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SHELL: Two radical steps could further distance Royal Dutch Shell from the reserves scandal

SHELL: Two radical steps could further distance Royal Dutch Shell from the reserves scandal

Monday 8 August 2005

By John Donovan

Although the media has welcomed the appointment of Jorma Ollila as the new Shell Chairman from June 2006, many of the news reports about his recruitment also include references to the Shell reserves debacle. This is despite the fact that over a year and a half has passed since news first broke about the scandal.

Commentary harking back to the scandal has been a regular feature of news reports about Shell. Although Shell has paid nearly a quarter of a billion dollars in regulatory fines and litigation settlements, other litigation is still proceeding, as well as on-going investigations, so there is no prospect of negative commentary abating any time soon. There is also the matter of the pending FSA tribunal ruling in respect of proceedings brought by disgraced former Shell Chairman Sir Phillip Watts.

Consequently the new company, Royal Dutch Shell plc has a major problem in shaking off association with what has been described on BBC TV as the biggest investor fraud in history.

The response to such outspoken criticism about management misdeeds has been far from consistent. Eight Royal Dutch Shell companies collectively obtained a High Court injunction against a former Shell geologist, Dr John Huong and brought defamation proceedings against him. This may have been done to silence him because Dr Huong is in possession of Shell internal documents proving that Shell ignored his internal whistleblower comments warning about deceiving shareholders in relation to hydrocarbon reserves. They also ignored his written warnings about health and safety issues relating to Shell’s accident prone helicopter fleet in Malaysia. His warnings on that matter have also been vindicated after the crash in June of a Shell helicopter in the seas off Sarawak.

Dr Huong appears to a curious exception because a host of outspoken comments about Shell and its management have been ignored. For example, the blunt comments made by a Shell shareholder, Mr John Farmer, about Shell management at two successive AGM’s have not resulted in any legal response from Shell. This is despite the fact that Mr Farmer publicly branded Sir Philip Watts as a “crook” – a comment which caught the attention of the national press (check links below).

The Royal Dutch/Shell Group has also ignored countless newspaper headlines and news reports, a number of which are featured on the home page of Some examples: a headline in The Independent on 20 April 2004 stated: “Lies, cover-ups, fat cats and an oil giant in crisis”: On 6 June 2004, a Mail on Sunday headline stated: “Chairman Jeroen van der Veer in frame over Shell scandal – could lead to 20 years in jail.”: On 25 June 2004, a London Evening Standard headline stated: Shell ‘has lied for 10 years’ (articles accessible via links below).

It is very difficult for Shell to deal with negative comments because of the unfortunate factual background. Shell senior management including Jeroen van der Veer and Malcolm Brinded signed Form 20-F filings to the SEC containing materially false information about Shell’s hydrocarbon reserves. When Sir Philip Watts signed the Form 20-F filings he did so knowing the figures for the reserves had been grossly inflated.

The incriminating emails from Walter van de Vijver to Sir Philip Watts left little room for denial of wrongdoing – the infamous email from van der Vijver to Watts saying: ‘I am becoming sick and tired about lying about the extent of our reserves issues…” will pass into corporate folklore.

Personally I have sympathy for Walter van de Vijver because it appears that the ambition and ruthlessness of his British colleagues was responsible for putting him into an intolerable position.

In summing up the situation, although Royal Dutch Shell has taken a step further away from the reserves scandal by hiring Jorma Ollila, the damaging repercussions and references to the scandal in the news media are likely to continue for a long time to come unless some radical further steps are undertaken.

I have two suggestions for further distancing Royal Dutch Shell from the reserves scandal. Firstly it should pension off all remaining directors tainted in any way by the scandal. This would have the double benefit of removing the people – Jeroen van der Veer and Malcolm Brinded, responsible for the $10 billion dollar Sakhalin-2 cost overrun debacle. Secondly, since the Shell brand name has been irreversibly damaged, it could be replaced by “DUTCH” or RD. This would take time and would obviously be a costly project but with the record high price price of oil, Shell has the cash flow to fund the makeover.

Only major action will change the mindset of the media. A genuine fresh start is needed.

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