Shell chief faces Nigerian challenge

Shareholders not told of incentive payments; Watts in firing line for over-booking oil and gas reserves

Shell failed to inform shareholders and US regulators directly that it was receiving incentive payments from the Nigerian Government in return for booking oil and gas reserves in the country.

The admission comes as the Anglo-Dutch oil giant enters a crucial week, with its embattled chairman Sir Philip Watts set to face the wrath of investors on Thursday when he presents Shell's annual results.

He is under pressure to resign following Shell's shock announcement last month that its proven reserves had been cut by 20 per cent after it discovered that massive over-booking of oil and gas finds had taken place between 1996 and 2002.

Half of the 3.9 billion barrel reduction in reserves concerns fields in Australia and Nigeria, where Shell has controversially had a presence for more than 20 years.

Under Nigeria's reserves addition bonus scheme Shell and other overseas oil majors received incentives in the form of tax credits for each barrel of oil booked. Nigeria also benefited from the arrangement by being able to demand a bigger output quota from Opec and higher prices from international oil companies when it auctioned off exploration acreage.

The bonus scheme ran for nine years from 1991. It was scrapped in 2000 by the new Nigerian Government of President Olusegun Obasanjo, which is now seeking to recover $600m (£329m) from Shell and other international oil companies.

Sir Philip ran Shell's Nigerian operations in the early 1990s and he was also head of worldwide exploration and production for much of the period when reserves were being overbooked in the late 1990s.

A Shell spokesman said the booking of reserves in Nigeria was made under Nigeria's national standards for reserves booking. These were a matter of public record which investors and other regulatory authorities were free to inspect.

The spokesman at first said: "The public record may not give details of the amounts paid but it did go into the fact that these payments were made, as I understand it."

He later said: "I do not know whether it was a matter of public record that these incentive payments were being made in return for booking reserves."

He said that under the Nigerian system, a wider range of reserves was reported to the government than was required by the US Securities and Exchange Commission.

An oil industry source said: "During the 1990s there was real competition for reserves booking and perhaps there was less vigilance attached to the Nigerian operation than there should have been. Everyone got carried away in the gold rush. Some of these reserves were not only not provable but not realisable."

Shell has declined to say what proportion of the over-booked reserves relate to Nigeria. But it is certain to come under pressure to give a clear account of what went on when it presents its results.

Sir Philip admitted he had "outraged" some shareholders by failing to attend the conference call at which the reserves bombshell was first dropped. He will front the results but the detailed explanation of its reserves downgrade will be left to the company's current head of exploration and production, Walter van de Vijver.

Sir Philip is not due to step down as chairman until June next year and has told staff that he intends to serve out his time. Shell is expected to attempt to appease investors by modernising its corporate governance arrangements but it will stop short of abandoning its dual-board structure.

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