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SHELL EP PRODUCTION FORECAST & TRAGIC WORLD EVENTS

Serious consideration was given by senior Shell EP execs to exploiting the tragic events of 9/11 for desperate commercial purposes – to cover-up investor deception about Shell’s claimed oil and gas reserves. Concern was expressed about the possibility of getting caught out telling Investor Relation “stories” regarding production growth and reserves replacement and what the likely punishment might be.

By John Donovan, first published 1st Feb 2013 (re-edited on 4 April 2019)

I stumbled across some shocking Shell internal email correspondence while searching the US Court files for class action litigation relating to the Shell oil and gas reserves scandal. 

It involved senior Shell EP executives all reporting to Walter van de Vijver, Chief Executive of Shell Exploration and Production and a Group MD of the Royal Dutch Shell Group.

Serious consideration was given by senior Shell EP execs to exploiting the tragic events of 9/11 for desperate commercial purposes – to cover-up investor deception about Shell’s claimed oil and gas reserves. Concern was expressed about the possibility of getting caught out telling Investor Relation “stories” regarding production growth and reserves replacement and what the likely punishment might be.

Aidan McKay said: “If I was Walter I would use this tragic event to introduce a little more conservatism (buying flexibility) into our story around production growth.” A draft statement he prepared for Walter contained the claim that “production growth and reserves are in really good shape…” (a blatantly false claim)

The background desperation leading to the emailed discussion of such a deeply unethical fabrication was well-founded internal and external concern about Shell production growth and problematic reserves.  The second batch of Shell internal emails circulated in the months leading up to 9/11 provides proof of the degree of concern over the issues that led to Shell executives considering such a distasteful strategy to manipulate the markets.

We do not know if the plot was dropped or implemented. 

Walter van de Vijver send his notorious e-mail to RDS Group Chairman Sir Phillip Watts, saying that he was “sick and tired about lying” about the company’s inflated oil and gas reserves estimates.

Extracts from the second batch of emails. 

“…the market will want to know whose head is going to roll for what they will see as blatant deception.”; “this is potential dynamite for management credibility and the share price”; “…how you have to break the detail of this news in September, assuming that there is indeed a firestorm of hostile comment…”; “why should we have any more confidence in these numbers than the previous ones…”; “…please don’t let the people who have got us into this mess be under any illusion that there is an ‘easy’ answer…”;

The first string of emails involved the following individuals with the indicated job titles at the time of the emails:

Aidan McKay: Manager Shell EP – The Hague (or Head Global Strategic Planning & Capital Allocation)

Dominique Gardy: Chief Financial Officer Shell International Exploration & Production

Lorin Brass: Member of EP Executive Committee. Head of Strategy Planning and Business Development for Shell EP. Reporting of oil and gas reserves fell under his supervision.

John J Bell: Head of Shell Global Planning and Strategy Team

Ceri Powell: Executive Vice President, Exploration International, Royal Dutch Shell)

Alf C Thorkildsen: Treasurer and controller of Shell Global EP business

Robert Sprague: Director of Shell EP International BV

A remarkably prescient presentation entitled “overpromise underdelivery” was published on this site a few years ago.  We understand that Aidan McKay was the author.

Extensive extracts from the second batch of Shell internal emails circulated in the months leading up to 9/11:

From Walter van de Vivjer “vol growth” email 9 July 2001

“This obviously needs a lot of debate and deep soul searching and pressure in the organisation.”

At the same time 1)we have not delivered in 2000/2001 and the first roll-up of numbers for 2002-2006 look very discouraging

“-damage would be far more severe if we had not discounted some of the growth volumes in the externally quoted numbers.”

From Stephen Hodge “vol growth” email dated 9 July 2001

“I support everything that Simon writes on this and would add that the EP’s systemic inability to realise that what they have said before is as important as what they say now is profoundly depressing.”

In short 2% not 5% production growth is a disaster unless there are good reasons for it, and the market will want to know whose head is going to roll for what they will see as blatant deception.”

From Simon Henry “vol growth” email dated 9 July 2001

The external consequences of backing away publicly from the 5% / $12 bin linkage are not good. I am obliged to mention this point tomorrow in CMD as the 2% figure was in the CMD paper, but I cannot comment on the underlying details other than to reinforce the fact that this is potential dynamite for management credibility and the share price. 

From Walter van de Vijver “Production Growth” email dated 1 August 2001

The facts are staring us now in the face and we need to deal with it professionally (utilizing the expertise of you et al) and with the sense of reality that does not create a real credibility problem in 2002.

From Stephen Hodge “Production Growth” email dated 1 August 2001

I am thinking now about how you have to break the detail of this news in September, assuming that there is indeed a firestorm of hostile comment after tomorrow (as, unfortunately, we expect)

But to use overall decline as an explanation to the extent used in your message below is going to cause really serious collateral damage. Before we use it we need answers on which fields are declining faster than we expected, why are there no offsetting increases, and why should we have any more confidence in these numbers than the previous ones, which came with full weight and authority of the EP organisation.

