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Royal Dutch Shell - A shell game with oil reserves


ROCK CENTER FOR CORPORATE GOVERNANCE
CASE: CG-17A DATE: 08/14/09

ROYAL DUTCH/SHELL: A SHELL GAME WITH OIL RESERVES (A)
I am becoming sick and tired about lying about the extent of our reserves issues and the 1 downward revisions that need to be done because of far too aggressive/optimistic bookings. —E-mail from Walter Van de Vijver, Chief Executive of Exploration and Production, to Sir Philip Watts, Chairman of the Committee of Managing Directors, November 9, 2003.

INTRODUCTION In January 2004, the Royal Dutch/Shell Group of Companies announced that it would reduce its estimate of proved oil reserves by nearly 4 billion barrels, or 20 percent. It was an embarrassing moment for a company which had long prided itself on a reputation for expert management, disciplined strategic planning, and a culture of conservatism. The announcement set off a chain reaction of events, including a drop in the company’s share price, internal and external investigations, and the resignation of several senior officers. By the time the restatement was completed six months later, the company had reduced its reserve estimates three additional times. The embarrassment, however, did not stop there. During this period, revealing details came to light about the sometimes bitter disputes among company officials over its reserve practices, including accusations of lying, cheating, and the intentional inflation of reserve figures to meet internal and external targets. Investors and public officials were outraged. The media lambasted the company for its “arrogant and inward-looking ways” and mocked it for violating its own corporate slogan, “You can be sure of Shell.”2 Lawsuits were filed. Investors called for dramatic reform, not only to the company’s leadership team, but to the entire corporate and
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Report of Davis Polk & Wardwell to the Shell Group Audit Committee, Executive Summary, March 31, 2004. “Humiliation—Royal Dutch/Shell,” The Economist, April 24, 2004. Professor David F. Larcker, Robert Lawson, and Brian Tayan prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The Rock Center for Corporate Governance is a joint initiative between the Stanford Graduate School of Business and the Stanford Law School. Copyright ? 2009 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: cwo@gsb.stanford.edu or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate School of Business.

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managerial structure that had governed the company since its founding almost 100 years before. Company officials had to decide what changes to make to restore public confidence in the organization and to work toward the rehabilitation of its broken reputation. CORPORATE STRUCTURE The Royal Dutch/Shell Group of Companies was formed through an alliance of Royal Dutch Petroleum Company and Shell Transport and Trading Company in 1907. At the time, the two companies agreed to combine their operating interests in order to better compete with John D. Rockefeller’s Standard Oil. The alliance did not, however, constitute an outright merger of the two companies. Because stakeholders wanted both companies to retain their national identities, the alliance was structured so that Royal Dutch and Shell Transport would continue to exist as legally separate corporate entities. Royal Dutch was to remain a Dutch company, with its headquarters in The Hague, while Shell Transport was to remain a British company with its headquarters in London. Each company was subject to the regulatory and tax requirements of the country in which it was domiciled. The operations, however, were consolidated into the Royal Dutch/Shell Group of Companies. Shareholders of Royal Dutch owned a 60 percent interest in the group’s operations, and shareholders of Shell Transport owned the remaining 40 percent. Shares of Royal Dutch traded in Amsterdam and New York, while shares of Shell Transport traded in London and New York. As such, the group was required to comply with stock exchange rules in the Netherlands, the United Kingdom, and the United States.3 Royal Dutch and Shell Transport maintained separate boards of directors that were responsible for the appointment of management, the review and approval of financial statements, and the payment of dividends to shareholders.4 Company directors were elected by the shareholders of each company at the annual meeting. Shell Transport had only one class of common shares. Royal Dutch had a dual-class system that included the existence of 1,500 priority shares. Each priority share was equivalent in value to 800 common shares. Holders of the priority shares were granted the right to determine the number of members of the supervisory board, draw up a binding nomination for filling vacancies on the supervisory board, and block changes to the articles of association or the dissolution of Royal Dutch. Each member of the supervisory board held six priority shares. The remaining priority shares were held by a foundation that was
Shares also traded to a lesser extent in Austria, Belgium, France, Germany, Luxembourg, and Switzerland. In the United States, Royal Dutch Petroleum traded on the New York Stock Exchange under the ticker symbol RD. Shell Transport traded on the New York Stock Exchange in the form of American Depository Receipts (ADRs) with the ticker symbol SC. An ADR is a certificate issued by a U.S. bank that gives the holder of the certificate the right to the economic and voting interest of a fixed number of shares in a foreign stock. The physical shares that underlie the ADRs are held by the bank in a foreign branch. ADRs are denominated in U.S. dollars. Companies whose securities trade in the form of ADRs are required to abide by the regulations of the Securities and Exchange Commission, just as they would if the physical shares traded in the U.S. Each Shell Transport ADR gave the holder the right to six shares of Shell Transport common stock. 4 Consistent with Dutch law, Royal Dutch employed a two-tiered board system, which included a board of management and a supervisory board. The supervisory board carried out the fiduciary responsibilities of a board of directors. The board of management represented the management interest of Royal Dutch in the group companies. For practical purposes, however, the board of management did not have the ability to make unilateral operating decisions without coordinating with Shell Transport management.
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controlled by the board. As a result, the existence of priority shares gave considerable power to the members of the supervisory board of Royal Dutch (see Exhibit 1 for the organizational structure of the group). The oversight of Royal Dutch/Shell required the coordinated effort of members of both organizations. Directors from both sides met jointly during the year to oversee and approve group matters. These meetings were known as the conference. Members of the conference had the responsibility to approve strategies and business plans, review major developments, approve compensation, review audited financial statements, and oversee the management and internal controls of the group. In 2003, the conference had 21 members, of whom 10 were from Royal Dutch and 11 from Shell Transport. In total, the conference comprised 16 non-executive directors and 5 executive officers (see Exhibit 2 for biographical information on the members of the conference). Three joint committees assisted members of the conference in the execution of their fiduciary duties: the group audit committee, the remuneration and succession review committee, and the social responsibility committee. These committees were analogous to subcommittees of a board of directors, in that they had expertise in a specialized function and made recommendations on these matters to the full board. Each committee consisted of six members, three of whom were selected from the supervisory board of Royal Dutch and three from the board of directors of Shell Transport. Only nonexecutive directors served on these committees, to preserve their independence from management. The group audit committee (GAC) was responsible for reviewing the financial reports of the group companies, overseeing the work of both internal and external auditors, and advising on the integrity of the company’s financial controls. In 2003, the GAC was chaired by Aad Jacobs, chairman of the Royal Dutch supervisory board. The GAC met six times during the course of the year. The remuneration and succession review committee was responsible for establishing pay levels and structuring the compensation of the company’s executives. It was also responsible for managing issues relating to succession. In 2003, the committee was chaired by Jonkheer Aarnout Loudon of the Royal Dutch supervisory board. The social responsibility committee reviewed the policies and conduct of the company in the areas of politics, the environment, and work safety, along with other issues relating to corporate social responsibility. In 2003, the committee was chaired by Lord Oxburgh of the Shell Transport board of directors (see Exhibit 3). Executives from Royal Dutch and Shell Transport met together in what was known as the committee of managing directors (CMD). This represented the top senior executives running Royal Dutch/Shell and was jointly responsible for making strategic and operating decisions for the company. Members of the CMD were appointed by the boards of the two parent companies. They attended the conference as executive officers. In 2003, they included three members of Royal Dutch and two members of Shell Transport. The CMD was chaired by Sir Philip Watts, executive chairman of the board of directors of Shell Transport. Other members of the CMD included Jeroen van der Veer, vice chairman and chief executive of chemicals; Walter van de Vijver, chief executive of exploration and production; Malcolm Brinded, chief executive of gas & power; and Rob Routs, chief executive of oil products. The CMD met 17 times in 2003.

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This unusual organizational structure, called a British-Dutch company, was not entirely unique in the corporate world. It had been similarly employed by food and consumer products company Unilever, which had been incorporated in both the Netherlands and the United Kingdom since the merger between Margarine Unie and Lever Brothers in 1930. Operating Structure The Royal Dutch/Shell Group of Companies thrived as a unified operation. By the 1950s, it had become one of the most successful multinational corporations in the world, built on the back of a rapid increase in demand for oil. In 1959, the company underwent a complete restructuring to cope with the scale and complexity of its operations and prepare for further growth. The restructuring was designed by consulting firm McKinsey & Company, which conceived of a matrix organizational structure. The matrix structure gave operating authority to local managers based on geographical region, while the responsibility for strategic planning and the allocation of capital for exploration and production was held by the central offices in London. The implementation of an elaborate system of reporting allowed critical information to be shared between local and central offices. Royal Dutch/Shell was well served by the matrix structure. By the 1970s, the company had become one of the most highly regarded corporations in the world. Its central offices were world-renowned for careful and insightful planning. For example, the company foresaw the oil shock in the 1970s and positioned itself appropriately to take advantage of higher prices. Pierre Wack, a leading economist in the company’s central office, explained how the company used scenario planning to examine a range of potential outcomes based on data collected through its global operations: “The point is not so much to have one scenario that ‘gets it right’ as to have a set of scenarios that illuminates the major forces driving the system, their interrelationships, and the critical uncertainties.”5 Peter Schwartz and Arie de Geus, longtime members of the Shell planning department, were prolific and widely influential writers on the topics of planning, leadership, and management. Scenario planning also served the company well when oil prices collapsed in 1986. The company prepared for a drop in oil by boosting its refining operations, which benefited from the lower prices. According to Lodewijk van Wachem, chairman of the CMD from 1985 to 1992, “I’m not saying we enjoyed [low prices], but there was no panic.”6 During this time, the company worked to become a leader in the application of three-dimensional seismic technology to locate underground reserves. This technology allowed Royal/Dutch Shell to improve the odds of successfully replacing depleted reserves. It also lowered the cost of production and improved return on capital. Company officials believed that credit for its success was attributable not only to its planning and technological expertise but also to the process by which decisions were made. In particular, van Wachem believed that the company benefited from a conservative culture and a requirement that leadership talent be developed internally. All CMD members were promoted from within and each was required to have on-the-ground experience running local operations. Van Wachem
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Pierre Wack, “Scenarios: Shooting the Rapids,” Harvard Business Review, Nov/Dec 1985, Vol. 63 Issue 6. Richard I. Kirkland, Jr., “L.C. van Wachem: The Royal Dutch-Shell Group,” Fortune, August 3, 1987.

