Shell Cuts Proven Reserves 20%, Fires Officers After Coverup
- From the New York Times, exposé of Shell Oil's coverup of reserve
overestimations...all too interesting.
> "Our reserves replacement performance over the past few years clearly illustrates the emerging problems with our resource base and is becoming a source of competitive disadvantage," the memorandum said.Full text & link:
> March 9, 2004--
> Oil Giant's Officials Knew of Gaps in Reserves in '02
> By STEPHEN LABATON and JEFF GERTH
> ASHINGTON, March 8 — The new head of the Royal Dutch/Shell Group and its current chief financial officer, as well as the chairman ousted last week, were advised of huge shortfalls in proven oil and natural gas reserves in 2002, two years before they were publicly disclosed, according to company memorandums and notes of executive discussions.
> But rather than disclose the problems to investors, senior executives in a July 2002 memorandum came up with — and later carried out — what the memorandum described as an "external storyline" and "investor relations script" that tried to "highlight major projects fueling growth," "stress the strength" of existing resources, and minimize the significance of reserves as a measure of growth.
> Problems with reserves were discussed among senior executives months earlier.
> A February 2002 memorandum said that one billion barrels of reserves "are no longer fully aligned" with Securities and Exchange Commission rules because the agency issued an interpretation of them. The memorandum said that an additional 1.3 billion barrels of reserves were at risk because it was no longer certain that they could be extracted during the remaining term of licenses between the company and three foreign countries.
> Oil and natural gas reserves represent a central asset of an energy company like Shell, the world's third-largest publicly traded oil company, and are closely followed by analysts and investors as an indicator of future profitability. The estimation of proven reserves is as much an art as a science, although there are extensive industry and government rules that try to measure them with some level of precision.
> The Shell memorandums were prepared by Walter van de Vijver, the head of exploration and production until his dismissal last week, for the company's committee of managing directors, a small group of senior executives that in 2002 was headed by Sir Philip Watts and included his recently named successor, Jeroen van der Veer. The July memorandum also noted that it was sent to Judy Boynton, now on the committee and the chief financial officer.
> Mr. van der Veer said the company was conducting an inquiry and would not comment on whether any illegal acts were committed.
> On Monday, The Wall Street Journal described an early 2002 memorandum warning of possible overstatements in reserves.
> The company documents, which The New York Times and lawyers investigating the company have copies of, suggest that current and former senior executives had known about significant problems with reserves since at least 2002 and they raise questions about whether the company moved swiftly to correct the problem. The company's accounting of reserves is now under investigation by the S.E.C.
> The July 2002 memorandum described licensing and other reserve problems in detail.
> "Shell faces a challenge" in maintaining its proven reserves "over the coming years — particularly during 2002 and 2003" and simultaneously achieving production growth and keeping expenses down, the July 18 memorandum begins. It said technical and commercial constraints "equates to a shortfall of 2-3 billion" barrels of proven reserves, which are oil and gas resources that are reasonably certain to be produced.
> The documents show that beginning late last summer, the company grew increasingly concerned about the reserves issue after audit reports of some reserves, a tougher accounting interpretation by the S.E.C. and passage in 2002 of the Sarbanes-Oxley Act, which imposes additional obligations on executives and audit committees. Company executives were also focused on an inquiry about reserves at several companies operating in the Gulf of Mexico, including Shell, that the S.E.C. began in October 2002.
> The company stunned the markets two months ago when it cut its proven reserves of oil and natural gas by 20 percent, or the equivalent of 3.9 billion barrels. Last week, the company dismissed Sir Philip, the company's chairman, and Mr. van de Vijver. The company has not said why they were dismissed.
> In conference calls with reporters and analysts on Friday, Mr. van der Veer, Sir Philip's successor, said that the boards of the group had "lost confidence" in the two men but repeatedly declined to elaborate. Mr. van der Veer was one of the handful of senior executives serving on the committee of managing directors who received the memorandums. Sir Philip headed the committee, which also included Mr. van de Vijver.
> Mr. van der Veer declined to say whether any former top executives had acted illegally and said that he was awaiting the outcome of the company's review.
> "The investigation is not completed," he said. "Let's not speculate on what the conclusion is." He said that the results of the company's internal review would be made public, though the process could take weeks or months.
> A spokesman at Shell said on Monday that the group audit committee conducting the review did not include executives but did include many members who had approved the earlier reserve figures before they were filed with the S.E.C.
> The company declined to comment on Monday about the memorandums, saying that the reclassification of the reserves was part of a continuing inquiry by the audit committee and the S.E.C.
> "We're not privy to the work of the group audit committee," said Andy Corrigan, a company spokesman in London. "It would be inappropriate to comment on their work."
> Neither Sir Philip nor Mr. van de Vijver could be located for comment.
> The February memorandum indicated that the shortfall in reserves could pose significant competitive problems.
> "Our reserves replacement performance over the past few years clearly illustrates the emerging problems with our resource base and is becoming a source of competitive disadvantage," the memorandum said.
> But the company did not appear seriously to consider whether to revise its reserve figures until last August. Mr. van de Vijver, then head of exploration and production, sent a memorandum to the audit committee explaining a host of reserve issues. On the cover page of the memorandum, an unidentified executive scrawled a note.
> " `Potential exposure,' " the note reads. "Some look like they should be debooked."
> Over the last two years, Sir Philip repeatedly minimized the reserve problems and stressed the company had been quick in addressing and disclosing them.
> In August 2002, a few weeks after the July memorandum, he was asked in an analyst conference call about reports about reserve problems in Oman.
> "There have been reports in Oman," he replied. "Sometimes you get a bit of hiccup, but I have no doubt that people are getting on top of that and that we will see a pretty good future."
> The July 2002 memorandum that talked about the "investor relations script" suggested building on existing positive messages "already delivered externally."
> Last month, after revising the reserve figures, Sir Philip said the company had moved swiftly.
> "This thing came up late last year," Sir Philip said in a conference call with analysts. "As soon as that came to my attention, it was a matter of all hands on deck, and I remember writing down the words `get the facts and do the right thing,' because we had a duty to disclose as soon as it was possible."
"I believe that every right implies a responsibility; every opportunity,
an obligation; every possession, a duty."
John D. Rockefeller, Jr.
- On Mon, 8 Mar 2004, Richard Risemberg wrote:
> From the New York Times, exposé of Shell Oil's coverup of reserveNow, there's an understatement ;-)
> overestimations...all too interesting.
>Well... unless it turns out that the competition has the same problem.
> Quick quote:
> > "Our reserves replacement performance over the past few years
> > clearly illustrates the emerging problems with our resource base
> > and is becoming a source of competitive disadvantage," the
> > memorandum said.
For years, we've been hearing that the "proven reserves" numbers
provided by European- and U.S.-domiciled companies could be treated
much more seriously than those of certain other players (e.g. some
OPEC members) which have been widely considered to be mere fantasy.
More and more, it appears that a fair amount of wishful accounting has
been going on in the "civilized" world, also.
I'll be amazed if only one of the majors has been padding the
That drop-off is getting closer, and looking steeper, all the time.
"Anybody who thinks we're going to be using cars twenty-five
years from now the way we've been accustomed to using them
in the recent past ought to have his head examined. That
phase of our national history is over..."
-James Howard Kunstler
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