Shell Execs Knew Reserves Were Overstated

Royal Dutch/Shell Group executives two years ago knew the company’s reserves were overstated by 2.3 billion barrels and sought to “manage the problem” and “play for time,” a strategy that failed, according to an internal audit released Monday.

Executives including Walter van de Vijver, the former head of oil and gas production, hoped that more wells, rising natural gas demand or new drilling licenses would later justify the reserves and resolve the matter, according to the report, which called that approach “unrealistic.”

“The market can only be fooled if credibility of the company is high,” Van de Vijver wrote in a September 2002 note to senior executives, the report said. “Unfortunately, we are struggling on all key criteria” in delivering results to investors, he wrote.

The oil company Monday cut oil and gas reserves for the third time this year and replaced Chief Financial Officer Judith Boynton, after the ouster last month of Chairman Philip Watts and Van de Vijver. Boynton, in her role as head of finance and disclosure, “took virtually no action” early on to investigate the extent of the overbooking, the report prepared by law firm Davis Polk Wardwell said.

Watts and Boynton couldn’t be reached for comment.

“Unfortunately, the Davis Polk report does not describe the extraordinary efforts Mr. Van de Vijver undertook,” said John Dowd, the attorney who represents Van de Vijver.

The report concluded that “Shell guidelines were not adequately designed to yield compliant reporting of proved reserves.”

Documents cited in the summary of a Shell audit committee report showed Shell was aware reserves were overstated beginning Feb. 11, 2002.

Shell is under investigation by the Securities and Exchange Commission and the Justice Department for the adjustment of reserves, a key figure for investors judging oil firm success replacing the oil and gas it pumps.

Van de Vijver last week said he was frustrated in efforts to disclose the matter, saying he informed other senior managers that reserves were overstated.

Van de Vijver first raised the issue Feb. 11, 2002, in a memo to Shell’s management committee, the report said.

SEC rules require “reasonable certainty” that reserves will be produced before they can be included in annual filings.