Briefing - Corporate governance - How top Shell execs found themselves over a barrel.

(From Financial Director)

Following Shell's disclosure in January 2004 that it had miscategorised 3.9 billion barrels of oil equivalent (boe) of its "proved" reserves, the group appointed law firm Davis Polk & Wardwell to conduct an independent investigation.

The firm delivered a 463-page report to the General Audit Committee (GAC) in March, which has been accepted in full by the Shell board. An executive summary was made available on Shell's website in April.

Walter van de Vijver succeeded Sir Philip Watts as CEO of Shell's Exploration & Production (EP) business in 2001. He told Davis Polk that, soon after he took office, he noticed that "the health of the EP business was not as robust as the company-determined performance targets set under the former EP CEO (Sir Philip). In fact, it was in a far worse state ... than was portrayed by my predecessor to senior management ..."

Van de Vijver claimed repeatedly over the years that reserves booked during Sir Philip's tenure were "premature" or "aggressive", and did not comply with Shell guidelines, hence, were also in violation of SEC requirements.

He added that the premature booking of reserves had frustrated his ability to meet business targets.

Davis Polk concluded that the reserves problem was seen as "a serious and immediate business question but not, equally, as a regulatory and disclosure failing", even though from 2001 onwards there was a "growing recognition" within Shell that the reserve data was not fully compliant with SEC rules. In February 2002, van de Vijver sent a note to the Committee of Managing Directors (CMD) pointing out that recent SEC clarifications "make it apparent that the (Shell) guidelines for booking proved reserves are no longer fully aligned with the SEC rules." He added that some 2.3 million boe may be "exposed" as a result.