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US: U.S., Britain Fine Shell $150 Million for Lying on Oil Reserves

by Justin BlumWashington Post
August 25th, 2004

U.S. regulators said yesterday that they had concluded their investigation of Royal Dutch/Shell Group in connection with the company's overstatement of its oil and gas reserves and now will target officials responsible for the problem.

The announcement came as regulators in the United States and Britain formally announced that they were fining the company a total of about $150 million for what Britain's Financial Services Authority described as "unprecedented misconduct." Shell also agreed to spend $5 million on an internal compliance program.

Last month, Shell announced it had reached preliminary agreements to pay the fines.

Both the U.S. Securities and Exchange Commission, which imposed a fine of $120 million, and the FSA, whose fine totals about $30 million, said their respective investigations were continuing.

"As our investigation continues, we intend to focus on, among other things, the people responsible for Shell's failures," Harold F. Degenhardt, the administrator of the SEC's Fort Worth office, said in a statement.

Degenhardt did not return phone calls and a spokesman could not say which individuals would be pursued by regulators.

The FSA issued a statement saying that although its probe of Shell is closed, "investigations into other aspects of this matter are ongoing."

The investigations concluded that officials of Shell, the world's third-largest publicly traded oil company, repeatedly ignored information indicating that the company was overstating reserves, a key asset.

"By mid-2000, Shell had information indicating that the proved reserves figures reported to the market for at least the previous three years may have been overstated," according to a notice issued yesterday by the FSA. "Nonetheless, no further steps were taken to assess the accuracy of its reported proved reserves."

Several former executives of Shell have stepped down since the overstatement was first disclosed in January, including its chairman, Philip Watts, and the chief executive of exploration and production, Walter van de Vijver.

The company previously announced it had cut its proven reserve estimates by 4.47 billion barrels, or 23 percent, from 1997 through 2002.

Shell, which is based in London and The Hague and is traded on exchanges around the world, agreed to settle the charges that it violated securities laws in the United States and Britain without admitting or denying the regulators' allegations.

Jeroen van der Veer, chairman of Shell's Committee of Managing Directors, said in a statement yesterday that the company had worked to improve its controls to prevent a recurrence of overstatements.

"The conclusion of the FSA's and SEC's investigations into Shell represents another significant step for Shell in putting the reserves issues behind us," he said.

Shell, however, remains under investigation by the U.S. attorney's office in Manhattan, which often handles securities law cases against large publicly traded companies.

In paperwork filed yesterday, the SEC said that Shell failed to maintain adequate controls. The SEC said the failure arose from inadequate training and supervision of the employees responsible for estimating and reporting proven reserves.

The company used a retired Shell petroleum engineer who worked part time and had no staff to audit reserves worldwide, the SEC said. The engineer, according to the SEC, received "scant, if any, training on such critical matters as how he should conduct his work and the rules and standards on which his opinions should be based."

The engineer also reported to the same people he audited and failed to act independently, the U.S investigation found. In some cases, according to the SEC, the auditor was more bullish on the reserves associated with certain projects than the local managers of those projects.




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