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Nigeria hits Shell with $1.5bn bill

Daily Telegraph: Nigeria hits Shell with $1.5bn bill

“Shell and Nigeria’s state oil company would ultimately be forced to increase environmental spending in the country.”

By James Moore (Filed: 26/08/2004)

Shell faced fresh regulatory difficulties yesterday as the Nigerian Senate called on it to pay $1.5 billion (£840m) in compensation to pollution-hit communities living near its oil field in the Niger delta.

The move comes a day after the US Securities & Exchange Commission and UK Financial Services Authority issued damning reports spelling out the reasons for imposing penalties of $120m and £17m after Shell overstated proven oil and gas reserves from 1998 until this year by nearly five billion barrels.

Yesterday Shell said it planned to spend an extra $150m this year on its European exploration and production business, bringing the total to $1.8 billion. The decision comes at a time when the company is desperate to replace the oil and gas wiped from its books this year.

The Nigerian Senate demand follows a petition by the Ijaw tribe that was originally presented to the lower House of Representatives and reviewed by an independent legal advisory panel. The Senate resolution calls for a $1 billion up-front payment and a further $500m in instalments over the next five years.

Shell is the biggest investor in Nigeria and its reporting of reserves from the country was sharply criticised by the FSA in Tuesday’s report.

A spokesman for Shell said it strongly contested the claims in 2002 and the earlier House of Representatives’ resolution “did not endorse” the legal panel’s call for $1.5 billion in compensation. Shell said it had not seen the resolution and would not comment before careful study.

Analysts said they believed the matter would become tied up in the courts but that Shell and Nigeria’s state oil company would ultimately be forced to increase environmental spending in the country. The two operate a joint venture.

The FSA report found that Shell based its reports of Nigerian reserves on “unrealistic assumptions” about improved economic and operating conditions, increases in its production quota from Nigeria and increases in Nigeria’s quota from Opec, the oil cartel. The assumptions did not comply with the SEC’s demand that reserves classed as “proven” must be based on existing economic conditions.

The FSA report also said the Nigerian operations had performed below projected levels throughout the period. It detailed further failings at operations in Oman, Brunei and the Gorgon field off the coast of Australia and criticised pay packages that incentivised staff for booking reserves as proven. In 1998 Shell introduced a new policy on booking reserves.

The report said Shell had received repeated warnings in 2002 that the policy flouted SEC guidelines. The warnings were ignored amid concerns about the reaction of analysts should Shell be forced to de-book “proven reserves”.

One large shareholder said it was too early to say whether more heads should roll at the company, which has lost three executives this year. But the shareholder added: “What we will want to know is who knew what and when they knew it.”

It is understood that Jeroen van der Veer, Shell’s chairman of managing directors, will bring forward the planned November release of the results of a review of Shell’s governance, which is expected to result in the creation of a unified board. The company now has two boards overseeing its two halves – the Dutch-listed Royal Dutch and Britain’s Shell Transport & Trading.

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