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himself had served in Latin America, Africa, Asia, and Europe before joining the CMD: “We have been able to steer our own course. This is certainly a function of the people, but the organizational structure helps…. We grow our own timber.”7 Furthermore, all major decisions in planning and internal promotion were made on a consensus basis among members of the CMD. As a result, decisions were less dependent on the judgment of one individual and instead based on the shared judgment of seasoned executives with a proven set of experiences. According to one analyst: “More than most big companies, Royal Dutch/Shell is very much run by committee. Whoever is at the top, they just carry on being good at what they do.”8 Because decision making was institutionalized, it could more easily be passed on to future leaders as chairmanship of the CMD changed. The formula was a winning one for Royal Dutch/Shell. By 1990, the group’s revenues ($107 billion) exceeded those of industry leader Exxon for the first time, making it the largest oil company in the world. It ranked second among all companies by revenues (after General Motors) and first by net income with $6.4 billion. Changes to the Operating Structure In the 1990s and early 2000s, Royal Dutch/Shell faced new pressures that posed a challenge to its business model. The low oil prices of the late 1980s persisted well into the next decade, despite an environment of global economic growth. This made it increasingly difficult for oil producers to replace reserves in a cost-effective manner. Many producers—including Royal Dutch/Shell—responded by cutting back on exploration as the risk-reward payoff became too unfavorable. The problem was particularly hard on Royal Dutch/Shell, however, given its strict investment standards. The company’s reserve replacement ratio, which had consistently tracked above 100 percent, began trending down toward 100 percent. A reserve replacement ratio of less than 100 percent was troubling because it indicated that a company was having difficulty replacing the oil that it produced each year with new reserves. By comparison, the reserve replacement ratio at main competitors remained around 110 percent to 140 percent.9 The industry saw a wave of merger activity as the major oil producers consolidated in an attempt to offset the impact of lower investment. In 1999, Exxon purchased Mobil for $82 billion in what was the largest acquisition to date. Other major acquisitions included the purchase of both Amoco and Arco by British Petroleum (BP), Texaco by Chevron, Phillips Petroleum by Conoco, and both Elf and Fina by Total. Royal Dutch/Shell did not participate in this trend, deciding instead to grow organically and through niche acquisitions. The oil industry also faced elevated public scrutiny for its business practices during this time. This included claims of environmental destruction, human rights violation, and collusion with corrupt governments for access to local oil reserves. Two incidents in particular brought Royal Dutch/Shell into the public spotlight. One was the decision in 1995 to decommission its Brent
Christopher Knowlton, “Shell Gets Rich by Beating Risk,” Fortune, August 26, 1991. “L.C. van Wachem: The Royal Dutch-Shell Group,” Fortune, loc. cit. 9 Source: Company annual reports. The reserve replacement ratio measured the ratio of new proved reserves found by the company relative to the reserves extracted by the company for production. Analysts considered this a key indicator of future profitability in that it demonstrated that a company was not depleting its access to producible oil.
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Spar oil storage facility in the North Sea by sinking it in deep waters. The proposal drew fierce opposition from environmental activists and considerable press coverage. The company eventually capitulated, and transported the Brent Spar to Norway where it was decommissioned on shore. The other was the execution of Ken Saro-Wiwa by the Nigerian government that same year. Saro-Wiwa had been a vocal critic of Royal Dutch/Shell, which he accused of environmental destruction and the displacement of local tribes. Although the company was not involved in his execution, the incident damaged its reputation through an association with human rights violations. Royal Dutch/Shell responded to these pressures by making several changes. First, the organizational structure was flattened, and several regional and functional roles were eliminated. The restructuring was carried out under Cornelius Herkstroter, chairman of the CMD from 1993 to 1997. Herkstroter believed that the company had grown too complex and that excessive decentralization had led to bureaucracy and territorialism among regional leaders. In order to increase operating efficiency and create a fast, flexible organization that could make quicker decisions, group activities were organized by business activity rather than by geography. The matrix structure was replaced with five centralized operating units: exploration and production, oil products, gas and coal, chemicals, and corporate functions. The change meant decreased autonomy for regional leaders who previously had extensive control over all activities in their territories, from exploration to retail gasoline sales. Second, the company initiated a thorough reevaluation of its internal processes. According to CMD member Maarten van den Bergh, speaking at that time, “I don’t think any idea or thought right now is untouchable.”10 The top 100 senior executives of the group were required to take personality tests. Risk aversion was discouraged. To permeate the organization with new ideas, the company’s internal talent development process was revamped. Rather than maintain a rigid system of job rotation leading to increased seniority and responsibility, the company migrated toward a more free-flowing internal labor market, where talented employees were encouraged to apply directly to positions that interested them. Corporate controls were also relaxed, as employees were asked to define new ways of operating. The move was expected not only to boost operating efficiency but also to prevent mishaps like Brent Spar, which were attributed in part to a purely economic approach to problem solving that did not adequately consider stakeholder perspectives. One senior executive described the challenge: “Transformation is messy. We don’t have this wonderful plan. The company has put growth and profitability numbers on the table. If we don’t change our leadership style, our behaviors and mindsets, we aren’t going to be able to get the results.”11 Finally, a renewed emphasis was placed on growth. Herkstroter challenged the senior executive team to find new investment opportunities: “The growing ‘cash mountain’ [on our balance sheet] is an indictment of our collective failure to bring forward sufficient investment or acquisition opportunities.”12 Herkstroter’s successor, Mark Moody-Stuart, who chaired the CMD from 1998 to 2001, reiterated this message: “If you don’t deliver on the sort of things we’ve been promising
Janet Guyon, “Why Is the World’s Most Profitable Company Turning Itself Inside Out?” Fortune, August 4, 1997. 11 Ibid., loc. cit. 12 Ibid., loc. cit.
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the markets, you’re dead.”13 He warned that the company was facing “one of the toughest challenges of its entire history.” “What is inescapable,” he said, “is that we have allowed the competition to overtake us.”14 The Leadership of Royal Dutch/Shell (2001–2004) In 2001, Philip Watts was named chairman of the CMD. Watts was also executive chairman of the board of directors of Shell Transport. Watts had joined Royal Dutch/Shell in 1969 as a seismologist, geophysicist and exploration manager. During his tenure with the company, he took assignments in Southeast Asia, Africa, Europe, and the Middle East. He was managing director of Shell Nigeria in the 1990s when Saro-Wiwa was executed by the Nigerian government. Watts led the crisis group that Royal Dutch/Shell created to rebuild its reputation in that country in the aftermath of the incident and his leadership was viewed positively. In 1997, he became chief executive of the exploration and production, the largest of Royal Dutch/Shell’s five global business units. The appointment of Watts as chairman of the CMD was generally welcomed by investors who believed he would be effective in delivering the results that Royal Dutch/Shell had long been promising. For example, the Financial Times wrote that: The announcement that Phil Watts will replace Mark Moody-Stuart as chairman of the Anglo-Dutch energy group confirms its shift to a more investor-orientated approach. Mr. Watts’ proven operational record in the upstream business, costcutting bent and focus on capital discipline are more significant than his nationality. Shell’s consensus-driven system notwithstanding, he will shake things up.15 Some investors however were put off by Watts’ style which they described as “aloof and uncommunicative.”16 Another large shareholder found that Watts “seems to show a complete disdain for communication with the City [London].”17 Another shareholder commented: “I would like to be generous to him as he is relatively new in his job, but our meetings with him have been poor and unsatisfactory.”18 The criticism leveled against Watts stemmed in part from the manner in which he communicated with investors about a reduction in the company’s publicly stated production targets. In one of his first moves after assuming the chairmanship, Watts announced that he was placing the company’s long-term target of oil and gas production under review. At the time it was 5 percent per year. He did not, however, provide an explanation for the move and it was not for several months that the new target of 3 percent was set. At the same time, he reduced the company’s expected return on investment from 15 percent to 13-14 percent. Investors bristled not only
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Robert Corzine, “Man Bent on Effecting a Sea Change at Shell,” The Financial Times, August 8, 1998. Michael Harrison, “Shell Profits Plunge in Worst Results on Record,” The Independent. February 12, 1999. 15 The Lex column, The Financial Times, December 19, 2000. 16 Cummins, “Shell’s Watts Draws Fire,” The Wall Street Journal, January 15, 2004. 17 David Buchan and Tony Tassell, “Leading Investors Attack Shell Chief,” The Financial Times, August 22, 2002. 18 Ibid., loc. cit.

