Philip Watts - Reserves

Reserves

Less than three years after taking over the chairmanship Watts was swept out of office in early 2004 by revelations that the company had overstated its proved oil and gas reserves by nearly 25 percent.

On January 9, 2004, Shell announced that it was cutting its estimate of proven oil and gas reserves by roughly 3.9 billion barrels, close to 20 percent of total reserves. Investors began calling for Watts to resign.

Reports surfaced of internal memoranda addressed to many of Shell's senior executives months earlier discussing the possibility that the company's proven reserves had been overestimated. Watts had stated that he had not been informed that there might be a need to restate reserves until late in 2003. During 2003, increasingly fractious e-mails from Walter van de Vijver, Watts' successor as CEO of Shell Exploration and Production, made it clear that senior executives had been discussing the issues around reserves for some time. In an appearance in front of around 1,000 staff in Shell Centre's sports hall in January 2004, Watts stated that he had been informed of the problem in late 2003 and that his first response had been to write down on a piece of paper that he (and, by implication, Shell) should 'get the facts and do the right thing.'

In April 2004, the U.S. law firm of Davis Polk & Wardwell released a report on its review of Shell's reserves overbooking crisis. The report alleged that top company executives, including Watts, had known about the reserves shortfall since early 2002. As a result of the Davis Polk Report, the Board asked Watts to resign.

Watts (who had consistently said that he had "...acted properly and in good faith at all times") was investigated by the UK Financial Services Authority (FSA) about his role in relation to the recategorisation of the company's hydrocarbon reserves. In November 2005 the FSA announced that it had "closed its inquiries" when its "Regulatory Decisions Committee," decided that the regulator should take no action. Watts had earlier been refused permission to proceed with a counter action against the FSA by the "Financial Services and Markets Tribunal" when he filed an action seeking to show that the FSA had unfairly prejudiced him in statements made in its settlement with Shell that appeared to condone the findings in the Davis Polk report.

Watts was also investigated by the U.S. Justice Department and the Securities and Exchange Commission for allegedly misleading the stock market by allowing the overstated reserves figures to stand. These investigations are now closed with "no case to answer."

The Securities and Exchange Commission has proposed new regulations regarding the accounting of oil reserves that, according to a Dow Jones article may serve to vindicate Watts, since the proposed changes involve changing many of the SEC proved reserves criteria that prompted Shell's large debooking.