Shell scandal promptsindustry call for newtest of reserve auditorsby Richard Orange

if HE oil industry isplanning a profes-sional qualificationfor auditing compa-nies' oil and gas

reserves, in a move designed tosteer the US Securities andp:change Commission (SEC)iway from plans to force com-~~es, to have their claims veri-led by independent consultants.Mpresent there is no professionalftandard or methodology forserves auditors.Confidence in the oil indus-IT's claims of what it has intore beneath the ground wasbverely dented after Royal~lutch!Shell slashed its claimedil and gas reserve estimates by3%, primarily because theumbers failed to meet SECridelines. Shell's revision was?llowed by similar cuts fromISindependents Forest Oil andI Paso, but did not trigger thetdustry-wide epidemic feared~thetime.Representatives from themerican Association of Petro-urn Geologists and the Soci-iy of Petroleum Reservesaluators are drawing up the~alification under the Certifi-ttion Programme for Petro-~ Reserves Evaluators.Daniel Tearpock of the Amer-in Association of Petroleumeologists told TheBusiness: ''Web hoping it's a way to let the~estment community and gov-nment know that we are reg-sting ourselves. It might helpavoid the need for compulsorydependent reserve auditors."The qualification would[uire auditors to be trainedd to take professional examsthe geological and engi-ering expertise required andthe complex array of defin-

Goinv alone: independent veolovists needed to test reserves

itions of oil and gas reserves,with special attention paid tothe SEC's guidelines.Tearpocksaid: "It means com-

panies can't just employ some-one who's got a geology degreeand leave them to learn the def-initions as they go along. Peoplejust don't understand the vari-ety of definitions out there. Also,quite often, people don't knowthe geological techniques."Reports into the Shell scandal

\

by the SEC and the UK's Finan-cial Services Authority (FSA)stressed that many within Shellshowed imperfect knowledge ofthe, admittedly vague, SEC def-initions of proved reserves andhow they differed from the com-pany's internal standards.They also drew attention to the

way the job ofverification restedwith a single, semi-retired Shellgeologist, who was not givenenough resources for the task. As

a result, the committee is alsosetting up an ethics committeeto devise professional standardssimilar to those used in the legaland accounting professions.Professional petroleum

reserves evaluators would betaught to recognise when theinformation provided to themwas inadequate, and to see it astheir duty to require companiesto provide better data. If theyfailed to do so, they would risklosing their qualification.The SEC said in July it was

considering requiring compa-nies to have an independentreserves audit, but has issuedno statement on its progresssince then. Norwegian oil firmStatoil is a rarity in having itsreserves annually evaluated bygeologists DeGolyer and Mac-Naughton, which also appraiseYukos. Since its scandal, Shellhas committed to employingconsultant geologists as part ofits audit.But oil companies such as

Exxon Mobil and Total areresisting the proposals, arguingthat the expense would beunnecessary given that theircompany experts will alwayshave a deeper knowledge of thefields concerned than any con-sultant.Ron Harrell, chief executive

of geologist Ryder Scott and amember of the team drawingup the qualification, has arguedthat there aren't enough inde-pendent geologists to carry outsuch a task.Ratings agency Standard &

Poor's last week added to thepressure on companies to intro-duce greater standardisation ina report calling for better dis-closure of reserves auditingmethodology, emphasising theneed for companies to appointqualified personnel.

YOU can be sure of Shell ...but lately it seems the onlything you can count on isdisappointment. The appar-ently rock-solid Anglo-Dutch giant, once the

