20-04-04

Shell could take the rest of the decade to rebuild its beleaguered oil exploration business, which was revealed to have been the victim of a huge deceit by its senior management. In a damning 463-page report into the behaviour of Shell’s top directors, Britain’s second largest oil company was revealed to have repeatedly lied to shareholders about the value of its oil and gas reserves.

Evidence of the concealment, revealed in a report compiled by outside lawyers commissioned by Shell’s board and which is now being scrutinised by the US Department of Justice and American securities regulators, emerged as the company removed a third senior executive, Judy Boynton, the finance director, and wrote down its reserves for the third time in three months.

The scale and duration of the deception by Sir Philip Watts, the former chairman, and Walter van de Vijver, former head of exploration and production, combined with news of a further cut of 500 mm barrels of proven reserves, prompted Standard & Poor’s, the rating agency, to strip Shell of its triple A credit rating, lowering it to AA plus.

Standard & Poor’s cited "durably weak corporate governance" and said: "A successful upstream division, notably in exploration, is key to an integrated oil and gas company’s creditworthiness."

The final tally of the leakage from what was once seen as an enviable portfolio of assets, leaves Shell with just 14.5 bn barrels in its tank, a reserve life of just ten years, the lowest among the oil majors. More worrying, analysts said, is the confirmation that Shell has only been replacing between half and 60 % of the oil it produced over the past five years. Analysts said that Shell had a mountain to climb to restore its position in terms of reputation and actual performance.

"Realistically, it will take the rest of the decade to restore its reserve base," Jon Rigby, of Commerzbank, said.

Malcolm Brinded, the new head of exploration, said the record in replacing reserves was "not acceptable" and admitted that Shell had made errors in focusing on its own patch instead of moving into new oil provinces, such as Angola and Azerbaijan. He also cited the decision made by Mark Moody-Stuart, former chairman, in 1998 to cut drastically exploration spending.

Lord Oxburgh, chairman of Shell’s parent company, said the report from Davis Polk & Wardwell into the reserves scandal was a major embarrassment that was attributable to human failings, not structural deficiencies, and he promised reforms, including tighter reporting rules.

Analysts called for new blood, criticising the remaining directors as "pretty green and wholly unproven". One suggested that Philip Hampton, the former Lloyds TSB finance director who previously held the top finance job at British Gas, was a possible contender.

Tim Morrison, group controller, is currently filling the shoes of Ms Boynton, who remains with the company. While she was not accused of any impropriety, Shell said it would be looking outside the group to seek a more robust finance director "with top credentials".

The report suggests that Ms Boynton, took "virtually no action" to inquire independently into the facts relating to aggressive bookings of reserves. The scandal has already prompted class-action lawsuits in the United States while American prosecuting authorities have requested documents for review.

Source: Times Newspapers