Royal Dutch/Shell 'Oil Reserves' Controversy

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Excerpts

After its announcement of its reclassification of its reserves in January 2004, Shell undertook an extensive review of its global oil reserves portfolio with the assistance of external 'oil reserves' consultant Ryder Scott Company.During the review, 300 fields covering approximately 90% of Shell's global oil reserves base were looked at. These included all the company's fields with oil reserves above 10 mn barrels, and also such fields in associated companies. Following the review, Shell announced that subject to further consultation with the SEC, it would reinstate a total of approximately 4.35 bn barrels of oil equivalent (boe) as per the end of 2002. This represented the earlier recategorized volumes in the previous year (as at end-2002). Additionally, the company proposed to reduce the amount which it had originally planned to book in 2003, including some negative revisions, by around 0.5 bn boe......

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While the downward revision of proven oil reserves by Shell had shaken investor confidence, the internal report released by the company to the press on April 19, 2004, worried them even more.The report stated that the top managers at Shell knew about the inflated reserves for years and had been arguing about whether and how to lie about it to investors....

From the time the first oil reserves recategorization was announced in January 2004, shareholders had called for Watts' resignation as the chairman of Shell. But Watts continued in his office and on February 05, 2004, while announcing the group's annual results said that he would not resign.However, on March 03, 2004, Watts stepped down as chairman of Shell with immediate effect. This sudden departure came as a surprise to all the stakeholders of Shell. Following Watts' departure, there were a series of management changes at Shell.....

Analysts felt that Shell's controversy had brought into focus the lack of standardization in the definitions of various categories of oil reserves.Though many petroleum analysts believed that the best measure of a company's reserve holdings was the combination of proved and probable reserves, the SEC allowed the industry to record only proved reserves in the books. Moreover, SEC rules did not allowed firms to book reserves using modern technologies like advanced computer-based imaging techniques for measuring new reservoirs....

Exhibit I A: The Royal Dutch Petroleum Company (May 2003 - April 2004)
Exhibit I B: The Shell Transport and Trading Company (May 2003 - April 2004)
Exhibit II: Oil and Gas Reserve Replacement Percentage Rates
Exhibit III: Royal Dutch/Shell - Statements of Income
Exhibit IV: SEC Definitions for Proved Oil Reserves
Exhibit V: Improved Controls that are Implemented/In Progress