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about the delay in these new targets, but also for what they believed to be their insufficient justification. The press pointed out that Watts had been the head of exploration of production before becoming chairman, so should have been intimately familiar with the business’ prospects.19 Internally, Watts had a reputation for being a strong-willed individual who was demanding of executive performance. Although he reduced the company’s external targets, he continued to promote the original targets among colleagues.20 Walter van de Vijver replaced Watts as chief executive of exploration and production. Van de Vijver first joined the company in 1979 as a petroleum engineer. During his tenure, he worked in Qatar, Oman, the U.S., the U.K., and the Netherlands. He also served as chief executive of Shell international gas, Shell coal international, and Shell exploration and production in the U.S. before becoming a group managing director and chief executive of exploration and production. Joining Watts and van de Vijver on the CMD were Jeroen van der Veer, vice chairman and chief executive of chemicals; Malcolm Brinded, chief executive of gas & power; and Robert Routs, chief executive of oil products. The operating performance of Royal Dutch/Shell under Watts’ leadership team was mixed. The company was able to take advantage of higher oil and gas prices to boost revenues from $135 billion to $202 billion between 2001 and 2003. Profits, however, remained relatively flat at $11.5 billion. At the same time, the company’s market capitalization declined modestly from $126 billion to $105 billion.21 More importantly, the company’s reserve replacement ratio declined to 74 percent. By contrast, Royal Dutch/Shell’s largest competitors—Chevron, Exxon Mobil, and BP—were able to maintain reserve replacement ratios in excess of 100 percent. The decline signaled that the company was struggling to locate new sources of producible oil, a figure known as proved oil reserves. PROVED OIL RESERVES The accounting standards that Royal Dutch/Shell used for proved oil reserves were developed by the SEC, along with the Financial Accounting Standards Board (FASB), in 1978. Known as the “1978 System,” it was designed in response to the oil supply crisis of the early 1970s to help investors and regulators better understand the amount of oil and gas reserves that a corporation had ready access to for production purposes. Because securities of all of the major, publicly traded energy corporations were listed on the New York Stock Exchange, the 1978 System became the de facto worldwide system for estimating oil and gas reserves reportable to investors. In 1982, FASB released disclosure requirements for proved oil reserves. Importantly, these rules stipulated that proved reserves were not to be reported as a balance sheet item, but instead should be included as supplementary disclosure information. That is, a company was not required to
David Buchanan and Tony Tassell, “ ‘Perplexed’ of Shell Defends a ‘Bad Patch,’ ” The Financial Times, August 21, 2002. 20 Ian Bickerton et al., “Planning Strengths Weakened by Mistakes,” The Financial Times, June 18, 2004. 21 Based on the combined market values of Royal Dutch and Shell Transport, at year end.
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calculate the economic value of its reserves and report that amount as an asset on the balance sheet. Instead, a company was required to disclose these amounts as information that supplemented the financial statements and footnotes. Reserves were kept off the balance sheet because their calculation was not deemed reliable enough to justify the opinion of the external auditor. Still, investors relied on reserve data as an important indicator of future profitability. FASB prescribed a general approach for disclosing oil and gas reserves, which involved their estimation and classification. First, reserves were to be estimated, based on the size of the reservoir, its physical properties, and the amount of the reservoir assumed to be recoverable. Because reserves are underground and cannot be visibly identified, their size must be estimated based on complex geological, engineering, and statistical data. Second, not all oil stored in an underground reservoir can be recovered, even using the best technology. Differences in fluid, pressure, and rock characteristics limit the amount that can be physically extracted. Only the fraction that can be recovered can be counted toward reserves—an amount known as the recovery factor. Recovery factors are derived based on the company’s experience with similar fields, and can range from 10 percent to 80 percent. Because each step of the estimation process is subject to informed discretion, experts examining the same reservoir may come to vastly different conclusions about the quantity of recoverable reserves. The Society of Petroleum Evaluation Engineers recommended that engineers select the most conservative estimation.22 After reserves were estimated, they had to be classified. Companies generally used three classifications, based on the probability of recovery: proved reserves, probable reserves, and possible reserves. Proved reserves are the estimated quantities of oil and gas which geological and engineering data demonstrate with reasonable certainty to be recoverable under existing economic and operating conditions (primarily the price of oil). A probability cutoff of 90 percent likelihood of recoverability is typically assumed in order for reserves to be proved. Proved reserves are then sub-classified as either proved developed or proved undeveloped. Proved developed reserves are those that can be produced with existing wells or at low additional expense. Proved undeveloped reserves require additional investment in new wells before extraction is possible. Probable reserves have a better than 50 percent chance of being producible under current conditions. Possible reserves have a significant (but less than 50 percent) chance of being producible. In general, probable and possible reserves tended to convert to proved status over time, as operating experience and technological improvements increased the likelihood of extraction. While many petroleum engineers found the sum of proved and probable reserves to be the most reliable measure of a company’s reserves, the SEC allowed companies only to report its proved reserves. Furthermore, rather than allow a company to report a range of estimates of proved reserves, the SEC required that a single metric be calculated and reported. The spot price of oil was a critical input variable in the classification of reserves. In a high price environment, a larger quantity of reserves tended to be classified as proved. In a low price environment, companies found it less economical to engage in production, and certain hydrocarbon reserves were declassified to a lower status. Disclosure rules required that
Susan Warren and Peter A. McKay, “Shell Move Puts Spotlight on Murky Measurements,” The Wall Street Journal, January 14, 2004.
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companies calculate the reserve estimates using prevailing market prices on the last day of the fiscal year. As a result, proved reserves were a point-in-time measure that could change quickly, depending on the movement of oil and gas prices. While the 1978 System remained in force for 25 years, many industry experts believed that it had become outdated. For example, Cambridge Energy Research Associates (CERA), a research and consultancy firm in Boston, wrote that the 1978 System “was rooted in the technologies and market structures of the 1950s and 1960s.”23 It did not take into account the vast technological improvements in estimation, including 3D seismic technology, more accurate simulation and modeling, the use of probabilistic estimates, and materials and equipment that could access more difficult onshore and offshore locations. Instead, it required somewhat anachronistically that quantities be booked only after wells were physically flow tested. Furthermore, the SEC did not have an established process for discussing technological improvements with the industry. Some experts also recommended a shift toward stochastic (or probabilistic) modeling. Stochastic modeling involved reporting a range of estimates of proved reserves, rather than a single statistic. It also involved reporting the prices at which reserve quantities would become economically recoverable. Reserve Reporting at Royal Dutch/Shell Because Royal Dutch and Shell Transport securities traded on the New York Stock Exchange, the company was required to comply with SEC reporting standards, including the disclosure of proved oil and gas reserves. Within Royal Dutch/Shell, the procedures for estimating and classifying reserves began at the operating level under the supervision of petroleum engineers. Technical staff was responsible for monitoring the performance of wells. Any noticeable change in performance was reported to the central office. If the change was greater than 5 percent, further analysis was undertaken by staff in the central office. Reserves were classified as proved only after technical staff could demonstrate that they could be recovered through existing wells under current economic and operating conditions. In order for reserves to be booked as proved, a final investment decision (FID) by Royal Dutch/Shell senior management was required. A FID represented the formal process by which a commitment was put in place to extract reserves. For projects in which Royal Dutch/Shell was a joint-venture partner, a FID was typically made simultaneously among all partners. Proved oil reserves were reviewed by senior management of the exploration and production division. An annual reserve statement was also reviewed and approved by the group chief financial officer, the group audit committee (GAC), and the committee of managing directors (CMD). Given the subjective nature of estimating reserves, the disclosed numbers were treated as unaudited supplementary information, filed in the company’s Form 20-F with the SEC. The SEC did not require third-party certification of these figures, and the external auditors (KPMG and PricewaterhouseCoopers) did not sign off on reserves statements. (See Exhibit 4 for Royal Dutch/Shell 2002 proved reserves disclosure, and Exhibit 5 for disclosure of risk management and internal controls.)
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CERA Special Report, “In Search of Reasonable Certainty: Oil and Gas Reserves Disclosures,” April 2005.

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The proved reserve figures did have some impact on the audited financial statements, however. The cost of finding proved reserves was capitalized as an asset on the balance sheet and depreciated on a unit basis as reserves were depleted. Any recategorization of reserves from proved to probable status reduced the base over which these costs were depreciated. Therefore a reduction in proved reserves was accompanied by an increase in the per unit depreciation included in the income statement. Also, certain exploration costs associated with declassified reserves no longer qualified for capitalization and were immediately expensed. Unbeknownst to the public, Royal Dutch/Shell standards for reserve reporting had changed in recent years. In a 1998 memo, Watts—then head of exploration and production under Mark Moody-Stuart—instructed senior executives to bring the company’s reserve accounting “more in line with industry practice.”24 Watts was referring to what he and colleagues believed to be more aggressive practices by competitors. This, he considered, allowed them to report more favorable reserve replacement ratios than Royal Dutch/Shell. DOWNGRADE OF RESERVES The First Downgrade On January 9, 2004, without prior warning to the public, Royal Dutch/Shell issued a press release stating that the company would recategorize 3.9 billion barrels of proved reserves. The figure represented almost 20 percent of the company’s total proved reserves at the time and amounted to $67.5 billion of value at prevailing market prices.25 Two-thirds of the recategorization (2.7 billion barrels) related to crude oil and natural gas liquids, and one-third (1.2 billion of oil equivalent or 7.2 trillion standard cubic feet) to natural gas. In this reclassification, 90 percent of the changes were in proved undeveloped reserves and the remaining 10 percent in proved developed reserves. About half of the reclassified reserves were in Nigeria and Australia. The rest were in “Other Eastern Hemisphere” countries.26 In the release, the company noted that: There is no material effect on financial statements for any year up to and including 2003. The recategorisation of proved reserves does not materially change the estimated total volume of hydrocarbons in place, nor the volumes that are expected ultimately to be recovered. It is anticipated that most of these

Chip Cummins, “Changing Drill: How Shell’s Move to Revamp Culture Ended in Scandal,” The Wall Street Journal, November 2, 2004. 25 Chip Cummins and Susan Warren, “Shell Cuts Reserve Estimate 20 percent as SEC Scrutinizes Oil Industry,” The Wall Street Journal, January 12, 2004. 26 Australian reserves represented Royal Dutch/Shell’s interest in the Gorgon project, a joint venture between Royal Dutch/Shell, ExxonMobil, and Chevron Texaco. Only Shell had booked its portion of these reserves as proved. Shell had viewed the reserves as being commercially viable because of letters of intent from potential Asian customers; however, these customers disappeared when the Asian crisis hit and so final gas sale agreements were not put in place. Internal procedures mandated that an agreement be in place before a final investment decision (FID) could be made. A FID was a prerequisite to upgrading reserves from probable status to proved undeveloped status.