biggest oil company in the world,has been shaken to its core.Shareholders have been calling for thehead of UK chairman Sir Philip Watts.Tomorrowwillbe a key test as he unveilsShell's 2003 profits, hoping their hugescale - about £6bn - willsoothe City angerand see him through to retirement nextyear.The cries for blood have died down butsome big investors are set on changingShell's two-headed structure. There is eventalk that one head - RoyalDutch Petroleum- will devour the other in a nil-premium bid.That might be the ultimate answer.Anger has been simmering since January9,when Shell wiped 3.9bnbarrels offits esti-mates of 'proven reserves' - confessingit hada fifth less proven oil than it had claimed. SirPhilip left the announcement to his investorrelations staff, which some saw asadding insult to injury.Shell shares were 401p then.Today they are 365p.The 9pc drophas wiped £8bn off the entiregroup's market value.Rebels have gathered under thebanner of the Association ofBritish Insurers. Normally, irateshareholders' first port of call is acompany's chairman. In Shell'scase, Watts is the chairman.So the issue has broadened toexamining Shell's structure. ShellTransport, the UK company, is40pc of the group. Royal Dutch is60pc.They are separate companieswith separate share quotes, butthe combined group is run by acommittee ofmanaging directors.Reformers are thinking theunthinkable - that the double edi-fice should end. Royal Dutchwould make a share bid for ShellTransport. It could sweeten this byoffering investors a cash element.The cost would soon be recoupedfrom its massive cash flow.This would be revolutionary. Butsome argue that this is needed togiveShell the lean, clean manage-ment it needs tocompete with BPand Exxon Mobil - and with nim-bleminnows such as Cairn Energy.

Daily Mail, Wednesday, February 4, 2004

by BRIANO'CONNOR

FINANCE SPECIAL

700 SHELL AND BP SHARE PRICES SINCE 1990 ...BP

600

500

400

300

~340jijiAiSiOiNiOij U)

It would be surprising if Wattsunveiled anything so radicaltomorrow. But it would be a startif he set up a committee to reviewthe structure.

sober suits in its ageing headquar-ters on London's South Bank.After the shocking events of 9/11,Shell's response was handled bytwo committees - a signal of theirunprecedented gravity.It is easy to make fun of Shell.But it has become one of the topglobal companies. Annual sales are

£120bn,it has 25millioncustomersand 100,000staff in 140countries.It has oilfields in Nigeria, theSakhalin project in Russia andpetrol stations and refineriesaround the world. It has a grow-ing 'gas to power' division andleading technology in freezing gasfor transport.

Most things in Shell are run bycommittee. Trading, investment,divestment and social responsibil-ity have their own roomfuls of

V1 Page 83

And it makes shedloads ofmoney.Three years ago its profitshit a record £6.4bn. Tomorrow'sfigures may come close to that.Peter Hitchens at brokerCheuvreux expects the final divi-dend to rise to 9.7p.So why have its shares not donebetter? And why is such furydirected at Sir Phil, an affableLeicester-born physics graduate?Watts took over in mid-2001knowing he had a hard act to fol-low in Sir Mark Moody-Stuart, apolished performer whobegan thepainful process of levering Shellinto the modern age.Watts followed, leading Shell tothe £3.5bn acquisition of NorthSea rival Enterprise. But he gotoff to a bad start with the City.The latest shock rekindled Oldgrievances.His appointment was a bold oneby Shell standards. The top jobalternates between an English-man and a Dutchman, and it wasthe turn of the Dutch. But suchcustoms jar with modern thinkingon board behaviour.It is a safe bet that Shell's struc-ture will be attacked before thedebate is over. The UK board isdominated by non-executives,but there will be pressure formore City heavies and fewerretired civil servants.Sir Philip is due to retire by June2005.He may not go the distance.Angry investors met independentdirectors, led by scientist LordOxburgh, this week. The boardseems to have closed ranks, butthe argument has broadened tohow Shell should run itself.The problem is not just one forShell alone. BP's boss LordBrowne is hugely admired, whileWatts is under the cosh. Yet, asour charts show, until recentlyShell's shares had .kept pace withBP for more than a decade.The charts do not tell the fullstory. BP had huge problems in1991-92,recovering with a breath-taking series of mergers. Its mar-ket value, once much smaller, isnow £94bn against the £89bn towhich Shell has slipped.Investors are impatient with BigOil, switching funds to more fleet-footed rivals such as Scots-basedCairn. Its shares soared after itfound a prize oilfield in India - onterritory Shell relinquished.Allthis feeds Citysuspicions thatShellneeds a shake-up. That is onething you can be sure of, at least.

