Chapter 1: Royal Dutch Shell: The Overbooking of Reserves
Bernard Taylor SHELL SHOCK. CASE A: WHY DO GOOD COMPANIES DO BAD THINGS?* INTRODUCTION On 9 January 2004 the Royal Dutch/Shell Group became involved in Britain’s biggest business scandal since the Guinness Affair of 1986, after it emerged that the company had overstated its proven reserves of oil and gas. This concerns ‘a reduction of 4.47 billion barrels (23%) from the previously reported end2002 ﬁgures of 19.5 billion barrels’ (Malcolm Brinded, Managing Director of Shell Transport, Annual Report and Accounts 2003, p. 3). ‘Proved Reserves’ Royal Dutch/Shell deﬁne proved reserves as follows: Proved reserves are the estimated quantities of oil and gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions … Oil and gas reserves cannot be measured exactly since estimation of reserves involves subjective judgment and arbitrary determinations. All estimates are subject to revision. (The Shell Report 2002, p. 26) During January 2004, relative to the FTSE World Oil & Gas Index, shares in Shell Transport & Trading fell by 17 per cent and shares in Royal Dutch Petroleum fell by 10 per cent (Thomson Datastream, cited in Financial Times 2004, p. 21). * This case was compiled from published sources, and public information. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. 7 8 Corporate governance in Europe BRITAIN’S MOST ADMIRED COMPANY Shell 2001: Britain’s Most Admired Company Shell...
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