Shell Reserves Scandal 2004

Shell scandal prompts industry call for new test of reserve auditors by Richard Orange a result, the committee is also setting up an ethics committee HE oil industry is to devise professional standards planning a profes- similar to those used in the legal sional qualification and accounting professions. for auditing compa- Professional petroleum if nies' oil and gas reserves evaluators would be reserves, in a move designed to taught to recognise when the steer the US Securities and information provided to them p:change Commission (SEC) was inadequate, and to see it as iway from plans to force com- their duty to require companies ~~es, to have their claims veri- to provide better data. If they led by independent consultants. failed to do so, they would risk Mpresent there is no professional losing their qualification. ftandard or methodology for The SEC said in July it was serves auditors. considering requiring compa- Confidence in the oil indus- nies to have an independent IT's claims of what it has in reserves audit, but has issued tore beneath the ground was no statement on its progress bverely dented after Royal since then. Norwegian oil firm ~lutch!Shell slashed its claimed Statoil is a rarity in having its il and gas reserve estimates by reserves annually evaluated by 3%, primarily because the geologists DeGolyer and Mac- umbers failed to meet SEC Naughton, which also appraise ridelines. Shell's revision was Yukos. Since its scandal, Shell ?llowed by similar cuts from has committed to employing ISindependents Forest Oil and consultant geologists as part of I Paso, but did not trigger the its audit. tdustry-wide epidemic feared But oil companies such as ~thetime. Exxon Mobil and Total are Representatives from the resisting the proposals, arguing merican Association of Petro- that the expense would be urn Geologists and the Soci- unnecessary given that their iy of Petroleum Reserves company experts will always aluators are drawing up the have a deeper knowledge of the ~alification under the Certifi- fields concerned than any con- ttion Programme for Petro- sultant. ~ Reserves Evaluators. Ron Harrell, chief executive Daniel Tearpock of the Amer- Goinv alone: independent veolovists needed to test reserves of geologist Ryder Scott and a in Association of Petroleum member of the team drawing eologists told TheBusiness: ''We itions of oil and gas reserves, by the SEC and the UK's Finan- up the qualification, has argued b hoping it's a way to let the with special attention paid to cial Services Authority (FSA) that there aren't enough inde- ~estment community and gov- the SEC's guidelines. stressed that many within Shell pendent geologists to carry out nment know that we are reg- Tearpocksaid: "It means com- showed imperfect knowledge of such a task. sting ourselves. It might help panies can't just employ some- the, admittedly vague, SEC def- Ratings agency Standard & avoid the need for compulsory one who's got a geology degree initions of proved reserves and Poor's last week added to the dependent reserve auditors." and leave them to learn the def- how they differed from the com- pressure on companies to intro- The qualification would initions as they go along. People pany's internal standards. duce greater standardisation in [uire auditors to be trained just don't understand the vari- They also drew attention to the a report calling for better dis- d to take professional exams ety of definitions out there. Also, way the job ofverification rested closure of reserves auditing the geological and engi- quite often, people don't know with a single, semi-retired Shell methodology, emphasising the ering expertise required and the geological techniques." geologist, who was not given need for companies to appoint the complex array of defin- Reports into the Shell scandal enough resources for the task. As qualified personnel. \ V1 Daily Mail, Wednesday, February 4, 2004 Page 83 FINANCE SPECIAL by BRIAN And it makes shedloads of money. Three years ago its profits hit a record £6.4bn. Tomorrow's O'CONNOR figures may come close to that. Peter Hitchens at broker Cheuvreux expects the final divi- OU can be sure of Shell ... dend to rise to 9.7p. So why have its shares not done but lately it seems the only better? And why is such fury thing you can count on is directed at Sir Phil, an affable disappointment. The appar- Leicester-born physics graduate? ently rock-solid Anglo- Watts took over in mid-2001 Dutch giant, once the knowing he had a hard act to fol- biggestYoil company in the world, low in Sir Mark Moody-Stuart, a has been shaken to its core. polished performer who began the Shareholders have been calling for the painful process of levering Shell head of UK