Shell boss is sorrybut he. won't resign

~~ ..,P.t,,'.';,';#~""""".':.By Andrew Johnson --SIJELL chairman Sir PhilipWatts yesterday apologisedfor the botched way he han-dled a shock 20 per cent fallin the group's oil and gasreserves.But the on giant's boss did

not apologise for the debacleitself and expressed his deter-mination to stay on to sort outthe mess, despite calls fromshareholders for his head.Shell lost £8.9billion in stock

market value when it saidon January 9 that oil reserveshad been overstated by 3.9bil- .lion barrels.Watts was not available

then and has kept a low profileuntil yesterday's City briefingwhen he and the companyoffered an explanation forwhy the reserves were over-booked.''January 9 is seared into my

memory;" Watts told a packedresults meeting. "Why was Inot here? I can come up witha number of perfectly logicalexplanations."But the fact of the matter

is, knowing what I do now, itwas a mistake. I am sorry Iwas not there and that's anunqualified apology. I got itwrong."No, I won't resign because

I'm determined to fix the situ-ation and pursue the strategicchanges we have started."Investors have demanded

Shell reforms a complicatedmanagement structure to anormal board with a chiefexecutive and chairman.Watts, who is due to· retire

in 2005, said he would bespending the next two orthree weeks talking to share-holders about their concerns.One analyst expected Watts

to remain in the short termbut suggested he might goearly in the autumn.Watts was in charge of the

company's exploration andproduction between 1997 and2001, when the bulk of theoverbooking took place.Shell said reserves were

overbooked because it did nothave a true understanding ofwhat was in the ground,despite partners on some pro-jects not booking their rightsas reserves.

Record results fail to impressSHELL tried to set its woesaside by trumpeting arecord set of earnings forthe year to December.

Beleaguered chairman Sir .Philip Watts said underlyingprofits were up 46 per centto $13billion (£7billion),buoyed by strong oil prices,with good incomingcashflow being used to paydown debt.

He said organic growthwould be driven by highercapital expenditure. The·impact of the reserves cut

was an "iinmaterial"$86 million and costs hadbeen cut by $1 billion overthe next two years.

But the companydisappointed analysts bysaying production growthwould be flat until 2006and results in for the fourthquarter were down 33 percent year on year to$1.85billion. Analysts saidthe reserves cut meant thecompany had much catchingup to do and the shares fell7p to 358lflp.

Reserves shock wipes £8bnfrom value Iof oil giant ShellBy MICHAEL HARRISONBusiness Editor

SHELL, THE world's secondbiggest oil and gas company,saw £Bbnwiped from its marketvalue yesterday after it stunnedthe industry and the financialmarkets by cutting its estimateof proven reserves by a fifth.The disclosure sent shares in

the Anglo-Dutch company tum-bling by 8 per cent and also hitits UK rival BP, although BPsaid it had no plans to followShell's lead.Shell said that after an in-

ternal review it had decided to"re-categorise" 3.9 billion bar-rels ofproven reserves as prob-able reserves or reserves thathave "scope for recovery".Late last year the US Secu-

rities and Exchange Commis-sion approached Shell andseveral other oil companiesabout the booking of reservesin the Gulf ofMexico. But Shelldenied that this was the triggerfor its review and said that lessthan 10 per cent of the re-serves it had re-categorisedlay in this region.The company said it had de-

cided to conduct a worldwidereview of its booked reservesafter a number of one-offreviews of proven reserves inparticular fields. The re-clas-sification is important becausean oil company's proven re-serves represent its futurevalue and Shell said that, on thismeasure, it was now worth 10per cent less on a discountedcash-flow basis.However; Shell was adamant

the cut in reserves would haveno impact on its financial resultsfor 2003,nor would it materiallychange the volume of oil andgas that the company ulti-mately expected to recover. "Itis anticipated that most of these

Shell chairman Sir Philip Watts: Reputation may be hurl by 20 per cent cut in booked reserves Financial Times

reserves will be re-booked inthe proved category over timeas field developments mature,"it added.The re-classification is, nev-

ertheless, a blow for the credi-bility of the company and thereputation of its chief executiveSir Philip Watts, who will pre-sent Shell's annual results to theCity early next month. Industrysources said the review ap-peared to have been sparked bythe fact that different parts ofthe Shell global empire adopteddifferent standards when book-ing reserves. Shell itself hinted

this had been the case by say-ing the re-categorisation exer-cise would bring its globalreserve base up to a "commonstandard of definition".Of the 3.9billion barrels that

have been re-categorised,about half had been booked inAustralia and Nigeria. Two-thirds are oil reserves and one-third natural gas. Shell said that90 per cent of the reservesinvolved were in fields that hadyet to be developed.Simon Henry, Shell's head of

investor relations, said that,notwithstanding the huge

extent to which provenreserves had been over-booked,none ofthe executives involvedwould be disciplined. The cal-culations, relating mainly toreserves booked between 1996and 2002, had been carried outin "good faith" but now Shellrecognised it had to work totighter specifications.Analysts were also un-

nerved by the disclosure thatShell is still failing to replenishits oil and gas reserves at thesame rate as they are beingdepleted. The company said itsreserve replacement ratio for

