Under regulatory authority investigation in three countries, facing a US Justice Department probe, with its hitherto rock-solid long-term borrowing downgraded by all major ratings agencies and its worldwide estimated proven reserves just slashed by 22% – this hardly sounds like the blue chip oil major Royal Dutch/Shell. But where did it all go wrong? Eloise Logan unravels recent events...

International oil major AngloDutch/Shell is living a corporate nightmare: billions have been wiped off its value, 22% of its estimated reserves have been “de-booked”, one of its auditors – KPMG – refused to sign off on its annual accounts, it is under investigation by the US Securities and Exchange Commission (SEC), the US Justice Department (DoJ), the UK’s Financial Services Authority (FSA), Autoriteit Financiele Markten (AFM) of the Netherlands, facing an open-ended legal “class action” in the US, placed on “credit watch” by ratings agencies, and with at least the possibility of further civil litigation. All copies of the annual report have been pulped and the AGM postponed. All since January.

There could be more. Although, unveiling the summary of a report by US lawyers Davis Polk and Wardwell on events leading up to recent reserves revisions by Shell – three in under four months – the new non-executive chairman, Lord Oxburgh, said there was no evidence of personal or financial impropriety by any Shell staff, the US Department of Justice may suspect differently. It was reported by the Financial Times to have requested part of the lawyers’ report to be withheld, pending criminal enquiries. The DoJ would not comment on that report but – like the other bodies investigating Shell – it has a policy of not commenting on ongoing enquiries.

So how did the blue chip Anglo-Dutch major get into this unenviable position? Shell’s nightmare began in January when group chairman Sir Philip (Phil) Watts attracted criticism for failing personally to explain to investors and others the reasons behind a major reclassification of reserves, downgrading the company’s “proven” reserves estimate by 20%.

Shell appeared to have misjudged the impact of the announcement, which wiped 10% off the discounted cashflow value of the company overnight. It hit other oil sector shares, too, with BP also falling 2% on the day, but later recovering. In February US stock exchange watchdog the SEC announced a formal investigation into the reserves downgrading.

By the following month the positions of both the chairman, Phil Watts, and upstream head Walter van de Wijver had become untenable. Shell first said they had left “by mutual consent”, then admitted they had been asked for their resignations. A further GBP1.5-bil ($2.67-bil) was wiped off the company’s market value in mid March when it again downgraded proven reserves – by a further 500-mil bbl – and delayed publication of its annual results until the end of May.

Bowing to criticism of its reserves estimation, and with questions now being asked about reserves bookings on the Norwegian North Sea Ormen Lange gasfield, Shell appointed US reservoir evaluation consultants Ryder Scott to carry out an independent global reserves assessment. US lawyers Davis Polk and Wardwell had earlier been commissioned to report on the circumstances leading to the reserves downgradings.

On Apr 19 the results of both were announced, together with a further 500-mil bbls downgrading – 300-mil against existing reserves and 200-mil against bookings for the rest of the year 2003 – and the news that chief financial officer Judy Boynton would be the third senior executive to take responsibility for the debacle. She was described as “stepping aside” to a consultancy role, to be replaced with immediate effect.

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This article first appeared in the May issue of Platts Energy Economist, which also a features a related article called 'A matter of definition: how long is an oily piece of string?'. The article analyzes the questions that arise from the debate about how much oil the world has left, and attempts to define those questions: What are reserves? What are recoverable reserves? What are resources? For more information on this story contact info@platts.com.

Created: May 3, 2004