Independent report lifts lid on Shell's fatal thirst for reserves

An external investigation into Shell's overstatement of its oil and gas reserves revealed in detail yesterday the roles played by the main protagonists in the scandal; Sir Philip Watts, who resigned as chairman last month, and Walter van de Vijver, the company's former chief executive of exploration and production.

The findings of the investigation, undertaken by Davis Polk & Wardwell, an American law firm, at the request of Shell, make grim reading for both men but will have proved particularly uncomfortable for Sir Philip, one of Britain's most respected businessmen. It reveals a company torn apart by a power struggle between Sir Philip and Mr van de Vijver, Shell's two most influential executives. While the two vied for influence over the once-proud Anglo-Dutch oil giant, a culture of fear was allowed to develop in which ordinary workers lived in fear of their jobs.

All the time, says the report, Shell allowed a situation to arise whereby its oil and gas reserves were overstated, misleading stock markets around the world, and the company's legions of international shareholders. While its conclusions stop short of apportioning blame ­ that will be the job of the various regulatory and financial inquiries going on in Europe and the United States ­ it pulled no punches in revealing what Shell's top executives knew about the impending scandal, and when they knew it.

It reveals warnings given by Mr van de Vijver about the crisis as far back as February 2002 and the ensuing attempts to gloss over the problem in public ­ an effort in which Sir Philip and Mr van de Vijver were heavily involved. Finally, it also reveals a company lacking crucial internal controls, run by two separate boards of directors, where the chain of command had broken down.

In mid-2001, Mr van de Vijver succeeded Sir Philip as Shell's chief executive of exploration and production, after Sir Philip's promotion to chairman. There was a perception within Shell and the stock market that Sir Philip's success was down, at least in part, to his ability to meet or exceed reserve expectations. But Mr van de Vijver believed the reserves booked under Sir Philip's time in the job were "aggressive" or "premature". They were non-compliant with Shell's own guidelines and, implicitly, guidelines for measuring oil reserves laid down by the Securities and Exchange Commission (SEC) in the US.

This antagonism lies in the struggle between Sir Philip and Mr van de Vijver that is revealed in a series of e-mails and memos dating from February 2002. By November last year, Mr van de Vijver had become so angry that in an e-mail to Sir Philip he said: "I am sick and tired about lying about the extent of our reserves issues and the downward revisions that need to be done because of far too aggressive/optimistic bookings."

Yesterday's report adds: "Sir Philip did not disclose receipt or content of this e-mail to anyone until well after Project Rockford [Shell's internal review of its reserves] had started, either in late December 2003 or early January 2004."

Even before last November, Mr van de Vijver had been issuing warnings. In February 2002, he told Shell's management committee the company may have overstated reserves by 2.3 billion barrels because it was ignoring SEC guidelines. Sir Philip asked for a further presentation, delivered in July 2002, but before he had even received it he was directing Mr van de Vijver by e-mail, in Maythat year, to "leave no stone unturned" in making sure Shell's reserves were as high as possible.

By July 2002, Shell was playing for time, although it recognised something would have to be done. In September, Mr van de Vijver fired off another memo to Shell's management committee, including Judith Boynton, the finance director, who became the latest victim when she was forced to step down yesterday.He said: "Given the external visibility of our issues ... the market can only be 'fooled' if 1) credibility of the company is high, 2) medium- and long-term portfolio refreshment is real and/or 3) positive trends can be shown on key indicators."

Finally Shell was forced into action and in late 2003 it began an internal review which resulted in it finally admitting on 9 January this year that it had overstated its reserves. But for Mr van de Vijver and Sir Philip this was only the start of their troubles. On 2 December 2003, Mr van de Vijver was told in a memo from his finance staff that Shell must disclose its need to reduce its reserves or be in breach of SEC rules. Mr van de Vijver responded: "This is absolute dynamite ... and needs to be destroyed."

The question remains why there was not another whistle- blower. The answer is that those in middle-management who knew, feared they would lose their jobs if they spoke out.

Shell's group reserves auditor, amazingly a part-time post at the company, was quoted in yesterday's report anonymously. He said: "I should have been more forceful in this respect. It would have been a clear break with all my predecessors and it would have probably cost me my job in those days."