2003 would be in the range of70-90per cent. Mark Lanotti, ofMerrill Lynch, cut his rating onShell from "buy" to "neutral",saying: "This will be the thirdconsecutive year that Shell's re-serve replacement will belower than 100per cent, raisingquestions over the sustain-ability of future growth."The market was further un-

settled by a trading updatefrom BP pointing to lower mar-gins in its US gas marketing andrefining businesses in thefourth quarter

Outlook, page 2.2

Shell chairman issuesan unreserved apology

I

By CHRISTOPHER HOPEBUSINESS CORRESPONDENT

SIR Philip Watts yesterdayissued "an unqualified apology"for not personally makingShell's shock announcementthat it was cutting its provenreserves by 20pc and admittede had considered resigningover the matter.The chairman of Shell's com-

mittee of managing directorsalso revealed the company hadexaggerated its proven reservesfor at least 10 years andannounced two inquiries intothe way it accounts for them.Sir Philip said he would be

meeting Shell's investors overthe next four weeks to "hear atfirst hand" their concerns,which have included demandsfor changes to Shell's complexcorporate structure.The surprise news on

January 9 that Shell had over-stated its proven oil and gasreserves by 3.9billion barrels of

r oil equivalent (boe) sent theshares tumbling by 8pc.Sir Philip and Judy Boyton,

the finance director, were( heavily criticised for not facing'! analysts and journalists on theday. Speaking at Shell's 2003results presentation yesterday, achastened Sir Philip said the daywas "seared into his memory".He said: "It wasa mistake not tobe there. I regret that and I amsorry that I was not there. That isan unqualified apology. I got itwrong. That is the reality that Iface."Shell had been been wrongly

classifying some of its reserves'since before 1994. About onethird carne from Nigeria, withthe rest from Australia, the Mid-dle East and Norway amongothers. Sir Philip ran Shell'soperations in Nigeria from 1991to 1994. He was head of explora-tion and production from 1997to 2001, when he becamechairman.He said the recategorisation

as proven of 600m boe fromAustralia's Gorgon gas field in1997 was "an embarrassment".

--·--Tlie .companY-rlever'rulITiittedthe reserves were proven untillast month.Sir Philip said that he had con-

sidered resigning. He said: "I

,It was amistake notto be there.I regret thatandIamsorry that Iwas not there.That is an

I' unqualifiedapology.Igot itwrong. Thatis the realitythat I face'

Shell chairmanSir Philip Watts

I, yesterday

came to my own personal deci- 85pc of the reserves likely to besion that I should not do that. reclassified as proven over theThis thing has happened on my next 10 years. It should replacewatch. I am very determined to more than 100pc of its reservessee it through this difficult for the next five years. Produc-patch." tion will be flat for 2004 andNo Shell employee has quit 2005, and growing in 2006. Sir

ove~~~affair. ~r ~ili~E. not yhilip ~said Shell's nOI_1-execu-criticiseany employees, .saymg: tives would be canvassing sup-"Judgments made then would port among investors for changeprobably not be made today." to its structure. The companyShell said that the impact on has boards in Britain and the

earnings would be $86m, with Netherlands, as well as a com-

mittee of managing directors.He said: "We need to think hardabout the group's structure."Shell posted fourth quarter

pre-tax profits of $3.94billion,down 7pc because of a $984mexceptional .hit, -on turnoverl!head l3p.c.toj68.7billion. ~ __For the year to the end ofDecember, pre-tax profits wereup 35pc to $23.2billion on turn-over of $269.1 billion. Shell'sshares closed down 7 at 358.5p.

