Shell Sued Over Oil, Gas Reserves Downgrade

Royal Dutch/Shell Group Monday faces further grief over this month's oil and gas reserves downgrade, after a U.S. law firm filed a class-action lawsuitin New Jersey against the company, its Chairman, Philip Watts, and other senior management. In a press release, New York firm Milberg Weiss Bershad Hynes & Lerach LLP said the lawsuit alleges the Anglo-Dutch major oil company damaged shareholders when it "deliberately violated accounting rules and guidelines related to oil and gas reserves." In the filing, the law firm claims "Shell's materially false and misleading Financial Statements resulted from a series of systematic senior management decisions which had the purpose and effect of concealing the truth regarding Shell's actual operating results." A spokesman for Shell in London would only say: "We are aware of the press release, but we are not aware of having been served with proceedings."

The complaint was filed on Friday and names Joseph Cohen, Harold Silverstein and all others "similarly situated" as plaintiffs, according to a copy of the filing posted on the law firm's Web site.

In the press release, the firm invited other shareholders - who bought stock between Dec. 3, 1999 and Jan. 9, 2004 - to join the lawsuit. The firm, which has 190 lawyers, claimed its previous litigation "has been responsible for more than $20 billion in aggregate recoveries."

The lawsuit presents a new, and potentially costly, challenge for Shell as it battles to restore investor confidence following its admission earlier this month that it overestimated its proved reserves position globally.

Stock-market reaction to the new development was relatively mild, with shares in U.K. component Shell Transport & Trading down 0.6% to 359.5 pence around 1122 GMT. Analysts said it was impossible to foresee the impact of what might turn into years of litigation, but said they doubted Shell's shares would fall much in the near term ahead of the company's full-year results and strategy presentation on Feb. 5.

"I think its unlikely to make a big impact on the stock price, but it adds to the negative sentiment," said Canaccord Capital analyst Charlie Sharp, who has a hold rating on Shell's shares.

More Pressure On Phil Watts
Shell's shares dropped 7.5% on Jan. 9 after it said it had overstated its proved oil and gas reserves by a fifth. At the time, Shell said the downgrade came after a comprehensive review of its reserves base, and insisted there was no wrongdoing on the part of its employees.

The U.S. Securities & Exchange Commission only recognizes proved reserves in filings oil companies submit to the commission each year. Proved reserves are those oil and gas resources which a company has a reasonable certainty of being able produce within a certain time frame.

Analysts said the guidelines for accounting for these proved reserves are vague, with no requirement for third party verification. Because of this, they said it may well be difficult to prove legal wrongdoing in this case.

"I don't think there's an awful lot of credence there (to the lawsuit)," said one analyst, who asked not to be named. "It is the company's decision whether they book something." At worst, the suit is "just more pressure on Phil Watts," he added.

Shareholders were angered not only by the downgrade itself, but by the fact Watts and Finance Director Judy Boynton didn't explain the situation themselves in a conference call with analysts and reporters.

News reports have flagged calls from shareholders for Watts's ouster and a shakeup of the company's complicated structure.

Last week, the company found itself embroiled in another reserves dispute involving the repayment of a reported $300 million in tax write-offs to the Nigerian government. The government said the two sides had agreed that Shell would repay the funds. Shell wouldn't confirm this.

Analysts said shareholders aren't likely to make any big moves before the Feb. 5 presentation, which is scheduled to include an extraordinary 75-minute briefing on the company's reserves status.

"The big issue will be what they (management) say at the results," said Oriel Securities analyst Richard Rose, who also has a hold rating on Shell's shares.

Rose added Watts and other managers might manage to recoup some of their damaged credibility if they make an honest, straightforward presentation on exactly what happened to cause the downgrade.