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reserves will be re-booked in the proved category over time as field developments mature.27 The company referred investors to a conference call that same day, conducted by Mary Jo Jacobi and Simon Henry of investor relations, and John Darley, technical director of exploration and production. During the call, Henry explained that the reclassification was triggered by “several in-depth studies of reserves data” that were carried out in 2003. “These studies raised certain issues that led to a broader review of the [portfolio] of reserves and ultimately it is this follow-up work that had led to today’s announcement.” He emphasized that “the hydrocarbons are still there in the ground. It is just a case of what classification they will fall into.”28 In assessing accountability for the problem, Henry stated, “We believe that at the time the original bookings were made, all individuals were correctly interpreting ‘reasonable certainty’ as it was interpreted at that time. I think by definition the standards we now apply are leading to the recategorization.… They could be read as being tightened.” Jacobi agreed: “Yes, I think it’s safe to say that people exercised their best judgment and we have no reason to believe anything else.” The company reiterated that the reclassification would not have a material impact on its financials and that annual depreciation would only increase by “a fracture of tens of millions of dollars.” Although Royal Dutch/Shell downplayed the announcement, Lynn Turner, former chief accountant at the Securities and Exchange Commission, told the Wall Street Journal that “a 20 percent restatement of proven reserves is a humungous error. For a company like Shell to have missed its proven reserves by that much is not an oversight. It’s an intentional misapplication of the SEC’s rules.”29 Reserve reclassifications by oil companies were infrequent, and the degree of reclassification typically ranged from 1-5 percent of proved reserves. The announcement took the market by surprise. Shares of Royal Dutch fell 7 percent on the day of the announcement. BP, Chevron, ConocoPhillips, ExxonMobil, and Total all assured investors that they did not expect to reclassify their reserves. Still, the stock prices of these companies fell between 1-2 percent. (See Exhibit 6 for the stock price performance of Shell Transport during this period.) Investors, meanwhile, were outraged that the conference call was led by investor relations and not Watts himself. One shareholder told the press: Watts comes across very poorly and this is from a company that has a history of not being very good with the City. Shell really doesn’t care about shareholders. We don’t matter to how they run their company, not least because they have not had to come to the market [to raise cash] for over 50 years.30
Royal Dutch/Shell press release, “Proved reserve recategorisation following internal review: No material effect on financial statements,” January 1, 2004, http://www.shell.com/home/content/media/news_and_library/press_ releases/2004/pr_announcement_09012004.html (June 1, 2009). 28 “Shell Transport and Trading Company PLC Conference Call,” Fair Disclosure Wire, January 9, 2004. 29 “Shell Cuts Reserve Estimate 20 percent as SEC Scrutinizes Oil Industry,” The Wall Street Journal, loc. cit. 30 Sylvia Pfeifer, “When Will Watts Come Out of His Shell?,” The Sunday Telegraph, January 18, 2004.
27

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Royal Dutch/Shell defended the chairman, explaining that the company was in a quiet period before announcing year-end financial results and this limited the comments that Watts could make publicly. One month later, however, Watts apologized for not conducting the conference call himself, saying, “Frankly, with hindsight, that was a mistake. I regret I wasn’t there.”31 The Second Downgrade In February, the SEC announced that it was launching a formal investigation of Royal Dutch/Shell’s reserve restatement. The Financial Services Authority (FSA) of the U.K., the Netherlands Authority for Financial Markets, and the Euronext stock exchange followed suit with their own inquiries. The Royal Dutch/Shell group audit committee (GAC) commissioned the U.S. law firm Davis Polk & Wardwell to perform an independent review of the events and background leading up to the restatement. The company also hired Ryder Scott Company, a prominent reserve consultancy, to review its booking practices. Ryder Scott was used by other multinational energy companies to certify proved reserves before they were filed with the SEC. On March 1, preliminary findings from Davis Polk were shared with the group audit committee. Although the information was not made public, the GAC announced that as a result of the findings the company could no longer claim that management had acted in good faith when it booked the reserves in question. The company would now only say that “judgments were made in the past that would not be made today.”32 The company reiterated, however, that the group audit committee had found no evidence of illegal activity. Furthermore, the company announced that Watts and van de Vijver would resign, effective immediately, at the request of the group’s separate boards. Jeroen van der Veer, previously the vice chairman and chief executive of chemicals, would replace Watts as chairman of the CMD. Lord Oxburgh would replace Watts as nonexecutive chairman of the Shell Transport board of directors. Malcolm Brinded, previously chief executive of gas & power, would assume the role of chief executive of exploration & production, replacing van de Vijver. In a conference call, van der Veer explained that the management changes were a result of “lost confidence” in these individuals by the two boards.33 He refused to elaborate on the contents of the Davis Polk preliminary findings, saying “It is too early. We will be very open about it, but it is too early to do that now.” Still, van der Veer promised to work on changing the culture and behavior of the organization. In particular, he called on Royal Dutch/Shell employees to act with “solidity, transparency, integrity, and speed” to win back the trust of investors. Also, he reconfirmed that the reserve restatement remained at 3.9 billion barrels. The reserve restatement did not, however, remain at 3.9 billion barrels. Two weeks later, van der Veer announced that the group would delay publication of its financial results for 2003, after auditors refused to sign off on them. Royal Dutch/Shell would reclassify an additional 250
31 32

“Showing Some Corporate Humility Goes a Long Way,” Marketing Week, February 12, 2004. Carola Hoyos, “Shell Drops Claim It Acted ‘in Good Faith,’” The Financial Times, March 4, 2004. 33 “Shell Transport and Trading Company PLC Conference Call,” FD (Fair Disclosure) Wire, March 5, 2004.

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million barrels of oil equivalent that did not meet SEC classification requirements. The move brought the total reclassification to 4.15 billion barrels, or 21 percent of proved reserves. Also in March, Sir John Kerr of the Shell Transport board of directors was asked to establish an independent committee comprising board members from both Royal Dutch and Shell to review the group’s corporate structure and governance. According to Kerr, the focus of the committee was not to examine “the entrails of the reserve crisis” but to consider “what would be best for the future of the company.”34 To this end, Kerr set about engaging in discussion with shareholders to understand their expectations for the companies. The Third Downgrade On April 19, 2004, Ryder Scott communicated the findings of its reserves evaluation to the Royal Dutch/Shell group audit committee. The firm recommended that an additional 200 million barrels be recategorized as probable rather than proved, bringing the total reserve recategorization to 4.35 billion barrels. Royal Dutch/Shell announced that it would restate its financials for the years ending 2000 through 2003 to incorporate the impact on balance sheet and income statement items. While the adjustments were not significant (an average of $100 million per year or less than 1 percent of after-tax earnings), the restatement was an additional embarrassment for the company. Also at this time, the company received the final report from Davis Polk & Wardwell containing the results of its investigation. The report totaled 463 pages and included detailed information about tense interactions between Watts and van de Vijver with regards to proved reserves.35 According to Davis Polk, as early as February 2002, van de Vijver informed the CMD that clarifications issued by the SEC “make it apparent that the group guidelines for booking proved reserves are no longer fully aligned with the SEC rules.”36 He estimated that the company was potentially exposed by 2.3 billion barrels but stipulated that “work has begun to address this important issue.” The issue had not been brought to the attention of the group audit committee or the boards of Royal Dutch or Shell Transport. In May that same year, Watts sent an e-mail to van de Vijver directing him to put additional effort into finding replacement reserves for those that would potentially be reclassified: You will be bringing the issue to the CMD shortly. I do hope this review will include consideration of all ways and means of achieving more than 100 percent [reserve replacement] in 2002 […] considering the whole spectrum of possibilities and leaving no stone unturned. In July 2002, van de Vijver made a presentation to the CMD about the reserve replacement issue. As minutes of the meeting made clear, the focus of the presentation was not on the reason the
Chris Redman, “Shell Rebuilds Itself,” Corporate Board Member, March/April 2005. Although the details of the report were not immediately made public (at the request of the SEC, which was still conducting its own investigation as of mid-2009), a 25-page summary report was released to the public. 36 Quotations and timeline from: “Report of Davis Polk & Wardwell to the Shell Group Audit Committee, Executive Summary,” March 31, 2004.
35 34

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company was noncompliant with SEC rules but instead, according to Davis Polk, on management’s plan to “manage the totality of the reserve position over time, in hopes that problematic reserve bookings could be rendered immaterial by project maturation, license extensions, exploration successes and/or strategic activity.” According to minutes from that same meeting: It is considered unlikely that potential over-bookings would need to be de-booked in the short term, but reserves that are exposed to project risk or license expiry cannot remain on the books indefinitely if little progress is made to convert them to production in a timely manner. In September 2002, van de Vijver sent a memo to the CMD in which he described “dilemmas facing EP [exploration and production] and the uncomfortable situation EP is in”: Given the external visibility of our issues (lean organic development portfolio funnel, RRR [reserve replacement ratio] low, F&D [finding and development] unit cost rising), 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. Unfortunately,[…] we are struggling on all key criteria. Van de Vijver identified reserve replacement booking practices in previous years as a root of the company’s current difficulties: “RRR remains below 100 percent mainly due to aggressive booking in 1997-2000.” Watts was head of exploration and production during this time. Still, the issue was not escalated beyond the CMD to the boards of directors. Following this memo, there were several meetings between Watts and van de Vijver, in which his concerns were discussed. Watts continued to instruct van de Vijver to achieve 100 percent reserve replacement ratio. Throughout 2003, van de Vijver worked with his staff to try to meet external targets that were proving unsustainable. He recognized the importance of achieving a 100 percent reserve replacement ratio, as demonstrated in an e-mail to a staff member: As you know 2003 RRR is the most important share price “influence,” also as expectations are high and they do not know that we are still paying for aggressive reserves bookings (including those that have not reached FID [final investment decision] yet!!) in the past! The reserve replacement ratio was also a key performance indicator for performance measurement and compensation purposes (see Exhibit 7 for compensation information). By November 2003, van de Vijver’s frustrations boiled over and he wrote an e-mail to Watts in which he stated, “I am becoming 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.”

