I have always had a sneaking respect for Shell, perhaps from listening
to my Father who was once a long term (part time) consultant with
them.

Last year they got a barracking because their estimates of reserves
did not tie up with the USA SEC rules for estimating reserves.

Now they have come up with a stonking GBP 9bn profit 
- about 16% of their market value
Which they need to get rid fast of before a predator has a go at them.

I would be interested to get a 'take' on how serious the
'underestimation of reserves' really was - also whether that GBP 9bn
is really a one-off
- my guess is that it will recurr

Ideally a marshalling of facts and a view from a GA 
- and some contributions from the Gallery

The downgrade of reserves that Shell announced on January 9, 2004 was
quite significant.  The reduction lowered Shell's reserves "...by
about 4 billion barrels, or 20%."  The CEO at the time, Philip Watts,
made BusinessWeek's list of the worst managers of 2004.  He resigned
at the request of the board on March 3, 2004.  Given that Mr. Watts
was the exploration and production chief when nearly all of the
overbooking of proven oil reserves occurred, the overstatement appears
to have been a deliberate fraud perpetrated by Mr. Watts.

An investigation by the Securities & Exchange Commission has resulted
in Shell agreeing in principle to pay a $120 million fine and to spend
$5 million improving its compliance.  The CEO, the successor to Mr.
Watts in the exploration and production chief role, and the chief
financial officer were all replaced.  Furthermore, Shell announced on
October 28 that it will abandon its unusual dual-company structure,
which critics stated had hindered Shell in competing with its nimbler
rivals.

"Philip Watts" BusinessWeek (January 10, 2005)
http://www.businessweek.com/@@4MsFVYUQkgNhDg0A/magazine/content/05_02/b3915651.htm

Robert Barker of BusinessWeek in an article dated October 18, 2004
viewed Shell as being potentially attractive to individual investors
because it is trading at a discount to its peers because of the
scandal.  Mr. Barker notes that, "[g]iven the gravity of its
transgression -- overstating its estimate of proven reserves by nearly
24%, for which last summer it agreed to pay US and British regulators
$150 million in fines -- Royal Dutch/Shell can count on doing much
more than the five months facing Martha Stewart." The simplified
corporate structure and other governance reforms should improve its
attractiveness to investors.  Furthermore, it offers a respectable
dividend.

Like you, Mr. Barker notes Shell's presence "...in the top tier of
supremely profitable oil tightens, with BP and Exxon Mobil."  He notes
that daily production is expected to decline for the next two years,
which may be a source of concern.  However, continued high demand for
oil and gas may continue to keep profits strong, and new projects are
expected to come online two years from now that would bolster output. 
Given the significant dividend yield, Mr. Barker considers Shell to be
a worthwhile investment for those prepared to wait for the new
projects to come online and memory of the scandal to dissipate.

"An Oil Giant For Players With Patience" by Robert Barker,
BusinessWeek (October 18, 2004)
http://www.businessweek.com/@@1*qXDWUQkgNhDg0A/premium/content/04_42/b3904129_mz026.htm

Sincerely,

Wonko

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Request for Answer Clarification by frde-ga on 07 Feb 2005 01:29 PST

Pity the second link is 'secure'

Without pushing it, I would appreciate a little information on the
severity of the overestimate - or should I say the diference between
the SEC rules and the rules Shell was internally applying. Were Shell
imprudent ?

The way I see it is that Shell Transport and Trading and Royal Dutch
Petroleum are both holding companies - essentially financial rather
than trading entities.

For Shell to slash 'known reserves' by 25% and pay a 'fine' is dead
easy, now all they need to do is commission some independant
geologists reports, fill in the paperwork and ... their reserves
increase by 30%.

---

Clarification of Answer by wonko-ga on 07 Feb 2005 12:45 PST

The regulators would eat them alive if they tried something like that.
 The fine imposed by Britain's regulatory agency was the largest in
its history.  I note that at least as of February 23, 2004, Shell
maintained that "most of the oil that Shell mistakenly booked as
proved reserves does actually exist and will eventually be developed.
Shell says a recent review of its worldwide operations showed that
some of the oil and gas booked as "proved" between 1994 and 2002
belongs in two other, more speculative categories."

"Shell's Drama Isn't Over" by Stanley Reed, BusinessWeek (February 23,
2004) http://www.businessweek.com/@@soBKf4UQPQRhDg0A/magazine/content/04_08/b3871071_mz054.htm

Here is the report to Shell's audit committee detailing the results of
the internal investigation.  I think it will address your questions.

"Report of Davis Polk & Wardwell to The Shell Group Audit Committee"
Shell (March 31, 2004)
http://www.shell.com/static/investor-en/downloads/gac_report.pdf

Sincerely,

Wonko

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Request for Answer Clarification by frde-ga on 08 Feb 2005 00:48 PST

Many thanks
- do you reckon that the latest windfall profits include a revaluation of reserves ?

---

Clarification of Answer by wonko-ga on 08 Feb 2005 11:38 PST

No, they are viewed as being "... mainly the result of soaring crude
oil prices...."

"Record Shell profit spurs windfall tax calls" by Terry Macalister,
Julia Finch and Nils Pratley, The Guardian (February 4, 2005)
http://www.guardian.co.uk/oil/story/0,11319,1405766,00.html

Sincerely,

Wonko

Very nice bit of digging - Thanks