City" Business Edited by STEPHENKAHNe-mail: stephen.kahneexpress.co.ul

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RACING TO COURT: A class-actlon suit against Shell, sponsor of the Ferrari Formula One team, has started In the US

Shell's Watts·sued. , ,

in oil reserves rowOIL giant Shell and bossSir Philip Watts came underfurther shareholder fireyesterday when a classaction lawsuit was filed alleg-ing the company deliberatelyoverstated its oil and gasreserves.The suit - filed in a US

court by law firm MilbergWeiss Bershad Hynes &Lerach - alleges the com-pany had "deliberately vio-lated accounting rules andguidelines".Milberg Weiss launched

the action after Shell saidproved reserves of 3.9billionbarrels, or 20 per cent of thetotal, had been "recate-gorised" after a review.Shell shares plummeted

30p to 371114on the day thenews broke. The life of Shell's

By Andrew Johnsonreserves dropped from13.4 years to 10.6 years as aresult of the overstatementand the shares closed down2114pat 359lhpyesterday.Milberg Weiss claims the

overstatement was not aresult of "error or accident"but that reserves were"knowingly overstated" topreserve the company'scredit rating and to shore upits competitive position.The suit also names Shell

chairman Watts as a poten- .tial defendant, along withother senior company direc-tors and executives.~berg Weiss is attempt-

ing to find shareholders tosupport the action and askedfor share buyers _between

December 3, 1999, andJanuary 9, ~OO4 - the datethe overstatement was dis-closed - to come forward. Itsaid the disclosure of thereserves overstatement had"damaged purchasers ofShell Transport securitesand rocked the investmentcommunity".Shell attempted to calm

investor fears over itsposition when it announcedthe cut to reserves, arguingthe oil or gas was still inthe ground or under the sea,but could no longer becounted as "proved" underUS rules.The statement announcing

the reserves cut led to fur-ther calls for Watts's headBut Shell non-executive

directors are not thought

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h.min

WAns: Investors havebeen calling for his headlikely to force Watts to standdown before he reaches thecompulsory retirement ageof 60 in June next year.However, the company is

considering changes to thegroup's complicated boardstructure.

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Oil slick .. boss Sir Philip

OIL giant SHELL and itschairman Sir PhilipWatts are facing a dam-aging lawsuit in the US.A group of shareholders

have accused Shell and itssister company, ROYALDUTCH, of deliberatelybreaking accounting laws.Also named in the action

are chief financial officer JudyBoynton and LLOYDS TSBchairman Maarten van derBergh, a former Shell manag-ing director.The legal move follows

admission less thanthree weeks ago that its oiland gas reserves were a fifthsmaller than thought.That sparked a plunge in

Shell's share price whichwiped £2.9billion from thecompany's stock market value.

The lawsuit piles more pres-sure on Sir Philip. who hasbeen slammed by some share-holders for not speaking pub-licly on or after the admission.The claim for damages -

which could run into hundredsof millions of pounds - wasfiled in New Jersey late on Fri-day by law firm Milberg WeissBershad Hvnes & Lerach. The

ays: "The complaintalleges that defendants deliber-ately violated accounting ruleswhich resulted in a shockingand unprecedented overstate-ment of oil and gas reserves."The eventual disclosure

damaged purchasers of RoyalDutch and Shell Transportsecurities and rocked theinvestment community,"Sir Philip did write to staff

last week saying: "I knowthere is significant concernand, in some quarter, out-rage ... but we did achieve theobjective of giving the factsunclouded by personality."The shares fell 2.25p to 359.5.

II

The oil giant has been heavily fined for overstating its reserves, but now looms theprospect of law suits against the individuals involved. Sylvia Pfeifer reports

Shell pumps in £25bn, .to restore reputation

OIL GIANTShell is to step upinvestment by 20 per cent to$45billion (£25billion) for thenext three years in a majorshake-up designed to restorethe group's battered reputation.More than $34billion has been

earmarked for the group'sexploration and production arm,the division at the centre of thescandal which S?W nearly 4.5bil-lion barrels wiped off the Anglo-Dutch oil giant's reserves.The focus is on bringing oil

and gas fields on line and turn-ing potential into production.However, $4.5billion will bespent searching for oil resour-ces, an area in which Shell hasunder-invested until recently.Executive chairman Jeroen

