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Executive Intelligence Review: Enron, Parmalat, Shell Oil (an important article we missed from May 2004)

This is an article we missed… LESS WE FORGET WHAT HAPPENED..
This article appeared in the May 7, 2004 issue of Executive Intelligence Review.
Who Will Be Next?
by Lothar Komp
“Shell shock” has hit the British Isles. The almost 100-year-old British-Dutch oil giant, Royal Dutch Shell, with 115,000 workers worldwide and an annual turnover of 35 billion euros, has had to acknowledge, in a series of reports, that it has pulled the wool over the eyes of its shareholders and creditors for years.
About one-fourth of the oil and gas reserves which have been reported in Shell's books, have existed only in the fantasy of the members of the board. And each barrel of estimated reserves represents an imputed income stream for the company in the future, which influences the stock value of an oil concern even today, and at the same time serves as collateral for credits and other financial transactions.
Already back in January, Shell Chairman of the Board Sir Philip Watts was sent into the desert, after the company's first admission: that it had vastly overestimated its own oil and gas reserves. The chief of exploration for Shell, Walter van de Vijver, was also fired at that time. At the end of March and again on April 19, Shell had to correct its reserves downward again. With the third such event, finance director Judy Boynton lost her job.
But the real shocker, which also came on April 19, was something else: The American law firm Davis Polk and Wardwell published excerpts from the 463-page report, concerning the background to Shell's faked reserve estimates, which Shell's new leadership had commissioned in January. And even the few excerpts of this report which were made public, hit the British media like a bombshell. So great was the shock, that even the continuing sex scandals of Britain's leading soccer idol, David Beckham, had to be pushed back to the inside pages for a few days. It became clear, that the Shell board of directors had had full knowledge that the figures were faked, for at least two years.
'Sick and Tired of Lying'
A series of e-mails between the exploration department head and the company's chief executive were cited in the report. In November 2003, Walter van de Vijver sent an e-mail to chairman Philip Watts, saying: “I am becoming sick and tired about lying about the extent of our reserves issues and the downward revisions that need to be done because of far too aggressive/optimistic bookings.”
Other documents show that van de Vijver already in February 2002 was fully aware that Shell's reserve estimates were far too high. It has also been revealed that top executives at Shell had destroyed certain documents in an attempt to cover up the fraud.
But appearances had to be kept up. According to the report, Shell's executive was playing for time. They hoped that somehow, sometime, a miracle would occur to provide all those missing reserves. As is now known, the amount of new explorations of oil and gas reserves per year at Shell, in Angola and elsewhere, had fallen to only 61% of annual production in recent years. Up to the last minute, chairman Watts wanted to keep this secret from the firm's financiers. On May 28, 2002, he had written to van de Vijver, to do whatever was necessary—obviously including faking the figures—to come up with an exploration/production ratio of at least 100% in Shell's official reports.
The dimensions of Shell's fraud, even after those of Enron, Parmalat, etc., are enormous. The faked oil and gas reserves, according to the latest tally—further corrections are not to be excluded—amount to 4.5 billion barrels. If one assumes, for a rough estimate, that the fraud only concerns oil reserves, and not production, and takes $35 per barrel as the basis for calculating Shell's “accounting errors,” then this yields a sum of a good $150 billion. By comparison, the current total market value of Shell shares, which imploded at the beginning of the year, is 140 billion euros.
The rating agencies have already reacted by downgrading Shell. American shareholders' groups have already presented a class action suit. American attorneys are preparing charges against Shell, for criminal machinations.
Empty Promises, Not Production
Whatever the further destiny of Royal Dutch Shell might be, the significance of the “British Enron” goes beyond the destiny of the company itself, in two ways.
First, the incident at Shell is a symptom and a symbol of the condition of the worldwide financial and economic system: As a result of insufficient real economic re-investments, the real value of operating, productive capacities in the “formerly industrialized” countries is being burned out. Financial values are promises on future income, which at least in part must be paid for through real economic activity. As soon as it becomes apparent, however, that a large portion of the financial values are only “empty promises,” then a financial collapse, of a firm or a financial system, is inevitable. In the meantime, one can buy time, through the central banks, which print money and pump it into the financial markets—and through companies adopting the practice of falsifying their books.
On the other hand, Shell is no more a unique case than were Enron, WorldCom, or Parmalat. Hundreds of big companies, not least in the financial sector, are presently in a precarious state, which is at least as bad as Shell's. It is just that no one has noticed it yet.

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