chairman Sir Philip Watts. into the modern age. Tomorrow willbe a key test as he unveils Watts followed, leading Shell to Shell's 2003 profits, hoping their huge the £3.5bn acquisition of North scale - about £6bn - willsoothe City anger Sea rival Enterprise. But he got and see him through to retirement next off to a bad start with the City. year. The latest shock rekindled Old The cries for blood have died down but grievances. some big investors are set on changing His appointment was a bold one Shell's two-headed structure. There is even by Shell standards. The top job talk that one head - Royal Dutch Petroleum alternates between an English- - will devour the other in a nil-premium bid. man and a Dutchman, and it was That might be the ultimate answer. the turn of the Dutch. But such Anger has been simmering since January customs jar with modern thinking 9,when Shell wiped 3.9bn barrels offits esti- on board behaviour. mates of 'proven reserves' - confessingit had It is a safe bet that Shell's struc- a fifthless proven oilthan it had claimed. Sir ture will be attacked before the Philip left the announcement to his investor debate is over. The UK board is dominated by non-executives, relations staff, which some saw as but there will be pressure for adding insult to injury. more City heavies and fewer Shell shares were 401p then. 700 SHELL AND BP SHARE PRICES SINCE 1990 ... retired civil servants. Today they are 365p.The 9pc drop Sir Philip is due to retire by June has wiped £8bn off the entire BP 2005.He may not go the distance. group's market value. 600 Angry investors met independent Rebels have gathered under the directors, led by scientist Lord banner of the Association of Oxburgh, this week. The board British Insurers. Normally, irate 500 seems to have closed ranks, but shareholders' first port of call is a the argument has broadened to company's chairman. In Shell's 400 how Shell should run itself. case, Watts is the chairman. The problem is not just one for So the issue has broadened to Shell alone. BP's boss Lord examining Shell's structure. Shell 300 Browne is hugely admired, while Transport, the UK company, is Watts is under the cosh. Yet, as 40pc of the group. Royal Dutch is our charts show, until recently 60pc.They are separate companies Shell's shares had .kept pace with with separate share quotes, but BP for more than a decade. the combined group is run by a The charts do not tell the full committee of managing directors. story. BP had huge problems in Reformers are thinking the ~ 1991-92,recovering with a breath- unthinkable - that the double edi- 340jijiAiSiOiNiOij U) taking series of mergers. Its mar- fice should end. Royal Dutch ket value, once much smaller, is would make a share bid for Shell now £94bn against the £89bn to Transport. It could sweeten this by which Shell has slipped. offering investors a cash element. It would be surprising if Watts sober suits in its ageing headquar- £120bn,it has 25millioncustomers Investors are impatient with Big The cost would soon be recouped unveiled anything so radical ters on London's South Bank. and 100,000staff in 140countries. Oil,switching funds to more fleet- from its massive cash flow. tomorrow. But it would be a start After the shocking events of 9/11, It has oilfields in Nigeria, the footed rivals such as Scots-based This would be revolutionary. But if he set up a committee to review Shell's response was handled by Sakhalin project in Russia and Cairn. Its shares soared after it some argue that this is needed to the structure. two committees - a signal of their petrol stations and refineries found a prize oilfield in India - on give Shell the lean, clean manage- Most things in Shell are run by unprecedented gravity. around the world. It has a grow- territory Shell relinquished. ment it needs tocompete with BP committee. Trading, investment, It is easy to make fun of Shell. ing 'gas to power' division and Allthis feeds Citysuspicions that and Exxon Mobil - and with nim- divestment and social responsibil- But it has become one of the top leading technology in freezing gas Shellneeds a shake-up. That is one ble minnows such as Cairn Energy. ity have their own roomfuls of global companies. Annual sales are for transport. thing you can be sure of, at least. Shell boss is sorry but he. won't resign ~~ ..,P.t,,'.';,';#~""""".':. By Andrew Johnson -- SIJELL chairman Sir Philip Watts yesterday apologised for the botched way he handled a shock 20 per cent fall in the group's oil and gas reserves. But the on giant's boss did not apologise for the debacle itself and expressed his deter- mination to stay on to sort out the mess, despite calls from shareholders for his head.

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