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Despite his frustrations, van de Vijver was not yet willing to go public with the problem. In December 2003, he received a memo from exploration and production staff, in which he was advised to announce to the public the need for a reserve recategorization. The memo stated that: If and from the time onwards that it is accepted or acknowledged by the management… [that] the 2002 proved reserves as reported in the Form 20-F [to the SEC] are materially wrong, the issuers are under a legal obligation to disclose that information to all investors at the same time and without delay. Not to disclose it would constitute a violation of U.S. securities law and the multiple listing requirements. It would also increase any potential exposure to liability within and outside the U.S. Van de Vijver responded by e-mail: “This is absolute dynamite, not at all what I expected and needs to be destroyed.” Nevertheless, the group audit committee was notified of the problem, and the process began by which the company would ultimately announce a revision in January 2004. Despite all this, the Davis Polk report was not able to find a “common explanation” for the reserve problem. It noted that the process by which reserves were overstated varied region by region (see Exhibit 8 for more information). Still, Davis Polk concluded that that “the booking of ‘aggressive’ reserves and their continued place on Shell’s books were only possible because of certain deficiencies in the company’s controls.” The report noted that the internal audit function was “understaffed and undertrained” and that it was “provided with virtually no instruction concerning regulatory requirements.” It also found that “Shell guidelines blurred the distinction between reserves reporting for internal decision-making and the requirements for regulatory reporting of proved reserves.” In addition, Davis Polk laid blame on Chief Financial Officer Judy Boyton, who was characterized as “not effective” in her compliance function: Ms. Boyton took virtually no action … to inquire independently into the underlying facts relating to the “aggressive bookings.” Rather, she relied upon the “checks and balances” of Shell’s representation and assurance process and the work of its independent external auditors to ensure compliance. The report noted that her “ability to act effectively was impaired because until recently none of the business units’ CFOs reported to her. For this and other reasons, on the issue of reserves, it may be that her responsibility exceeded her authority.” Finally, the report suggested that lack of oversight by the board contributed to the problem: “Shell’s outside directors and the GAC [group audit committee] were not presented with the information that would have allowed them to identify or to address the issue.” In response to the criticism of board inaction, Lord Oxburgh, nonexecutive chairman of Shell Transport, commented that “the committee had tried to get hold of the information [about

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reserves] for a long time but had failed.”37 He expressed a belief that the reserve replacement issue did not “have significance for the culture of the company as a whole.” Instead, he attributed the problem to “human failings not structural deficiencies.”38 Aad Jacobs, chairman of the Royal Dutch supervisory board, echoed this sentiment: “Neither structure nor corporate governance is the main issue behind the problems we have with the oil reserves.”39 He went on to say, “I have read the [Davis Polk] report very carefully, all 453 pages, and there was no criticism about the structure on any page.” He reminded the public that an independent committee, led by Kerr, was in the process of reviewing the matter, but he stipulated, “Before you make the choice for a new structure you also have to look at what this structure has done for the company in the past.” The Fourth Downgrade On May 24, 2004, Royal Dutch/Shell announced a fourth reduction to proved oil reserves. The move was made in advance of the group’s annual filing (Form 20-F) with the SEC. The reduction amounted to 120 million barrels of oil and brought its total reserve reduction to 4.47 billion. At the same time, the company said it would make further adjustments to earnings to reflect the impact of lower reserves on the balance sheet and income statement. (See Exhibit 9 for a summary of the four downgrade announcements and Exhibit 10 for a summary timeline of events.) RESTORING REPUTATION Although the downgrades ended with the fourth restatement, the period for restoring the reputation of Royal Dutch/Shell had just begun. To this end, the company agreed to settle its disputes with regulators by paying a combined $151 million (?83 million) to the SEC and FSA. The fine was the third largest ever assessed by the SEC, after WorldCom ($500 million) in 2003 and Bristol-Myers Squibb ($150 million) in 2004. Also, the company announced further personnel changes at the top of the organization. Most importantly, Boyton resigned from her position as group chief financial officer. Tim Morrison, the group controller since July 2002, assumed her responsibilities. In addition, the group would make changes to its internal controls relating to proved reserves estimation to bolster investor confidence in its financial reporting practices. Still, many outsiders believed that Royal Dutch/Shell needed to go farther and consider broad governance and structural changes to ensure that the proved reserves scandal would not be repeated in the future. Investors and members of the media argued that the company’s problems stemmed not only from lapses in internal controls, but from broad deficiencies in the way group activities were organized and monitored. One group in particular believed that a radical
Norma Cohen and Clay Harris, “Human Failings and Hyperbolic E-mails,” The Financial Times, April 20, 2004. Martin Dickson, “Shell Shocked and Still Very Badly in Denial,” The Financial Times, April 20, 2004. 39 Interview with Aad Jacobs, chairman of the supervisory board of Royal Dutch. Reproduced and accessible via: Royal Dutch/Shell press release, “The report to the Group Audit Committee and the reserves recategorisation review,” April 19, 2004. .
38 37

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restructuring was in order. The Financial Times summarized this viewpoint by describing Royal Dutch/Shell as “a kind of Austro-Hungarian dual monarchy run by a Soviet-style central committee.”40 The Economist agreed: Shell now needs a thorough overhaul…. Its separate British and Dutch boards of directors, now a cumbersome anachronism, must be combined into a single board to clarify lines of accountability, especially through a strong independent Chairman. That person must require Sir Philip’s successor, Jeroen van der Veer, to change Shell’s arrogant and inward-looking ways.41 The senior leadership of the Royal Dutch/Shell group would have to decide what changes, if any, were needed to address the deficiencies that led to the proved reserve restatement and to ensure that managerial oversight would be strengthened in the future. STUDY QUESTIONS 1. What elements of the Royal Dutch/Shell corporate governance system contributed to the problem that ultimately led to the reserve restatement? In your response, consider organizational structure, the boards of directors, the company business model, succession of senior leadership, performance measurement, executive compensation, internal controls, and shareholders. 2. Do you agree with Lord Oxburgh that the problem lay in “human failings, not structural deficiencies?” What role did culture play in the problem? 3. What recommendations should Sir John Kerr make with regards to overhauling company structure and governance? Include each element from Question 1 and be sure to discuss a) those that should remain the same, and b) those that should be altered. Justify your recommendations by explaining the impact each is expected to have on management oversight and firm performance.

40 41

“Shell Becomes a Normal Company,” The Financial Times, October 29, 2004. “Humiliation,” The Economist, April 24, 2004.

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Exhibit 1 Royal Dutch/Shell Group: Organizational Structure (2003)

Source: Royal Dutch Petroleum Company, Summary Annual Report and Accounts, 2003.

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Exhibit 2 Royal Dutch/Shell: Senior Leadership (2003)
The Conference The role of the conference is to review and discuss: the strategic direction of the businesses of the Royal Dutch/Shell Group of Companies; the business plans of both the individual businesses and of the Royal Dutch/Shell Group as a whole; major or strategic projects and significant capital items; the quarterly and annual financial results of the Royal Dutch/Shell Group of Companies; reports of the group audit committee, remuneration and succession review committee and social responsibility committee; performance appraisals both of the individual businesses and of the Royal Dutch/Shell Group as a whole; annual or periodic reviews of group companies’ activities within significant countries or regions; governance, business risks and internal control of the Royal Dutch/Shell Group of Companies; a program of insights and briefings on specific aspects of the Royal Dutch/Shell Group of Companies; and any other significant or unusual items on which the group managing directors wish to seek advice or the members of conference wish to raise. Members of the Conference Shell Transport Board of Directors Sir Philip Watts Teymour Alireza Sir Peter Burt Eileen Buttle Luis Giusti Nina Henderson Sir Peter Job Sir John Kerr Sir Mark Moody-Stuart Lord Oxburgh Shell Transport Managing Directors Sir Philip Watts (repeated) Malcolm Brinded Royal Dutch Supervisory Board Aad Jacobs Maarten van den Burgh Wim Kok Jonkheer Aarnout Loudon Professor Hubert Markl Lawrence Ricciardi Henry de Ruiter

Chairman Nonexecutive Directors

Managing Directors

Royal Dutch Board of Management Jeroen van der Veer (President) Rob Routs Walter van de Vijver