van der Veer said yesterday thegroup hoped to finance the pro-gramme with $12billion fromdisposals and extra cash gener-ated by the present highoil price.Shell will also merge its oil

products and chemicals arms tohelp make cost savings.Investors were under-

whelmed. The shares fell 14lf4pto 418p as analysts complainedabout a lack of information onshare buybacks and frettedover the increased investment,which could mean less moneyfor shareholders.Van der Veer said the com-

pany's break-even price for abarrel of oil had increased from

By Andrew Johnsonr

$20 to $25,which he felt accept-able given historically highoil prices.Significant growth in output is

not expected to kick until 2009,with next year seen as a"low point".The reserves fiasco lead to a

board shake-up, with van derVeer's predecessor, Sir PhilipWatts, and exploration bossWalter van de Vijver losing theirjobs. "I wish we had not had togo through the past six months- crisis is not the best way tooperate," van der Veer said."However, we are -where we.

are and we will use this as anopportunity to show what wecan do."Much depends on-the new

production chief Malcolm Brin-dred. He said the firm had cutthe number of countries whereit has a presence from 40 to 25.Short-term production will be

driven by oil fields in WestAfrica, the Middle East andNorth Sea, later shifting to Sak-halin, off the Russian Eastcoast, central Asia and the Asia-Pacific region.He said Shell had possible

reserves in oil and gas of up to60billion barrels but admittedsome of the short-term replace-ment of actual reserves wouldcome from rebooking reserveswiped off by the scandal. OPPORTUNITY: Van der Veer hopes to turn crisis Into a coup

Training isthe key toavoidingnew fiascoSHELL has so far trainedmore than 2,000 staff toensure the way they bookfuture oil reserves will meetregulations laid down by theUS watchdog, the Securitiesand Exchange Commission.Exploration and produc-

tion chief Malcolm Brindredsaid the group also planned\ to have more than 3,000, employees versed in SECi compliance tactics by theend of this month.Itwas a failure to comply

with SEC guidelines, partlythe result of slack internaland external controls, thatled to the shock reservesdowngrade earlier this year.The firm has also hired a

series of external reservesauditors to ensure the deb-acle will not happen again.However, Shell had no news

yesterday on the biggestchanges of all - in the com-pany's complex, three-boardstructure. Shareholders wanta single board with clear linesof accountability.Jeroen van der Veer,execu-

tive chairman, said a "unifiedstructure" was one of theoptions the company was con-sidering, adding: "There aredifferent ways of unification."The group is expected toreveal its plans in November.The Financial Services

Authority said it was "confi-dent" it had followed theright guidelines in finingShell £17million for marketabuse earlier this year.

Investors howl for Shell'sbloodBy John Phaceas

OIL giant Royal Dutch Shell is again expected tocome under immense pressure this week frominvestors around the world after Friday's shock.revelation it had slashed its oil reserve estimatesby 20 per cent.

The Independent on Sunday I 24 October 2004

BUSINESSI7

Analysis

Tarnished Shell seeks to be born againTim Webb onthe oil giant'sattempts to putscandal behindit and giveitself a facelift

hell is expected to outdoits rival, BP, when itannounces higher third-quarter earnings this

week. In fact, it has alreadyearned more than BP this year,which isn't bad for such a "trou-bled" company.It underlines the fact that the

Anglo-Dutch company has con-tinued to perform financiallydespite spending most of theyear mired in controversy. Thisis the same Shell which in thepast six months has seen itschairman, exploration chief andfinance director leave after afifth of its proven oil and gasreserves were found to bewrongly booked. And it is thesame company whose new chair-man, [eroen van der Veer, vowedlast month at its annual strate-gy meeting: "Much more needsto be done. We are driving Shell .to be a different company."So why is the oil giant - motto,

"You can be sure of Shell" -changing and what will the"new Shell" look like?One of the biggest problems

facing Shell is how to replace theoil it is pumping. After it down-graded four billion barrels of"proven" oil and gas reserves to"probable", the company was leftwith one of-the lowest reservereplacement ratios among itspeers. Since 1999, excludingreserves from companies itbought, it has averaged lessthan 100 per cent replacement;last year it was 80 per cent. Thismeans that it is selling oil fasterthan it can find it. In effect, thecompany is shrinking. By com-parison, BP's ratio has been com-fortably over 100 per cent overthe last five years.Peter Hitchens, an analyst

from the French stockbrokerCheuvreux, says that the prob-lems date back to the late 1990swhen Shell cut explorationspending. "As a result, it couldnot find enough reserves andcould not meet its productiontargets," he says.Rather than massaging the fig-

ures, as his predecessor had, Mrvan der Veer promised "actionsand urgency" to solve the re-serves problem. Disposals wouldraise up to $12bn (£6.6bn) by2006 and capital spendingwould be boosted to $l5bn peryear over the next two yearsfrom an original budget of$12bn,

