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Daily Telegraph: Shell drops 'bombshell' on reserves

By Dominic White (Filed: 10/01/2004) 

Major shareholders of Royal Dutch/Shell are to press non-executives for the resignation of top executive Sir Philip Watts after the oil giant stunned the City yesterday with a 20pc cut to its estimate of proven oil and gas reserves. 

Sir Philip, who is chairman of the committee of Shell's managing directors, was in charge of the group's core Upstream division from 1997, when some of the reserves now being questioned were booked as proven. Investors expressed anger that he was absent from a conference call after yesterday's shock announcement which caused Shell shares to tumble 30 to 371.25p and sent oil company stocks sliding worldwide. 

"Watts has not had a lot of support in the City and he's not seen as very charismatic," said one leading shareholder. "His credibility has been tarnished as a result of this." 

Mr Watts, who was paid 1.8m in 2002, is to retire in June 2005 when he reaches the Anglo-Dutch company's retirement age of 60. "There will be pressure for him to go before then," said one large fund manager. "We will make our feelings known to the non-executives soon." 

Shell recategorised 3.9billion barrels of previously "proven" oil and gas reserves - enough to supply the world for 50 days - as either "unproven" or having "scope for recovery". The decision came after a review of its portfolio in 2003 found that many of its interests did not pass tight US Securities and Exchange Commission rules. The SEC says for a reserve to be "proved" it has to have "reasonable certainty" of being technically and commercially produced. 

Most top western oil companies are struggling to find new viable fields on a scale to replace maturing assets. However, in recent years Shell has trailed rivals in replacing reserves from its own finds and in buying reservoirs through acquisitions. 

Yesterday, rival BP said it had no intention of making a similar "reclassification". However, Shell's news and BP's own downbeat trading statement yesterday saw the shares fall 8.5 to 434.25p. 

"I haven't seen this kind of announcement from an oil major, ever," said Bruce Evers, analyst at Investec Securities. "It's come as an absolute bombshell because Shell has always been seen as so safe. It's been the Rolls Royce of the industry." 

When oil majors recategorise reserves as unproved, it means they are no longer as certain of being able to produce oil commercially from yet untapped resources. 

Shell said the restatement would not have a material impact on cash, on production in the near term or on the volumes expected. Speaking in a conference call with analysts and reporters, Simon Henry, chief of Shell's investor relations, said: "The resources are in place." He said the managers making the previous classification had acted in good faith and exercised their best judgment. 

During the call, David Cumming, head of UK equities at Standard Life, said he was "surprised" Sir Philip was not available.

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