Committee of Managing Directors Sir Philip Watts (Chairman) (None) Finance, HR, Legal Int’l Directorate Strat. Planning Strat. Development External Affairs United States Jeroen van der Veer (Vice Chairman) Chemicals Renewables Group Research Malcolm Brinded Gas & Power Trading IT Rob Routs Oil Products Consumer Walter van de Vijver Exploration & Production Contracting & Procurement

Business Unit Corporate Function

Geography

Balkans, Caspian Middle East, N. Africa Russia S. Asia

Australasia E. Asia

Canada Europe

C. America S. America Sub-Saharan Africa

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Exhibit 2 (continued) Royal Dutch/Shell: Senior Leadership (2003)
Royal Dutch Supervisory Board Aad Jacobs (Chairman) Born May 28, 1936. A Dutch citizen. Chairman of the Supervisory Board since July 2002 and a member of the Supervisory Board since 1998. Due to retire by rotation in 2003. A member of the Board of Management of ING Group 1991–98 and its Chairman 1992–98. Chairman of the Supervisory Boards of Joh. Enschedé and Imtech. ViceChairman of the Supervisory Boards of Buhrmann and VNU and a member of the Supervisory Boards of Euronext, IHC Caland and ING Group. Maarten van den Bergh Born April 19, 1942. A Dutch citizen. A member of the Supervisory Board since 2000. Due to retire by rotation in 2004. A Managing Director of the Company 1992–2000 and President 1998–2000. A Group Managing Director 1992–000. Chairman of the Board of Directors of Lloyds TSB and a member of the Boards of Directors of British Telecom and British Airways. Wim Kok Born September 29, 1938. A Dutch national, appointed a member of the Supervisory Board with effect from July 1, 2003. Due to retire by rotation in 2007. Chaired the Confederation of Dutch Trade Unions (FNV) before becoming a member of the Lower House of Parliament and parliamentary leader of the Partij van de Arbeid (Labour Party). Appointed Minister of Finance in 1989 and Prime Minister in 1994, serving for two periods of government up to July 2002. Member of the Supervisory Boards of ING Group, KLM and TPG. Jonkheer Aarnout Loudon Born December 10, 1936. A Dutch citizen. A member of the Supervisory Board since 1997. Due to retire in 2007. A member of the Board of Management of Akzo (which became Akzo Nobel in 1994) 1977–4 and its Chairman 1982– 4. A member of the First Chamber of the Dutch Parliament 1995–9. Chairman of the Supervisory Boards of ABN AMRO Bank and Akzo Nobel and a member of the International Advisory Board of Allianz. Professor Hubert Markl Born August 17, 1938. A German citizen. A member of the Supervisory Board since July 2002. Due to retire by rotation in 2007. President of the Max-Planck-Gesellschaft 1996–2002. Professor of biology at the University of Constance since 1974. A member of the Supervisory Boards of Aventis, BMW and Münchener Rückversicherungsgesellschaft. Lawrence Ricciardi Born August 14, 1940. A US citizen. A member of the Supervisory Board since 2001. Due to retire by rotation in 2006. President of RJR Nabisco 1993–5. Senior Vice-President and General Counsel of IBM 1995–2002. Senior Advisor to Jones Day and Lazard Frères & Co. A member of the Board of Directors of The Reader’s Digest Association. Henny de Ruiter Born March 3, 1934. A Dutch national, appointed a member of the Supervisory Board in 1994. Due to retire in 2004. Managing Director of Royal Dutch 1983–1994. Chairman of the Supervisory Boards of Univar and Wolters Kluwer, Vice-Chairman of the Supervisory Board of Aegon and a member of the Supervisory Board of Heineken.

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Exhibit 2 (continued) Royal Dutch/Shell: Senior Leadership (2003)
Royal Dutch Board of Management Jeroen van der Veer (President) Born October 27, 1947. A Dutch citizen. A Managing Director of the Company since 1997 and President since 2000. A Group Managing Director since 1997. Joined the Group in 1971 in refinery process design and held a number of positions in refining and marketing in the Netherlands, Cura?ao and the UK. Area Co-ordinator SubSaharan Africa 1990–92 and a Managing Director of Shell Nederland with responsibility for the Pernis refinery and petrochemical complexes at Pernis and Moerdijk as well as the chemicals business 1992–95. President and Chief Executive Officer of Shell Chemical Company in the USA 1995–97. A member of the Supervisory Board of De Nederlandsche Bank and an Advisory Director to Unilever. Walter van de Vijver Born November 1, 1955. A Dutch citizen. A Managing Director of the Company since 2001. A Group Managing Director since 2001. Joined the Group in 1979 as a petroleum engineer. Worked in Exploration and Production in Qatar, Oman, the USA, the UK and the Netherlands. General Manager Brent Business Unit of Shell U.K. Exploration and Production in Aberdeen 1993–97. Chief Executive Officer of Shell International Gas Ltd. and Chief Executive Officer of Shell Coal International Ltd. in London 1997–98. President and Chief Executive Officer of Shell Exploration & Production Company in the USA 1998–2001. Rob Routs Born September 10, 1946. A Dutch national, was appointed a Managing Director of Royal Dutch and became a Group Managing Director with effect from July, 2003. Joined the Group in 1971. Held various positions in the Netherlands, Canada and the USA. Previously President and Chief Executive Officer of Shell Oil Products USA and President of Shell Oil Company and Country Chair for Shell in the USA. Non-executive Directors Shell Transport Teymour Alireza Born September 7, 1939. A Saudi Arabian citizen. A Director of Shell Transport since November 12, 1997. President and Deputy Chairman, The Alireza Group. Chairman National Pipe Company Ltd, Saudi Arabia. Director Arabian Gulf Investments (Far East) Ltd, Hong Kong and of Riyad Bank Saudi Arabia. Member of the International Board of Trustees of the World Wide Fund for Nature. Sir Peter Burt Born March 6, 1944. A UK citizen. A Director of Shell Transport since July 25, 2002. Executive Deputy Chairman of HBOS plc and Governor of the Bank of Scotland 2001–03. Group Chief Executive of Bank of Scotland 1996– 2001. Joined the Bank of Scotland in 1975. Chief General Manager of the Bank 1988–96. Worked in the computer industry in the USA and the UK 1968–74. A Director of a number of charitable organisations. Dr Eileen Buttle Born October 19, 1937. A UK citizen. A Director of Shell Transport since July 8, 1998. Retired in 1994 from a career of public scientific appointments. Member of a number of Government and EU advisory committees of environmental aspects of national and European research and of Boards of Trustees of environmental nongovernmental organisations.

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Exhibit 2 (continued) Royal Dutch/Shell: Senior Leadership (2003)
Luis Giusti Born November 27, 1944. A Venezuelan citizen. A Director of Shell Transport since September 13, 2000. Joined the Venezuelan Shell oil company in 1966, and the Venezuelan state oil company, Petroleos de Venezuela, SA (PDVSA) in 1976. Chairman and CEO of PDVSA 1994–99. Currently a Senior Adviser at the Center for Strategic and International Studies in Washington DC and also acts as a consultant in oil and energy. Mary (Nina) Henderson Born July 6, 1950. A US citizen. A Director of Shell Transport since May 17, 2001. 1972–2001 wide experience in marketing consumer goods with Bestfoods, a major US foods company, rising to President of a major division and Corporate Vice President responsible for worldwide core business development. Currently a non-executive Director of Pactiv Corporation, AXA Financials Inc., Del Monte Foods Company and Visiting Nurse Service of New York. Sir Peter Job Born July 13, 1941. A UK citizen. A Director of Shell Transport since August 2, 2001. Chief Executive of Reuters plc, 1991–2001 following wide experience in that company from 1963 in Latin America, Africa, Asia and the Middle East. Currently a non-executive Director of Schroders plc, GlaxoSmithKline plc, TIBCO Software Inc, Instinet Group Inc, Multex.com, Inc and a member of the Supervisory Board of Deutsche Bank AG and of Bertelsmann AG. Sir John Kerr Born February 22, 1942. A UK citizen. A Director of Shell Transport since July 25, 2002. Member of United Kingdom Diplomatic Service 1966–2002 and Head of the Service 1997–2002. Principal Private Secretary to the Chancellor of the Exchequer 1981–84. UK Permanent Representative to the EU 1990–95. British Ambassador to the United States 1995–97. Foreign Office Permanent Under Secretary of State 1997–2002. Secretary-General of the Convention, chaired by President Giscard d’Estaing, on future EU institutional arrangements. Currently a nonexecutive Director of Scottish American Investment Trust plc; Trustee of National Gallery and of Rhodes Trust. Sir Mark Moody-Stuart Born September 15, 1940. A UK citizen. A Director of Shell Transport since July 1, 1991. Chairman 1997–2001 and a Group Managing Director 1991–2001. A non-executive Director since July, 2001. Currently Chairman of Anglo American plc and a Director of HSBC Holdings plc and Accenture. Member of the UN Secretary General’s Advisory Council for the Global Compact. Lord Oxburgh Born November 2, 1934. A UK citizen. A Director of Shell Transport since January 10, 1996. Scientific and University appointments 1960–88. Chief Scientific Adviser, Ministry of Defence 1988–93. Rector, Imperial College of Science, Technology and Medicine, 1993–2001. Currently Chairman SETNET and Chairman House of Lords Select Committee on Science and Technology.

