LONDON: Royal Dutch/Shell executives knowingly hid an oil and gas reserves shortfall for years and feared the game was up as far back as 2002, an independent review revealed on Monday.
The news came as the oil giant cut reserve estimates again and sacked a third senior executive, chief financial officer Judy Boynton, for her part in the scandal, which shocked investors when it finally became public in January this year.
Shell added 300 million barrels to total booked reserve cuts for 2002, to make a total reduction of 4.35 billion barrels of oil equivalent (BOE) – more than 22% of reserves originally booked for that year.
It also cut a further 200 million BOE from 2003 bookings for a total 2003 reserves cut of 500 million BOE.
The eagerly awaited report, commissioned by non-executive directors in the aftermath of the reserves debacle and compiled by US law firm Davis, Polk and Wardwell, unearthed memos in which one executive talked of his “lying” and about how the company had “fooled” the market.
It also showed that internal audits on booking reserves – a crucial measure of value in the oil industry – were undertaken by a single former Shell employee working part-time.
Standard & Poor’s cut its long-term credit rating on Shell one notch to AA-plus from AAA following the reserves report.
Shell’s report “highlights areas of durably weak corporate governance with significant digressions from US Securities and Exchange Commission rules”, S&P said in a statement.
Shell’s crisis came to a head on Jan 9 this year, when it announced it had overbooked proved reserves by 20%. The debacle has prompted investigations by investment regulators in the United States and Europe, including America's Department of Justice, and shareholder lawsuits.
Monday’s report summary quoted from a September 2002 note by former exploration and production chief Walter van de Vijver, since sacked for his conduct in the job, in which he talked about how investors could not be “fooled” for much longer.
“The market can only be ‘fooled’ if 1) credibility of the company is high, 2) medium- and long-term portfolio refreshment is real and/or 3) positive trends can be shown on key indicators,” he said. “Unfortunately, we are struggling on all key criteria.”
Then in November 2003, he told the then chairman of managing directors, Phil Watts, that he was “sick and tired about lying about the extent of our reserves issues”.
But a month later, Van de Vijver told staff to destroy a document outlining how 2.3 billion barrels of reserves were out of line with regulatory guidelines because it was “dynamite”.
The lawyers also criticised Watts, who was sacked along with Van de Vijver. Watts ran the core exploration and production division from 1997 to 2001 – the period during which the mis-bookings were made.
He was elevated from this post to the top job in 2001, leaving Van de Vijver to pick up the mess.
The report said Watts then attempted to “manage” the problem rather than reveal it. “Simply put, it is illustrative of a strategy to play for time in the hope that intervening helpful developments would justify or mitigate the existing reserve exposures,” the report said. “Ultimately ... this strategy failed.” – Reuters