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Shell Chairman Brushes Off Criticism, Affirms Long-Term Production Prospects

Shell Chairman Brushes Off Criticism, Affirms Long-Term Production Prospects

Under fire for overseeing the reclassification of 20% of the company's oil and gas reserves in January, Royal Dutch/Shell Corp.'s chairman on Thursday brushed off calls for his resignation, and said he was determined to "fix" the reserves situation.

Sir Philip Watts, the chairman of the managing directors for Royal Dutch/Shell Group, was leading a day-long investors' conference in London in conjunction with fourth quarter and full-year earnings.

During a conference call to discuss Shell's performance early Thursday, Watts said he was sorry that he had not been present at the January conference call concerning the reserves reclassification (see Daily GPI, Jan. 12). However, Watts, who led Shell's exploration and production business during most of the period when the reserves overbooking occurred, said he would not be leaving.

"No, I will not resign," Watts said. "I am determined to fix the reserves situation." Watts said that he had the "wholehearted" support of top management, but noted that the company has implemented a process to make managing directors "more accountable." Watts is scheduled to retire in mid-2005.

The chairman admitted that the company was "discussing" the overbooking issue with the Securities and Exchange Commission, adding that the commission suggested Shell amend its 2002 earnings report to reflect the reclassifications. He did not say that Shell was being investigated by U.S. regulators, nor that it was being ordered to amend its regulatory filings.

Watts confirmed that he had been approached by shareholders to change the Group's corporate structure, and he said he would listen to their case. "That is not a commitment to do anything or nothing, but a commitment to get into that discussion," he said.

In its year-end report, Shell acknowledged that it has several short-term production problems, which include an industry-wide challenge to boost worldwide oil and gas production. And it confirmed that oil and gas production worldwide would be flat in 2004 and decline in 2005. Production overall fell 2% last year. But the statement did not answer questions about its reserves reclassification to date, nor its reserve reporting in recent years.

"As previously advised, the Group does not believe that the re-categorization has a material impact for any year," the company said in its statement. It did break out where the overbookings occurred geographically. Besides its previous statement that the overbookings were in the Gorgon basin of Australia and in Nigeria, Shell also said downgrades were made from projects in Kazakhstan, Norway and Oman. No North American reserve numbers were changed.

Shell noted that its reserves replacement ratio in 2003 was 98%, well above its 70-90% guidance issued in January. However, analysts noted that the actual new bookings were closer to 86%, which would mean the third consecutive year of reserves depletion by the major.

Quarterly earnings for the energy giant were disappointing, down 33% compared with 4Q2002. Earnings are split between Royal Dutch Petroleum Co., which carries 60% of the income, and London-based Shell Transport & Trading Co., which has 40%. Royal Dutch earned 55 cents/share, compared with 67 cents/share in 4Q2002. The Shell unit earned 47 cents/share, down from 57 cents in 4Q2002.

Net profit for the fourth quarter, which Shell adjusts for the current cost of supply, fell from $2.8 billion to $1.9 billion. The profit included a previously announced $1 billion charge for asset sales. Analysts had forecast an average of about $2 billion in earnings.

The disappointing quarterly results overshadowed Shell's record year, which showed annual profit the highest in its history. Net profit for 2003 was up 27% to $11.7 billion, compared with $9.2 billion in 2002.

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