Royal Dutch/Shell Group agreed on Tuesday to pay a total of $151 million in final settlements with the U.S. Securities and Exchange Commission (SEC) and UK regulators for its overstatement of proven oil and natural gas reserves during a five-year period.
Royal Dutch/Shell agreed to pay $120 million in civil penalties to the SEC, and consented to a cease-and-desist order that found the company violated anti-fraud and other provisions of the federal securities laws. The company also will commit $5 million to develop and implement a comprehensive internal compliance program. At the same time, the United Kingdom’s Financial Services Authority (FSA) issued Royal Dutch/Shell a “final notice” Tuesday of its decision to impose a penalty of 17 million pounds (US$31 million) on the company for inflating reserves.
The SEC order said that Royal Dutch/Shell had overstated the proved reserves reported in an SEC 2002 filing by 4.47 billion barrels of oil equivalent (boe), or by approximately 23%. Between January and May of this year, the company was forced to downgrade its proven reserves four times to reflect the 4.47 billion boe reduction in reserves. The company corrected the overstatements in an amended SEC filing last month, which revealed the degree to which reserves had been inflated between the years 1997 to 2002.
In addition, Royal Dutch/Shell had overstated the future cash flows from the reserves by approximately $6.6 billion, according to the SEC. The company settled with the SEC without admitting or denying any of the Commission’s “substantive findings,” the agency said.
The Commission order further said that Royal Dutch/Shell “materially misstated” its reserves replacement ratio (RRR), a key performance indicator in the oil and natural gas industry. Had the company properly reported its proved reserves, its RRR for the five-year period from 1998 through 2002 would have been 80%, rather than the 100% that Royal Dutch/Shell originally reported, the SEC said.
Royal Dutch/Shell was warned several times prior to the fall of 2003 that its reported proved reserves potentially were overstated, but the company dismissed the warnings as “immaterial or unduly pessimistic,” the SEC noted.
The Royal Dutch/Shell Group is 60% owned by The Hague, Netherlands-based Royal Dutch Petroleum, and 40% owned by Shell Transport & Trading in London.
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