trust of our investors, partners, customers and employees.”

Shell shocked investors earlier this year when it admitted that it had overstated its reserves, wiping £2.9 billion off Shell Trading & Transport’s market capitalisation in one day. The sensation cost three executives their jobs, including former chairman Sir Philip Watts, amid allegations the issue had been covered up in the boardroom for two years.

The biggest “recategorisation” of its proven reserves came on 9 January, when it said that it had overstated its estimates from 1998 through 2002 by 3.9 billion barrels. Three smaller revisions followed, reducing the major’s proven reserves by a further 570 million barrels.

The majority of the overstatements related to its projects in Nigeria and Australia. Even when Shell’s management first became aware of the discrepancies between its methods of calculating proven reserves with that of the SEC, it sought to avert the need to make an announcement to the market.

A memorandum circulated internally in July last year said that “5 per cent [of Shell’s proved reserves] is considered to be potentially at risk”. The memo continued: “At this stage, no action is recommended. … It should be noted that the total potential exposure is offset by the potential to include gas fuel and flare volumes in external reserves disclosures.”

Van der Veer and managing director Malcolm Brinded have since tried to shore up investor support by promising an extensive overhaul of the company’s internal controls and hinting at significant changes to corporate governance.

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