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Exhibit 2 (continued) Royal Dutch/Shell: Senior Leadership (2003)
Shell Transport Managing Directors Sir Philip Watts (Chairman) Born June 25, 1945. A UK citizen. A Director and a Managing Director of Shell Transport since July 1, 1997 and Chairman since July 1, 2001. A Group Managing Director since 1997. Joined the Group as a seismologist in 1969, and held positions in Asia Pacific and Europe leading to Exploration Director, Shell UK 1983–85. Head of various Exploration and Production functions in The Hague 1985–91. Chairman and Managing Director in Nigeria 1991–94, and Regional Co-ordinator, Europe 1994–95. Director Planning, Environment and External Affairs, Shell International 1996–97. Chief Executive Officer, Exploration and Production 1997–2001. Currently Chairman of the Executive Committee of the World Business Council for Sustainable Development. Also Chairman of the International Chamber of Commerce’s UK governing body and Trustee of the Sa?d Business School Foundation, University of Oxford. Malcolm Brinded Born March 18, 1953. A UK citizen. A Managing Director of the Company since July 2002. A Group Managing Director since July 2002. Joined the Group in 1974. Held various positions in the Netherlands, Brunei, Oman and the UK. General Manager of Shell U.K. Exploration and Production in Aberdeen 1998–2001. Country Chairman in the UK 1999–2002. Director of Planning, Environment and External Affairs at Shell International Ltd. 2001–02.

Source: Royal Dutch Petroleum and Shell Transport Annual Reports, 2002 and 2003.

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Exhibit 3 Royal Dutch/Shell: Group Audit Committee (2003)
Group Audit Committee In 1976 the Supervisory Board of Royal Dutch, jointly with the Board of Shell Transport, established a group audit committee. Under its terms of reference, the committee acts in an advisory capacity to the boards, providing them with quarterly and annual updates regarding its activities and related recommendations. The committee regularly considers the effectiveness of risk management processes and internal control systems within the group and reviews the financial accounts and reports of the Royal Dutch/Shell group of companies. The committee also considers both internal and external audit reports (including the results of the examination of the group financial statements) and assesses the performance of the internal and external audit. During 2003 there were a total of six meetings of the group audit committee. Attendance at these meetings is shown in the table below. Member Aad Jacobs Sir Peter Burt Luis Giusti Nina Henderson Lawrence Ricciardi Henny de Ruiter Attendance 6 5 6 6 2 4

Note: Lawrence Ricciardi was appointed a member during the year and attended all meetings following his appointment.

Source: Royal Dutch Petroleum Company, Summary Annual Report and Accounts, 2003

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Exhibit 4 Royal Dutch/Shell: Proved Oil Reserves (2002)
Supplementary Information — Oil and Gas Reserves […] Proved reserves are the estimated quantities of oil and gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those reserves which can be expected to be recovered through existing wells with existing equipment and operating methods. The reserves reported exclude volumes attributable to oil and gas discoveries which are not at present considered proved. Such reserves will be included when technical, fiscal and other conditions allow them to be economically developed and produced. Proved reserves are shown net of any quantities of crude oil or natural gas that are expected to be taken by others as royalties in kind but do not exclude certain quantities related to royalties expected to be paid in cash or those related to fixed margin contracts. Proved reserves include certain quantities of crude oil or natural gas which will be produced under arrangements which involve Group companies in upstream risks and rewards but do not transfer title of the product to those companies. Oil and gas reserves cannot be measured exactly since estimation of reserves involves subjective judgment and arbitrary determinations. Estimates remain subject to revision. Crude oil and natural gas liquids Group companies’ estimated net proved reserves of crude oil and natural gas liquids at the end of the year, their share of the net proved reserves of associated companies at the end of the year, and the changes in such reserves during the year are set out below. Proved developed, undeveloped reserves (in million barrels) Group companies At January 1 Revisions and reclassification Improved recovery Extensions and discoveries Purchases of minerals in places Sales of minerals in place Production At December 31 Group share of associated companies At January 1 Revisions and reclassification Improved recovery Extensions and discoveries Purchases of minerals in places Sales of minerals in place Production At December 31 Total (before minority interests) Minority interest in group company reserves Eastern Hemisphere Europe Other 1,105 103 15 667 (1) (254) 1,635 1 1 2 6,188 (170) 69 389 (101) (361) 6,014 568 43 6 7 121 (1) (52) 692 146 2002 Western Hemisphere U.S. Other 675 77 51 33 7 (3) (120) 720 356 65 33 (41) 413 576 16 1 102 (38) 657 69 Total 8,544 26 135 423 776 (105) (773) 9,026 925 109 6 40 121 (1) (93) 1,107 10,133 215

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Exhibit 4 (continued) Royal Dutch/Shell: Proved Oil Reserves (2002)
Natural gas Group companies’ estimated net proved reserves of natural gas at the end of the year, their share of the net proved reserves of associated companies at the end of the year, and the changes in such reserves during the year are set out below. These quantities have not been adjusted to standard heat content. Proved developed, undeveloped reserves (in thousand million standard cubic feet) Group companies At January 1 Revisions and reclassification Improved recovery Extensions and discoveries Purchases of minerals in places Sales of minerals in place Production At December 31 Group share of associated companies At January 1 Revisions and reclassification Improved recovery Extensions and discoveries Purchases of minerals in places Sales of minerals in place Production At December 31 Total (before minority interests) Minority interest in group company reserves Eastern Hemisphere Europe Other 23,722 52 75 29 1,074 (5) (1,331) 23,616 48 1 3 (8) 44 20,080 (1,064) 150 (236) (1,019) 17,911 5,153 157 8 37 (222) 5,133 207 2002 Western Hemisphere U.S. Other 3,694 162 20 411 208 (10) (611) 3,874 15 7 1 (2) 21 3,117 (103) 12 59 (246) 2,839 490 Total 50,613 (953) 245 452 1,341 (251) (3,207) 48,240 5,216 165 8 41 (232) 5,198 53,438 697

Note: The weighted average year-end oil price in 2002 was $23.87/barrel and the weighted average year-end gas price in 2002 was $14.26/barrel of oil equivalent. Source: Royal Dutch Petroleum, 2002 form 20-F, filed with the Securities and Exchange Commission, March 31, 2003.

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Exhibit 5 Royal Dutch/Shell: Risk Management and Internal Control
Risk Management and Internal Control The Group’s approach to internal control is based on the underlying principle of line management’s accountability for risk and control management. The Group’s risk and internal control policy explicitly states that the Group has a risk-based approach to internal control and that management in the Group is responsible for implementing, operating and monitoring the system of internal control, which is designed to provide reasonable but not absolute assurance of achieving business objectives. Established review and reporting processes bring risk management into greater focus and enable the Conference (meetings between the members of the Supervisory Board and the Board of Management of Royal Dutch and the Directors of Shell Transport) regularly to review the overall effectiveness of the system of internal control and to perform a full annual review of the system’s effectiveness. At Group level and within each business, risk profiles which highlight the perceived impact and likelihood of significant risks are reviewed each quarter by the Committee of Managing Directors and by the Conference. Each risk profile is supported by a summary of key controls and monitoring mechanisms. A risk-based approach to internal control continues to be embedded within the businesses. In addition, non-Shell operated ventures and affiliates are encouraged to adopt processes consistent with the Group’s approach. The Group’s approach to internal control also includes a number of general and specific risk management processes and policies. Within the essential framework provided by the Statement of General Business Principles, the Group’s primary control mechanisms are self-appraisal processes in combination with strict accountability for results. These mechanisms are underpinned by controls including Group policies, standards and guidance material that relate to particular types of risk, structured investment decision processes, timely and effective reporting systems and performance appraisal. Examples of specific risk management processes include the Group Issue Identification and Management System, by which reputation risks are identified and monitored. A common Health, Safety and Environment (HSE) Policy has been adopted by Shell companies. All companies have HSE management systems in place and for major installations the environmental component of such systems has been certified to international standards. The Group Financial Control Handbook establishes standards applicable across the Group on the application of internal financial controls. The management of particular risks related to property, liability and treasury is described separately opposite. A procedure for reporting business control incidents enables management and the Group Audit Committee to monitor incidents arising as a result of control breakdowns and to ensure appropriate follow-up actions have been taken. Lessons learned are captured and shared as a means of improving the Group’s overall control framework. A formalised self-appraisal and assurance process has been in place for many years. The process was reviewed and updated in 2002. Each year the management of every business unit provides assurance as to the adequacy of financial controls and reporting, treasury management, risk management, HSE management and the Statement of General Business Principles, as well as other important topics. Any business integrity concerns or instances of bribery or illegal payments are to be reported. The results of this process and any qualifications made are reviewed by the Group Audit Committee and support representations made to the external auditors. In addition, internal audit plays a critical role in the objective assessment of business processes and the provision of assurance. Audits and reviews of Group operations are carried out by Group Internal Audit to provide the Group Audit Committee with independent assessments regarding the effectiveness of risk and control management. Source: Royal Dutch Petroleum, 2002 form 20-F, filed with the Securities and Exchange Commission, March 31, 2003.

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Exhibit 6 Royal Dutch Petroleum: Stock Price Performance versus Competitors

Source: Center for Research in Securities Prices (University of Chicago).

