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Royal Dutch / Shell Oil Reserves Controversy

PGDM IB Ayan Bose Ajit Kukmar Rahul Ranka Sushant Shah

4/25/12

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Case Study

January 09, 2004 announcement by Royal Dutch/Shell groups management Downgrading 4 billion barrels of proven oil and gas reserves to probable category i.e. 1/5th of companys total proven oil reserves Share price fell by 7% post announcement
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Post Announcement

Shaken investor confidence, questions by analyst on procedure followed by company SEC investigation* Industry peer announcements on similar lines Analyst reactions

4/25/12 * Under SEC guidelines for booking of proven reserves, managerial discretion and reclassifications were allowed. Thus, no evidence of

Company Background

Royal Dutch Shell operations 145 countries, 118,000 employees One of the largest group in oil explorations, production, gas & power, oil products, chemicals Competes with giants like BP, ExxonMobil, Chevron Texaco
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Revelation

Extensive review of global oil reserves portfolio with assistance from external consultants Recategorization announcement based on application of technical data Criteria for reasonable certainty remained subjective assessment of seismic data, well data, reservoir modeling & other technical data Recategorization increased worldwide avg. reserve 4/25/12 replacement cost from $5.49 to $12.57. Increased

Revelation

Proven oil serves were only 14.5 billion barrels much less than competitors 50% reserve reduction from Gorgon JV, Australia which did not met SEC std of proved reserves; notably, JV partners ExxonMobil & Chevron had not included GJV as part of their proven reserves 33% reserve reduction in Nigeria to boast Nigerian govt. funding in JV projects company inflated oil reserves. Government overlooked it to 4/25/12 gain larger OPEC quota

Controversy

Internal report, Top managers at Shell knew about inflated reserves for years & they had been arguing whether & how to lie to investors The then CEO (Vijver) & Executive Chairman (Watts) Premature, aggressive bookings were done during Watts tenure Use of authority to take decision, position & loophole in law to advantage
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Controversy

On December 2003, memorandum from staff proved reserves where non-compliant Non-disclosure means violation of US SEC law & listing requirement liability within & outside US Disclosure could not wait next filing in April 2004 which resulted in launch of internal review
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Aftermath

Watts, Vijver & the then CFO had to step down, Entire Board and Top management changed Companys long term debt ratings were downgraded by S&P, Fitch, Moody Regulatory formal investigations - SEC inquiry in US, Financial Services 4/25/12 Authority in UK

Lessons

Lack of standardization in defining oil reserves SEC rules outdated and causing firms to use them to their advantage Linking performance evaluation & bonuses of employees with level of 4/25/12 reserves booked

Improvements by Company

Reserves review process, audit strengthening, clear guidance on technical, commercial issues Significant increase in staff both audit and experts Reserves bookings removed from performance
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Thank You

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