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Shell boss pours oil on troubled water

The Times: Shell boss pours oil on troubled water

“the scathing reports, in which the FSA accused Shell of announcing false oil-reserve figures since as far back as 1998 again drove investors to rage that not enough was being done to restore credibility.”

August 29, 2004

Posted 30 August 04

In an exclusive interview, Jeroen van der Veer spells out his plans to appease investors and analysts to Lucinda Kemeny

AFTER 33 years at Royal Dutch/Shell, Jeroen van der Veer, chairman of the oil giant’s committee of managing directors, probably would not have chosen to mark his ascension to the top by signing off £82m in fines to two of the biggest financial regulators.

Last week’s settlement with Britain’s Financial Services Authority and America’s Security and Exchange Commission over charges that Shell misled the market about the true position of its oil reserves may have at least closed one chapter in the crisis that has enveloped the company.

But the scathing reports, in which the FSA accused Shell of announcing false oil-reserve figures since as far back as 1998 again drove investors to rage that not enough was being done to restore credibility.

And, once again, commentators were quick to put the boot in, claiming that Shell was too arrogant, too set in its ways, and that it did not understand what needed to be done.

Yet an hour with Van der Veer shows he knows exactly what people think. “We were used to the fact that the outside world thought Shell was a decent company that was well organised. Now, suddenly, people put a question mark behind the assumptions we always had,” he said.

He and his colleagues had complete faith in the systems that were used to account for oil reserves, he said, and January’s downgrade, in which 20% of the proven reserves were wiped off, was as big a shock to him as to any investors or analysts.

“It has been a very tough time. This is by far the most difficult period of my whole Shell career. You have an absolute confidence that the systems work at Shell and that things are in hand,” he said.

He added that he could scarcely believe the size of the problem when the full details emerged. “We had all kinds of processes and procedures, audits, signing-off letters of representation, external accountants, so there was a whole list of things to make sure that we did not drop a ball. There was a basic belief that nothing major could happen in the company. But it happened,” he said.

Taking over as chairman on March 3 after the ousting of Sir Philip Watts and Walter van de Vijver, head of exploration and production, he set himself three priorities.

The first was to put the reserves issue in the past. While the settlement with the FSA and SEC is part of that, there are still three ongoing investigations. These are by the US Justice Department, which looks into criminal matters; Euronext, the European exchange; and AFM, the financial regulator in the Netherlands, where Royal Dutch is listed. The last two are broadly similar to the FSA’s probe.

Van der Veer’s second priority was to galvanise the business, which he encapsulated in the simple strategy statement “More upstream and profitable downstream”. He explained: “More upstream means pushing our investments to the maximum while profitable downstream means that if it is not profitable, we either have a plan to make it so or find alternative solutions.”

This is already starting to filter through. Last week Shell announced an additional $150m (£83.5m) investment in extending the life of offshore fields in Europe and bringing on new projects. Meanwhile, the downstream, which includes the chemicals, oil refineries and marketing operations, is also being shaken up.

The plastics manufacturer Basell, Shell’s joint venture with BASF, the German chemicals giant, has been earmarked for sale with a price tag of about €6 billion (£4 billion).

The Sunday Times recently reported that another joint venture, a power-stations business called Intergen that it owns with the American consultant Bechtel, could go under the hammer.

Individual staff bonuses are also being reviewed to encourage greater teamwork.

Van der Veer knows that while getting the business right is important, so too is making sure that investors are happy with the structure of the company — and that is the third priority.

He realised early on that the structure — at present a dual-listed company of two boards, with 60% owned by Royal Dutch and 40% owned by Shell Transport and Trading — would come under fire.

“I said in March that we must deal with the structure. The debate had already been going for some weeks, and people simply didn’t believe that the reserves issue had nothing to do with the structure of the group,” he said.

In his own mind, Van der Veer is still not convinced that the structure had any direct impact on the problems with reserves bookings, but he said he understood the critics’ view that it was too opaque and very complicated.

“The business environment changes and the expectations of shareholders change, so we have to make sure that we have got the most appropriate structure for decision-making, for effective leadership, and for accountability, and that it is transparent and simple to the outside world,” he said.

Van der Veer and his colleagues met more than 80% of the top 50 investors to ask what they would like to see. But he is still facing a stiff backlash from some who are dubious that a Shell lifer can really cope with making the sweeping changes they believe are necessary.

One way this has been borne out is the recent coverage given to rumours of a takeover bid for Shell — a very unlikely scenario given its market value of almost £40 billion. He acknowledges, sadly, that a few years ago this kind of rumour would never have made it into print. But, although Van der Veer is unwilling to be drawn on what the outcome of the governance review will be, he is clear that, come November, he will present a solution.

“There is a huge sense of urgency. It is an incredibly fast job if you look at the complexity of the problems we face. All the options have some merit, but we have to consider whether a certain option is feasible from a legal and taxation point of view, and whether it is fair to shareholders,” he said.

Shell has been spending a lot of time, he said, going through each option to see what the consequences would be for shareholders in different countries, because he knows that time is running out.

“We can’t come out in November saying sorry, we haven’t done our homework. We have got one chance to do it right,” Van der Veer said.

Some shareholders, at least, are convinced that Shell is on the right track. Eric Knight, of Knight Vinke, which acts with Calpers, the California state pension fund, said: “There was a great deal of frustration at the lack of progress leading up to the annual general meeting but I think we have moved on. I’m very happy with the progress being made.”

Insiders believe that Shell will stop short of merging the two companies because of the cost involved and could instead settle for having one chairman and one chief executive and two boards with identical membership.

But away from updating the market on the structure, Shell has got its regular strategy briefing planned for September 22 and, again, Van der Veer knows that the company will have to go a long way to satisfy analysts’ and investors’ worries and get the share price back up.

He said the patience of the market would be rewarded with a detailed presentation.

“The issues of reserves, performance, the agenda for growth, both organic and by acquisition, and the credibility of the leadership are all very important for the share price,” said Van der Veer.

“The strategy briefing will look very much at current performance and how we see the growth agenda compared to returns to shareholders. We will, of course, stick to our theme — more upstream and profitable downstream — but we will detail what we mean by it.”

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