SEC Launches Formal Inquiry of Shell's Reserve Reporting

Shell Loses Reserves in Niger Delta Regi
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Shell said Thursday that the Securities and Exchange Commission's inquiry into the company's overbooking of energy reserves will proceed as a formal non-public investigation.

Shell said earlier this month it was cooperating with an informal inquiry by the SEC, following the company's announcement of an unprecedented 20% cut in its energy-reserve tally in early January.

Shell's chairman, Sir Philip Watts, apologized earlier this month for mishandling the reserves announcement. He said he erred in failing to personally conduct a conference call Jan. 9 disclosing that Shell would slash its reserve tally by 20%. Criticism of Sir Philip has been especially intense because he led Shell's exploration-and-production business for much of the period during which the overbooking occurred. But he rebuffed calls for his resignation and said he continued to have the full support of Shell directors. Shell, as the combined group is commonly called, operates under an agreement in which Royal Dutch and Shell jointly own and run their oil businesses around the globe. The arrangement, criticized in the past as cumbersome and anachronistic, became a fresh target.

Shell said the individuals responsible for the bookings acted in good faith. Company officials said in January that a changing business climate in Australia and slower-than-expected infrastructure development in Nigeria led to big downgrades of its energy reserves in those countries. Executives added that larger-than-expected production declines in Oman and the start-and-stop pace of developing a project in Kazakhstan during recent years led to revisions.

But Walter van de Vijver, head of exploration and production, said Shell replaced about 98% of reserves depleted by production last year -- a higher number than many analysts had expected. If adjusted for acquisitions and divestitures, the replacement rate would have been 117%, Shell said.

Shell said output of oil and natural gas fell modestly in 2003 and will likely be flat this year. Production is expected to fall in 2005 before growing again the following year, Shell said.

The company highlighted strategic moves that it said should boost earnings and cash flow long-term. Last year, Shell moved forward as lead investor in a massive oil-and-gas development project on the Russian island of Sakhalin. The company is also moving ahead with development projects in Siberia, and a natural-gas project in partnership with Qatar.

The oil company reported disappointing fourth-quarter earnings earlier this month. Shell said net income for the fourth quarter fell 19% to $1.88 billion from $2.31 billion in the year-earlier period, largely because of restructuring charges. The results included charges of $984 million, including one for the closure of a California refinery. The charges were slightly less than the $1.02 billion in charges the Anglo-Dutch oil company had warned investors late last year to expect for the quarter.

Fourth-quarter earnings equated to 55 cents a share for holders of Royal Dutch Petroleum Co., which is based in The Hague, compared with 67 cents a share for the year-earlier period. Investors in Shell Transport & Trading Co., based in London, earned 47 cents a share, compared with 57 cents a year earlier. The group splits income 60-40, respectively, between shareholders of the two holding companies.

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