Shares in the oil giant Royal Dutch Shell fell to a two-and-a-half-year low yesterday after a former executive criticised the way the company accounted for its exposure to $7.4bn (£4.7bn) of bets on future US power prices.
George Namur, the former general manager of Shell's Houston-based gas and power trading division, said that the options could prove to be worthless. He also claimed the options were only justified internally by using questionable forecasts about future power prices and "creative" accounting techniques in order to meet Shell's required rate of return.
Under a series of "tolling agreements" Shell has committed to pay $7.4bn to independent power producers over the next 20 years in return for an option to sell the power generated from the gas it supplies to the stations.
If power prices are high then Shell makes a profit by exercising its options to sell the power produced from its gas. If they are low, then Shell makes a loss because it is still contracted to make the capacity payments.
The agreements were taken out three years ago at the top of the US power market, since when average US power prices have fallen by a third.
Shell, chaired by Philip Watts, insisted yesterday that its accounting approach to the tolling agreements was conservative and that the deals were only entered into after "rigorous due diligence and evaluation processes".
Nevertheless, shares in the company fell by more than the market. They ended 36.5p or 8 per cent lower at 415p – a level last seen at the beginning of 2000.
Mr Namur was quoted as saying: "If power prices collapse or even stabilise, there is potentially zero return on the investment." He also said: "We knew what our capacity payments would be and then had to use highly optimistic power price forecasts and other creative items to exceed the 15 per cent return rate."
However, Shell maintained that it had made transparent disclosure of the tolling agreements in its 2001 accounts. The company said that it did not recognise any gains implicit in the deals when the contracts were signed and booked profits and losses on the agreements as they arose.
It added that most of the tolling payments did not fall due until after 2007. "Shell believes the transactions will yield satisfactory returns over their lives, which in many cases extends to 20 years."
Although such tolling agreements are common in the power industry, analysts cautioned that the price forecasts on which they are based were susceptible to very big variations.
This is because the lack of long-term liquidity in the gas and electricity markets makes it difficult to give reliable forecasts about prices over the 20-year life of a power plant.
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