Shell chief 'told of reserves shortfall in 2002'

The heat was intensifying under the former chairman of Shell yesterday following reports that Sir Philip Watts was warned that oil reserves were being overbooked two years before the company publicly disclosed the fact.

According to a report in the Wall Street Journal, memos circulated in early 2002 to senior Shell directors including Sir Philip cautioned that the Anglo-Dutch company's reserves booking methods appeared to be inconsistent with guidelines laid down by the US Securities and Exchange Commission.

The memos, said to have been written by managers within Shell's exploration and production division, warned that the company's proven reserves might need to be cut by about one billion barrels.

Shell fired Sir Philip and Walter van de Vivjer, its current head of exploration and production, last week after the board "lost confidence" in them. The company said the sacking of the two directors had stemmed directly from the "facts and circumstances" of Shell's disclosure in January that it had cut its proven reserves by 20 per cent or 3.9 billion barrels.

The group's audit committee is now conducting an investigation into the reserves downgrade, due to be completed in the next few weeks, and Shell has pledged to make its findings public.

When the reserves downgrade was announced on 9 January, Shell said it had stemmed from a number of in-depth reserves studies and then a group-wide review undertaken in the fourth quarter of last year.

In a subsequent letter to staff a week later, Sir Philip said information about the reserves downgrade had been released "at the earliest possible time after the recategorised reserves had been quantified with some certainty".

However, yesterday's press report said there had been a "trail of communications" about the need to reclassify reserves dating back to early 2002.

In a conference call last Friday, Shell's new chairman, Jeroen van der Veer, declined say whether Sir Philip and Mr van de Vivjer had acted improperly or illegally. In response to repeated questioning, he would say only that the board had lost confidence in the two.

The overbooking of reserves took place over a six-year period between 1996 and 2002. For most of that time, Sir Philip was head of exploration and production for Shell. He became chairman in 2001.

Shell refused to comment on the claims that Sir Philip and other senior directors had been warned about the overbooking of reserves as long ago as early 2002. "We are not privy to the work of the group audit committee review and it would be inappropriate for us to comment or speculate," a spokesman said.

However, other sources said it was unlikely that the extent of the problem would have been covered up for two years. It was also pointed out that the memos would have been widely circulated among the directors and senior management of Shell, and not just sent to Sir Philip.