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Exhibit 7 Royal Dutch/Shell: Executive Compensation (2000-2002)
Sir Philip Watts (in ?) Salaries and fees Car benefits Other benefits Performance-related element Deferred bonus plan adjustment Total current Realized share option gains Total 2002 745,969 21,922 874,000 152,069 1,793,960 8,238 1,802,198 2001 607,398 20,089 455,000 75,834 1,158,321 508,167 1,666,488 2000 496,302 17,323 225,000 738,625 134,400 873,025

At December 31, 2002, Sir Philip Watts held 2,003,001 share options and 66,723 ordinary shares. 2002 ending price of Shell Transport on the London Stock Exchange: ?4. Average exchange rate during the year: ?1 = $1.5084. Walter van de Vijver (in ) Salaries Performance-related element Total cash Other compensation Realized share option grains upon exercise Total 2002 735,095 902,750 1,637,845 18,091 1,655,936 2001 342,536 221,330 563,866 2,162 566,028

At December 31, 2002, Walter van de Vijver held 187,000 share options and 10,668 ordinary shares. 2002 ending price of Royal Dutch Petroleum on the Euronext/Amsterdam Exchange: 42. Average exchange rate during the year: 1 = $0.9495. Remuneration Policy: Annual and deferred bonus The purpose of the annual bonus plan is to motivate Group Managing Directors to achieve annual results that further the Group’s long-term objectives. The target level of bonus for the year 2002 was 100% of base salary (2001 was 65% of base salary). The target for 2003 will be 100% of base salary. Bonus awards are recommended by REMCO [remuneration committee] based on the extent of achievement of challenging Group targets that are set as part of the annual Group business plan. These targets encompass financial, customer, people, sustainable development and other operational objectives. [Case writer note: approximately 2 42 percent of annual target was related to reserve replacement ]…. Having regard to the Group’s performance against all targets, REMCO has recommended that the bonus payable to Group Managing Directors in respect of the year 2002 is 115% of base salary. The same approach will be adopted in 2003. Since 2001, Group Managing Directors have been able to elect to defer up to one-third of their annual bonus into shares…. The deferred bonus shares, together with shares equivalent to the value of dividends payable on the deferred bonus shares, are released three years after deferral.

Chip Cummins, “Former Chairman at Shell Was Told of Reserves Issues,” The Wall Street Journal, March 8, 2004.

42

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Exhibit 7 (continued) Royal Dutch/Shell: Executive Compensation (2000-2002)
Long-term incentives The objective of long-term incentive arrangements is to ensure that Group Managing Directors share the interests of shareholders by being rewarded for share price growth, the creation of shareholder value and the achievement of superior relative shareholder returns…. Long-term incentives are currently awarded in the form of stock options. Options are granted once a year under the Group Stock Option plan which applies to Group Managing Directors and senior staff. Options granted before 2003 to Group Managing Directors may vest three years after grant and remain exercisable until ten years after grant. Of the options granted, 50% are subject to performance conditions and the proportion of such 50% which will either vest and become unconditional or lapse, will be determined for Group Managing Directors at the discretion of REMCO using the criteria below. REMCO will only exercise its discretion in favour of vesting to the extent that it is satisfied that the performance of the Group over the three-year vesting period reflects the objective for long-term incentives. Accordingly, when making its decision, REMCO takes into account a combination of TSR over the three-year vesting period (measured by the average weighted share price performance plus dividends of Shell Transport and Royal Dutch over the tenday period at the beginning and end of the vesting period) relative to a peer group of other major integrated oil companies and other long-term indicators of Group performance…. The peer companies were BP, ChevronTexaco, ExxonMobil and Total. The Royal Dutch/Shell Group of Companies ranked fourth. REMCO considered other performance indicators including profits over the three years and ROACE relative to the peer group. Having considered all of these factors REMCO determined that 50% of the options granted in March 2000 that were subject to its discretion should vest. Options granted in 2003, and in subsequent years, will be 100% performance linked…. In addition, it is proposed to introduce a new Long-term Incentive Plan (the Plan). This proposal will be put to shareholders at the 2003 Annual General Meetings of Shell Transport and Royal Dutch…. Participants will be made a conditional award of shares in either Shell Transport or Royal Dutch. The receipt of shares comprised in the award will be conditional on the participant remaining in employment (subject to certain exceptions, including normal retirement) and on the satisfaction of performance targets over the performance period. The performance period will not be less than three consecutive financial years…. Awards in any one year can range from zero to two times base salary, but the maximum number of shares will only be received for exceptional performance [based on total shareholder return relative to peer institutions]…. 100% of the shares tested against [peer companies] will be received if the Royal Dutch/Shell Group of Companies is in first place, 75% for second place and 50% for third place. No shares will be received for fourth or fifth place.

Source: Royal Dutch Petroleum, 2002 form 20-F, filed with the Securities and Exchange Commission, March 31, 2003.

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Exhibit 8 Davis Polk & Wardwell Report: Summary of Overbooked Reserves
While the dialogue, described above, confirms that these two senior executives were aware of the issue of “aggressive” proved reserves bookings and, in a manner, attempted to address it, these documents do not reveal the causes of the questionable bookings. To ascertain the need for the recategorization, the investigation has focused upon developments in four geographic areas – Australia (Gorgon), Nigeria, Oman and Brunei. While the findings of those inquiries are described in detail [later in the report], it is worth observing that there is no common explanation. Australia (Gorgon). As of December 31, 1997, the Group booked over 500 million boe (barrels of oil equivalent) of Gorgon gas reserves as proved. The Shell Guidelines at the time allowed proved reserves based on an “expectation of availability of markets,” and for a brief period, commercial expectations for Gorgon arguably met this loose requirement. From its inception, the Gorgon “proved” reserves did not meet the overriding SEC standard of “reasonable certainty.” There is no written audit trail indicating who made the decision to categorize Gorgon reserves as proved, or the basis of that decision. Sir Philip, EP CEO at that time, reports no recollection of the Gorgon booking, notwithstanding its size and impact on RRR [reserve replacement ratio] for 1997. The questionable status of Gorgon was re-visited at several points, beginning with the January 2000 decision—reviewed in a presentation to EP Excom [executive committee] attended by Sir Philip—to “freeze” the booking despite a 20 percent increase in technical reserves. In October 2000, the Group Reserves Auditor affirmed this “freeze” status, against a local technical opinion in favor of de-booking. While de-booking continued to be debated, no action was taken until January 2004. In the words of the current Group Reserves Coordinator, Gorgon had long “stuck out like a sore thumb,” but, at over 500 million boe, de-booking of the reserve was “too big to swallow.” Oman. Proved reserves were increased in 2000 in response to “top down” encouragement from Shell to bring its proved reserves of mature fields in line with its expectation reserves. Insufficient technical work was done to support this increase. When serious production declines were suffered thereafter, these increased reserves were maintained based upon aspirational production targets. It is clear that various members of management at EP, including Mr. van de Vijver, were aware of this situation since late 2001, when the production problems increased and Shell agreed to make a $30 million “down payment” (in the form of a deduction against its 2001 net reward) in partial payment for an inchoate de-booking of expectation reserves. Nigeria. SPDC accumulated over the 1990s and, particularly, in the late 1990s very large volumes of proved oil reserves. No later than early 2000, however, it became clear to EP management that SPDC’s substantial proved reserves could not be produced as originally projected or within its current license periods. Rather than de-book reserves, an effort was undertaken to “manage” the problem through a “moratorium” on new oil and gas additions, in the hope that SPDC’s production levels would increase dramatically to support its reported reserves. This solution remained in place for the next several years, until January 2004, notwithstanding the knowledge of EP management that, in fact, production was not increasing to a level which could support the booked proved reserves. Brunei. The large volume of de-bookings is attributable to reserves that were either uneconomic to develop or had been booked well ahead of any final investment decision or analogous financial commitment being made, and at a time when the Shell Guidelines did not specifically require such a commitment prior to booking. Part of the recategorization was attributable to “legacy” volumes, which did not comply as proved reserves and were being debooked gradually to avoid “major swings” in the reserves. Source: Report of Davis Polk & Wardwell to the Shell Group Audit Committee, Executive Summary, March 31, 2004

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Exhibit 9 Royal Dutch/Shell: Summary of Reserve Recategorizations

Proved developed and undeveloped reserves (million barrels of oil equivalent) Proved reserves: Originally Reported First Downgrade (9 Jan 04) Second Downgrade (18 Mar 04) Third Downgrade (19 Apr 04) Fourth Downgrade (24 May 04) Total restatements Proved reserves: Restated Oil and gas production in 2003 Reserves additions in 2003 Proved reserves: Reported

2002 19.35 -3.90 -0.25 -0.20 -0.12 -4.47 14.87

2003

Cumulative change vs. original

-20% -21% -22% -23%

-1.41 0.89 14.35 -26%

Conversion: 5,800 million cubic feet of natural gas = one million barrels of oil equivalent (boe).

Source: Royal Dutch Petroleum Company, Summary Annual Report and Accounts, 2002 and 2003.

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Exhibit 10 Royal Dutch/Shell: Summary Timeline of Events
1890

Royal Dutch Petroleum Company founded. Royal Dutch combines operations with Shell Transport & Trading Company. ‘Matrix’ organization structure designed by McKinsey and implemented. Shell changes its plans to sink the Brent Spar storage platform after environmental activist protests. Ken Saro-Wiwa arrested and executed following anti-Shell environmental protests in Nigeria. Mark Moody-Stuart appointed chairman of the CMD. Oil industry consolidation starts: BPAmoco (1998), ExxonMobil (1999), Total Fina (1999), Total Fina Elf (2000), ChevronTexaco (2001). Philip Watts appointed chairman of the CMD. First internal warnings about reserves bookings being too aggressive. Walter van de Vijver sends e-mail to Watts that he is “sick and tired about lying” about the reserves issue. First reserves downgrade. Shell announces that it will re-categorize its reserves filing. Watts and Vijver asked to resign. Van der Veer appointed chairman of the CMD. Second reserves downgrade Third reserves downgrade. Summary of the Davis Polk & Wardwell report made public. Judy Boynton asked to resign. Fourth reserves downgrade Shell settles with the SEC and FSA and agrees to pay $151 million in fines.

1907

1959

1995

1995

1998

1998-2001

2001

2002

Nov 9, 2003

Jan 9, 2004

Mar 3, 2004

Mar 18, 2004

Apr 19, 2004

May 24, 2004

Jul 29, 2004


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