After the Shell shock: watchdogs seek to wipe out the grey areas in the black stuff

Accounting regulators plan reform that would force oil companies to submit estimates of reserves to the scrutiny of auditors
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The fallout from the Shell reserves affair is widening. After two downgrades, the resignation of two senior directors and the postponement of its annual report, ExxonMobil and Norwegian oil company Norsk Hydro have joined the Anglo-Dutch company in facing the wrath of shareholders and regulators.

Now the entire oil and gas industry is coming under the microscope of accounting watchdogs as they prepare for a summit meeting in London next month.

For the first time, oil companies could be forced to submit their estimates of their oil and gas reserves to external auditors for approval. It would be a seismic change.

At the moment, auditors who sign off their accounts do not have to approve the estimates. They leave the companies to come up with their own estimates based on their own methods, which is precisely why Shell, and others, find themselves in such a mess.

The International Accounting Standards Board (IASB) will meet other accounting regulators from around the world to discuss whether to close this auditing loophole. Also on the agenda will be whether to establish standardised meth- ods for booking reserves.

If reserve bookings are included in oil companies' audited financial statements, they would face the same scrutiny from regulators as the rest of their audited results. This would also risk exposing auditing firms to shareholder lawsuits if the reserves they sign off prove to be wrong. The offshore subsidiaries of fallen energy giant Enron helped to bring down its now-defunct auditor, Andersen.

Existing auditing firms will hope that having to sign off clients' offshore and onshore oil and gas reserves will not end up bringing them down too. As each day brings news of the latest shareholder lawsuit or investigation by regulators, you wouldn't blame them for not wanting the extra responsibility.

Shell continues to lurch from crisis to crisis. In January, former chairman Sir Philip Watts reclassified a fifth of the Anglo-Dutch giant's "proven" oil and gas reserves as "probable". On Thursday, the company invited more humiliation when new chairman Jeroen van der Veer reclassified a further 470 million barrels of proven oil and gas reserves. He also delayed the publication of its annual report, due last Friday, and its annual general meeting by two months.

Shell faces a wave of class actions and investigations by UK regulator the Financial Services Authority and the Securities and Exchange Commission (SEC) in the US. Mr Van der Veer has conceded that the bloodletting might not be over. The company has appointed an internal audit committee to review its reserve bookings, which will report in six weeks' time. Finance director Judy Boynton is particularly vulnerable. Seen as a close confidante of Sir Philip, it is thought she is one of the executives who knew about the overbooking of reserves as long ago as early 2002. The share price is down by a fifth since the start of the year.

"Proven" reserves are defined as being close to commercialisation because they can be got out of the ground and transported to market for a profit. The term is open to interpretation, demonstrated by the different approaches taken by the operators of the Ormen Lange field in Norway, which Shell had to reclassify last week. The company had originally booked 80 per cent of its allocation of estimated recoverable oil and gas reserves from the field as proven. After its second reclassification, Shell booked 20 per cent. Yet Norsk Hydro has still booked around 75 per cent and now faces an investigation by the SEC. Another operator, BP, is thought to have booked a similar amount. Statoil, the Norwegian state oil company, has booked just 20 per cent of its allocation.

Shell's troubles have brought into focus the wider problems of the industry. In 2000 the IASB reviewed how extractive industries report their results, including reserve booking. But then the Enron and WorldCom accounting scandals broke, and there were other priorities.

Next month's summit had been planned long before Shell got into difficulties. Nigel Sleigh-Johnson, head of financial reporting at the Institute of Chartered Accountants in England and Wales, says it's long overdue. "There is a multiplicity of accounting practices used by the extractive industry. This is part of the problem. It was recognised several years ago that there is no conceptual justification for such diversity. The IASC should take another look at it, and very soon."

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