A bonus and incentive plan used by Royal Dutch/Shell Group is being examined by the Securities and Exchange Commission (SEC) to determine whether it encouraged upper level management to overstate oil and gas reserves, according to a report in the Wall Street Journal.

Citing people familiar with the matter, the Journal said the SEC is reviewing how Shell tied executive bonuses to reserves booking. The SEC also wants to know how executives received their bonuses and how high into the management chain the bonus awards extended. The SEC announced a formal inquiry in February into Shell’s recategorization of 20% of its reserves (see Daily GPI, Feb. 20).

However, the Journal noted that Shell’s audit committee, which also is reviewing the recategorization, was told that while reserve bookings played a role in Shell’s bonus scheme, the bookings did not materially affect any person’s compensation.

“Shell executives in the exploration-and-production business, including the company’s top reserve auditor responsible for vetting reserve bookings from Shell’s many global units, received bonuses based in part on the amount of energy reserves the company replaced each year,” the Journal said. “But the reserve-related weighting — the part of the bonus affected by reserve bookings — was small, ranging from nothing through the late 1990s to 15% last year, according to the person familiar with the Shell audit committee’s probe.”

The reserve-related weighting is part of a scorecard, according to sources, that is used to rate a business unit’s annual performance, and the rating would affect annual bonus calculations. However, the reserve weighting did not result in “material” payouts to executives in the company’s E&P units, according to sources. Sources told the newspaper that bonus plans for senior executives and top managers did not have any weighting related to reserves until last year.

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