Venus rising: by sellingup to $12bn in assetsand ploughing themoney into majorexploration projects, theAnglo·Dutch 011company •hopes to regain itsfaded charm. But it stillhas a lot of catchingup to doSTEVE CAPLIN

most of it on exploration andproduction. This is around fourtimes the amount earmarked fiveyears ago and the same spend-ing level as US oil major ExxonMobil, which is a third biggerthan Shell.

~Shelldirectorshave spent the lastyear reading thenewspapers abouthow bad they aret

Mr van der Veer alsopromised the money would bespent differently. Rather thandrilling smaller wells in moreareas, exploration would con-centrate on "big cat" discover-ies, he said Infuture, it will focuson West Africa, and in particu-lar Nigeria, Russia and the Mid-dle East, as well as on deep welldrilling and liquified natural gas.It is selling out of countrypositions where the deposits aresmaller - Thailand, Angola,Sweden and Spain.

Andrew Archer, an analyst atCommerzbank, argues that it ismore a case of tidying up ratherthan a radical departure from thepast. "The worry is that it's notgoing to be a very 'new Shell'.It's much more a case of tryingto catch up with its peers. Theyare trimming and tidying wherethey can."Mr van der Veer said that

reserve replacement wouldaverage at least 100 per cent until2008, hardly an ambitious goalbut if met, much improved onrecent performance. Produc-tion, he said, would be littlemore than flat, giving a range ofbetween 3.8 million and fourmillion barrels of oil a day by2009, after falling next year.With production this year at

a maximum of 3.8 million bar-rels a day - and the company'srecent appalling track record formeeting targets - some analystsare sceptical even that currentlevels can be maintained. Notalone in seeing productiongrowth falter, Shell will givemore specific production targetswith its full-year results earlynext year. Tellingly, however, theofficial presentation did notmention the word "target".Shell has also given itself

more flexibility by raising its oilprice assumptions - the price ofoil it assumes when it decideswhether a project would be eco-nomic - to $25 per barrel on theback of record crude pricesnow above $50. This is higherthan companies such as BP andENI and Total, which have alsoraised assumptions, and will

allow more exploration projectsto go ahead. Ron Mobed, thepresident of consultancy IHSEnergy, says that since oil com-panies raised their assumptionsthis year, he has already seen anincrease in requests for data onnew areas, suggesting that it isalready having an effect.MrHitchens says that the bar

has been left deliberately low bynew executives to manageexpectations and avoid moremissed targets. He points to therelatively high $1.20 per barrelfinding cost as an example oftargets that are ''verging on theridiculous". "Shell directorshave spent the last year readingthe newspapers about how badthey are," he says. "The last thingthey want to read is that theyhave failed again."Mr van der Veer's caution is

understandable. Oil explorationand production require billionsof pounds of investment and ittakes up to a decade for somefields to come on-stream. Ana-lyst IT Traynor from DeutscheBank says Shell has had someexploration successes this year.But there is no quick fix to itspredicament oflagging reservereplacement and minimal pro-duction growth.Mr Archer adds: "The prob-

lem Shell faces is that, despitebig projects coming on-streamtowards the end of the decade,there is nothing which will fillthe near-term production gapover the next four years." Onething you can be sure of: thissupertanker will take a long timeto turn around.

Shell plans to raise between$10bn (£5.5bn) and $12bnfrom disposals in the next twoyears. It has already identified$8bn of non-core orunderperforming assets tosell, and wants to raiseanother $5bn by selling offsmaller and mature oil and gasfields. More businesses couldbe sold as new finance .director Peter Voser onlyarrived this month.

buyer interest - first-roundbids were tabled a fortnightago - a sale early next yearappears the most likelyoption.

