S&P Lowers Shell's Long Term Ratings

Standard & Poor's Ratings Services said that it has lowered to 'AA+' from 'AAA' its long-term ratings on the Royal Dutch/Shell Group of Companies (Amsterdam: RD.AS; London: SHEL.L;) and its fully owned subsidiaries Shell Oil Co., Shell Petroleum N.V., and Shell Petroleum Co., Ltd. These ratings remain on CreditWatch with negative implications, where they were placed on Jan. 9, 2004.

At the same time, the 'A-1+' short-term ratings on the above entities were affirmed.

"The rating actions follow Shell's announcement today of a further negative recategorization of proved hydrocarbons reserves and its release of the audit report on the company's past booking process, which highlights areas of durably weak corporate governance with significant digressions from SEC rules," said Standard & Poor's credit analyst Emmanuel Dubois-Pelerin. The ratings were originally placed on CreditWatch following a previous recategorization (see "Shell LT Ratings on Watch Neg Upon Hydrocarbon Reserve Announcement, ST Ratings Afrmd 'A-1+'", published on Jan. 9, 2004, on RatingsDirect, Standard & Poor's Web-based credit analysis system).

As a result of the broad external review of 90% of the group's proved reserves and the boards' approval of the group audit committee's review of events leading to the recategorizations, a further approximate 0.3 billion and 0.2 billion barrels of oil equivalent (boe) of proved reserves at year-end 2002 and 2003 will be recategorized as nonproven.

Although Shell's reserves and reserve life indicators were only modestly affected on a proved-developed basis by recent announcements and the recategorization announced today is relatively modest, it is nevertheless the third announced since Jan. 9, 2004. "A successful upstream division, notably in exploration, is key to an integrated oil and gas company's creditworthiness," said Mr. Dubois-Pelerin. As a result, despite Shell's downstream strengths and its very conservative financial profile and policies, Standard & Poor's considers that the following features are not consistent with maintaining its 'AAA' rating on Shell: --A short reserve life of 10.2 years at year-end 2003, some two to three years below peers'; --A very weak, 50%-60% ratio of production replacement by proved reserves from 1999 to 2003, overall stagnant production through 2003-2006, and the abandonment of future production targets, which have reduced the visibility on the group's upstream division; and --Although the financial impact on historical figures is modest, and there is no cash impact, the quality of Shell's upstream exploration spending is confirmed to have been well below Standard & Poor's expectations at the previous rating level.

Standard & Poor's will resolve the CreditWatch placement only when definitive results from Shell's review of its proved reserves and full accounts for 2003 are obtained, and will focus on: --Shell's past and current procedures for proved-reserve booking; --Past digressions from adequate corporate-governance procedures and remedial actions undertaken by the new management; and --Any wider ranging aspect of the group's governance and structure that may influence creditworthiness, notably through internal reporting, controls, and decision-making procedures.