In short I feel that we don’t have anywhere near a clear explanation yet of what has gone wrong except to the extent that we can see that some major projects are going slower; so that we should not say more than this

Fundamentally if you are to retain credibility, I think you have to explain what has gone wrong almost of a field by field and project by project basis and in so doing demonstrate complete mastery of the issue. Conversely the worst thing of all for credibility is to fall short on promises and project that you don’t quite know why it has happened or what you are going to do about It. And please don’t let the people who have got us into this mess be under any illusion that there is an ‘easy’ answer here of taking a bath in Q3 ’01 and then regaining credibility by substantially over performing in ’02 and ’03. This is what the market thinks we did in 1997/8 and certainly they won’t let us do it twice in four years. Credibility once lost takes years to regain. If you-position EP as technically incompetent – as the widespread field decline story does, unless everyone else uses it – you can produce over the next few years the best reserve replacement ratios and new projects that you like and you will get little credit for them – because the credit we get for them rests on the markets assessment of EP technical competence. You will blight the relative TSR of the Group and everyone’s score card for years to come

From Walter van de Vijver “Production Growth” email dated 1 August 2001

Obviously internally I am not giving up on growth targets but there is a need to “cool” expectations particularly given the shortterm issues that are hitting us. D0 not forget that the quoted growth rates above do include some real big projects that are still far from FID (Sakhalin, Kashagan, Brasil DW, Nigeria UDW. Angola Block 18, GOM new (as yet undiscovered hubs), Egypt NEMEO). So “blaming”’ it on field declines and slippage on growth in emerging markets is the least we should do in order to downgrade expectations.

Shell Executives participating in the string of email correspondence

Phil Watts, Royal Dutch Shell Group Chairman & Group Managing Director

Walter van de Vijver, Shell EP CEO and Group Managing Director

Judith Boynton, Group Managing Director, Royal Dutch Shell Group

Simon Henry: Global Investor Relations Manager

Stephen M.G. Hodge, CFO & Director of Finance, Royal Dutch Shell Group

Jeroen van der Veer, Royal Dutch Shell Group Managing Director

Dominique Gardy: Chief Financial Officer Shell International Exploration & Production

Alf C Thorkildsen: Treasurer and controller of Shell Global EP business

John J Bell: Head of Shell Global Planning and Strategy Team

Lorin Brass: Member of EP Executive Committee. Head of Strategy Planning and Business Development for Shell EP. Reporting of oil and gas reserves fell under his supervision.

Frank Coopman, Chief Financial Officer, Shell EP

Michael Harrop, Shell Investor Relations Spokesmen

RELATED ARTICLES

SHELL EP PRODUCTION FORECAST & TRAGIC WORLD EVENTS: 1 Feb 2013

Simon Henry feared Shell would ‘score an own goal’ on reserves: 28 Jan 2013

Simon Henry and the reserves time bomb: 21 Jan 2013

Candid testimony of Simon Henry about disgraced Shell EP Boss Walter van de Vijver: 14 Jan 2013

Candid testimony of Shell’s Simon Henry about Sir Philip Watts: 13 Jan 2013

Reserves whistleblower quits Shell – Telegraph

The landslide bringing down Shell grandees

RELATED COMMENTS POSTED ON SHELL BLOG

LondonLad on Feb 1st, 2013 at 19:42

BBC website today : “Detective jailed for News of the World leak” – I just wonder if and when we will read “Shell staff jailed for leaks to tabloid website”? Note : Shell staff have / had signed contract obligations that are / were in place……. However, I must say that these leaks do make for lovely tabloid reading / titillation – i.e. how much can you really trust them? Have to say that I am disappointed with Aidan McKay (who used to work for me when he was in New Orleans) for being such a prat.

Relieved on Feb 1st, 2013 at 20:57

I found the emails interesting and indicative of the deception Shell management was clearly engaged in. They were trying to exploit the events of 9/11 to their benefit. What these emails could have done at the time they were written is cause Shell’s stock to drop significantly. I don’t think they will have any impact now. However, the emails do give a clear indication of the attitude Shell management has for Wall Street’s superficial approach to investment strategies. I do know Bob Sprague, but not well. He was a typical Shell USA manager. It is obvious from these emails that Shell management was not telling the investment community the truth about reserves, rate of reserve replacement, real rate of return on investment (ROR), and so on. It is also obvious that they really didn’t care if they were being factual or not. Their primary concern seems to be about getting caught in ‘a big lie’ about all the above. They were also clearly trying to use the events of 9/11 to their advantage if investor ‘expectations’ were not met, and as a means of ‘covering their tracks’ regarding previous deceptions. It is an interesting set of emails and clearly indicates that Shell management deliberately misled their institutional investors. It seems they were trying to keep stock prices from taking a tumble if the investors knew things were as they had been told. These emails clearly indicate deliberate fraud on the part of Shell management.

An old EP hand Posted 2013/02/05 at 20:13

Londonlad, you call Aidan a prat when he worked for you. I know him very well and your remark reflects some deep frustration on your side. If you are who I think you are, this remark: you were once a very good project manager, you appear to have imploded in frustration. Would it be appropriate to change your name from Londonlad to Punkahwallah?

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