INTERGENWhat is it? Aglobal power-generating business, owningor building power stationswhich generate 16,000 MW.Another joint venture: Shellowns 68 per cent, with USconglomerate Bechtelowning the rest.How much is it worth?Shell's stake could fetchSzbn,

BASELLWhat is it? A chemicalscompany which Shell ownswith German company BASF.How much is it worth?Shell's 50 per cent stake isworth around $3bn.Shell, which said it was

reviewing "strategic options"for the venture with BASFoverthe summer, could also floatBasell. But following strong

LPG DIVISIONWhat is it? LPGstands forliquified petroleum gas, aclean-burning gas, usuallybottled and used in cookingand heating systems. Shellproduces and distributes LPG.How much is it worth?Around $4.4bn.

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Shell moves tounify boards andlook at mergerIS,

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ByCarola Hoyos and James Boxellin London andIan Bickerton in Amsterdam

Royal Dutch/Shell, the energygroup, has reached a preliminaryagreement to unify its two boardsand has hired bankers to assessthe feasibility of merging itsDutch and British holding com-panies.The review, advocated by sev-

eral important members ofShell's steering committee, goesbeyond investors' expectations.The advocates of reform arepushing for a "root and branch"restructuring, including consider-ation of a full merger, to restorethe company's credibility. Theysee less resistance than they hadexpected for their proposals.Royal Dutch/Shell at present is

made up of Royal Dutch, theDutch holding company control-ling 60 per cent, and "Shell"Transport and Trading, the UK·side controlling the remaining 40per cent. The two companieshave separate main stockexchange listings in Amsterdamarid London.Informal agreement has been

reached by members of theboards that the least Shell needsto do i~ to unify its boards. Butany formal decision about the

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OIL PRICES KEEP RISINGOil prices rose further yesterdaydespite an assurance from SaudiArabia, the world's largest oilexporter, that it couldimmediately tap spare productioncapacity of about 1.3mbarrels aday and that its oil installationswere well-defended, write KevinMorrison and Henry Tricks.New figures showed global oil

demand was stronger thanexpected, while USinventories hadfallen. Meanwhile, tropical stormsin the Gulf of Mexico forced manyoperators to suspend production.USbenchmark crude futures

closed up 31cents at $44.83 abarrel while Brent crude hit arecord high of $4l.70.Report, Page 5Commodities, Page 45

unification, and other proposals,. would need the vote of bothboards and an agreement at nextyear's AGM.Some legal experts in the UK

and the Netherlands, and someadvocates of the reform, believecloser alignment of the two com-

panies, rather than a full merger,could be Shell's best option.Shell in January revealed it

had wrongly booked more than20 per cent of its oil and gasreserves with the US Securitiesand Exchange Commission. Shellis also under pressure because itlags behind its peers in its funda-mental business of finding andproducing oil and natural gas.After months of pressure from

investors, rating agencies andregulators, most investors hadexpected that the world's thirdlargest energy group would atmost unify its Dutch and UKsupervisory boards.But people close to the discus-

sions say far more is seriouslyconsidered - although the detailsof the reform, the most ambitiousin the company's 100·year his-tory; have still to be determined.They also say that the workinggroup advising the steering com-mittee about how the reformwould work and on the implica-tions - especially in terms ofShell's international tax burden- has not yet completed its work.Some UK board members are

pushing for a 50/50 structure,which would deprive their Dutchcounterparts of what amounts ineffect to a veto over importantdecisions of,the group.

Sea change

Details of the reform, whichwould take three to five years tocomplete, according to its advo-cates, are expected to be madepublic in November.A person close to the talks

said: "This is not a straightfor-ward exercise. The current corpo-rate structure has been in placefor 100years. If you want to play

around with it, make more solidthe relationship between the two,it requires quite a bit of work."Jeroen van der Veer, the

group's chairman, said recentlythe review committee was stillexamining drastic options.Shell last month settled its dis-

pute about its reserves bookingwith the SEC and the Financial

Services Authority, the UK regu-lator, and agreed to pay $151m.

Lex, Page 18Lombard, Page 20 .Shell's conundrum, Page 21Mudlark, Page 22Greater role for Rosneft, Page 24Jakarta shakes up Pertamina, Page 25Newsfile: www.ft.com/shell