Besieged Royal Dutch/Shell Group last week cut its proven oil and natural gas reserves again amid an unconfirmed report that the Department of Justice has opened an inquiry into whether the company or its executives violated any U.S. laws by failing to timely report the overbooking of reserves.

In addition, it was reported the Securities and Exchange Commission (SEC) is taking a look at industrywide reserve accounting practices in the wake of disclosures that the proven reserve numbers of Royal Dutch/Shell and El Paso Corp. were fudged (see NGI, March 15).

Royal Dutch/Shell announced Thursday it recategorized an additional 250 million barrels of oil equivalent (boe) of proven reserves at the end of 2002. It also reduced the volume of proved reserves that it planned to book in 2003 by another 220 million boe.

This was the second restatement of the company’s oil and natural gas reserves in two months, coming on top of the 20% reserve reduction, or about 3.9 billion boe, that was disclosed in January. Royal Dutch/Shell has drawn the attention of the Securities and Exchange Commission (SEC) and European regulators for its inflated reserve bookings, as well as the Justice Department.

The latest restatement by the group, which is 60% owned by Royal Dutch and 40% owned by Shell Transport and Trading, was felt on Wall Street last week. Royal Dutch shares tumbled 60 cents to $47.71 in Thursday trading, while Shell Trading stock was off 55 cents to close at $40.50. Both stocks had modest price slides Friday.

Noting that the additional restatement was both a “surprise and a disappointment,” the company said concerns arose about its volume of proven reserves for 2002 while it was working to finalize its 2003 reserve data. It conducted a fast-track review earlier this month with the aid of an external consultant, said Malcolm Brinded, new chief of exploration and production (E&P). The review covered only about 40% of the group’s global reserve base, suggesting perhaps that more restatements may be ahead.

Approximately 80% of the recategorization involved reserves in Northwest Europe and Australasia, he said. Of the 220 million boe reserve reduction for 2003, the majority involved reserve bookings (170 million boe) for a Norwegian field, Brinded noted. The 220 million boe correction cut the company’s reserve replacement ratio for 2003 by about 16%.

He reported that a team of internal and external auditors is carrying out a review of a wider reserve base of Royal Dutch/Shell. The company said it expects to complete the review within six weeks. It will include reserves to be booked at the end of 2003, and any restated 2002 reserve bookings, according to Brinded.

Despite the recategorization and reduction in oil and gas reserves, he said it would not affect the cost or timing of planned production. Brinded estimated, however, the impact of the restatement on earnings would be approximately $20 million. In addition, the well write-off costs related to the company’s initial recategorization would be $10 million after tax, he said.

As a result of the changes to reserves, Royal Dutch/Shell Chairman Jeroen van der Veer said the company’s annual report, which was due out Friday, will not be released until late May. He further said the company’s annual meeting in London would be postponed to June 28. Although Royal Dutch/Shell’s “reputation has been dented,” van der Veer said the company remains “financially healthy.”

The company said it has taken a number of remedial measures to avoid inflated reserve numbers in the future. Significantly, Brinded said reserve bookings have been removed from performance scorecards that have been used to determine executive bonuses.

However, he noted, “I want to clarify that this has never been a particularly significant element of individual remuneration. The potential bonus for on-target performance of reserve replacements was normally around five to 15% of the bonus available to those individuals.”

Brinded also said the company plans to significantly increase the number of E&P staff who are dedicated to reserve management. It also will initiate a major program for its technical staff worldwide to fully understand the SEC’s rules and compliance regulations as they relate to reserves bookings.

In another development, a Justice Department inquiry into Royal Dutch/Shell reportedly is being spearheaded by prosecutors in the U.S. attorney’s office in Manhattan, which often takes charge of securities law inquiries involving large publicly traded companies, according to The Houston Chronicle. Unlike the SEC, federal prosecutors have the authority to bring both criminal and civil charges against violators.

“As far as I’m aware, we’ve not been contacted by the Justice Department,” said Royal Dutch/Shell spokesman Simon Buerk in London last week. The company, however, confirmed it has been contacted by the Financial Services Authority in the United Kingdom, financial regulators in the Netherlands (Autoriteit Financiele Markten), the Dutch stock exchange (Euronext) and the SEC.

“The SEC told our lawyers that it had launched a formal, non-public investigation. We are cooperating fully with them,” Buerk told NGI.

The focus of all of the attention is Shell’s overbooking of proven reserves. It’s been reported that Shell’s former chairman, Sir Phillip Watts, may have known about the overbooking of oil and gas reserves as far back as two years ago (see NGI, March 15). Watts resigned in early March, along with the company’s exploration and production chief amid the fallout over Shell’s reserve restatement.

Also last week, it was reported the SEC is taking a broad look at oil and natural gas companies’ reserve accounting practices, sparked largely by recent reserve restatements by Royal Dutch/Shell Group and El Paso.

The existence of the wide-ranging inquiry was revealed in a Wall Street Journal article last Thursday, which SEC spokesman John Heine told NGI was essentially factual.

He declined to say whether producers, other than Royal Dutch/Shell and El Paso, will receive inquiries about their reserve accounting practices from the SEC’s enforcement division.

“I can’t speculate at all what is going to happen in any particular industry,” Heine said. “I don’t have any advice for them [energy producers].”

The Independent Petroleum Association of America, which represents independent producers, plans to alert its members about the shift in SEC policy, which is causing the agency to examine entire industries for the sins of a few, said spokesman Jeff Eshelman.

In a major departure from its past practice, the SEC is opening broad investigations into entire industries and sectors when a red flag goes up at a single company — even if there is no proof of industrywide wrongdoing, the WSJ reported.

In addition to producers’ reserve accounting practices, the agency also is reportedly examining executive compensation in the high-technology sector, accounting practices in the videogame and food-service businesses and derivatives transactions used to hedge or potentially disguise stock sales by corporate insiders, the newspaper said.

Known within the agency as “wildcatting” — the oil industry’s term for drilling in unproven areas — the practice is part of the SEC’s attempt to aggressively anticipate and possibly head off problems before they erupt into full-scale scandals, sources said.

Critics contend that companies who have done nothing wrong would be unfairly swept up in the broad inquiries. The SEC “is not doing fishing expeditions,” Heine countered. “It’s important to keep this in mind.”

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