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. Last Updated: 07/27/2016

Memo: Shell Officials Hid Shortfalls

WASHINGTON -- The new head of the Royal Dutch/Shell Group and its current chief financial officer, as well as the chairman ousted last week, were advised of huge shortfalls in proven oil and natural gas reserves in 2002, two years before they were publicly disclosed, according to company memorandums and notes of executive discussions.

But rather than disclose the problems to investors, senior executives in a July 2002 memorandum came up with -- and later carried out -- what the memorandum described as an "external storyline" and "investor relations script" that tried to "highlight major projects fueling growth," "stress the strength" of existing resources, and minimize the significance of reserves as a measure of growth.

Problems with reserves were discussed among senior executives months earlier.

A February 2002 memorandum said that 1 billion barrels of reserves "are no longer fully aligned" with Securities and Exchange Commission rules because the agency issued an interpretation of them. The memorandum said that an additional 1.3 billion barrels of reserves were at risk because it was no longer certain that they could be extracted during the remaining term of licenses between the company and three foreign countries.

Oil and natural gas reserves represent a central asset of an energy company like Shell, the world's third-largest publicly traded oil company, and are closely followed by analysts and investors as an indicator of future profitability. The estimation of proven reserves is as much an art as a science, although there are extensive industry and government rules that try to measure them with some level of precision.

The Shell memoranda were prepared by Walter van de Vijver, the head of exploration and production until his dismissal last week, for the company's committee of managing directors, a small group of senior executives that in 2002 was headed by Sir Philip Watts and included his recently named successor, Jeroen van der Veer.

On Monday, The Wall Street Journal described an early 2002 memorandum warning of possible overstatements in reserves.

The company documents suggest that current and former senior executives had known about significant problems with reserves since at least 2002 and they raise questions about whether the company moved swiftly to correct the problem. The company's accounting of reserves is now under investigation by the SEC.

The July 2002 memorandum described licensing and other reserve problems in detail.

"Shell faces a challenge" in maintaining its proven reserves "over the coming years -- particularly during 2002 and 2003" and simultaneously achieving production growth and keeping expenses down, the July 18 memorandum begins. It said technical and commercial constraints "equates to a shortfall of 2 billion to 3 billion" barrels of proven reserves, which are oil and gas resources that are reasonably certain to be produced.

The documents show that beginning late last summer, the company grew increasingly concerned about the reserves issue after audit reports of some reserves, a tougher accounting interpretation by the SEC and passage in 2002 of the Sarbanes-Oxley Act, which imposes additional obligations on executives and audit committees.

The company stunned the markets two months ago when it cut its proven reserves of oil and natural gas by 20 percent, or the equivalent of 3.9 billion barrels. Last week, the company dismissed Sir Philip, the company's chairman, and van de Vijver. The company has not said why they were dismissed.

Van der Veer declined to say whether any former top executives had acted illegally and said that he was awaiting the outcome of the company's review.