Governance Problems at Royal Dutch/Shell

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Case Details:

Case Code : BSTR155
Case Length : 17
Pages Period : 2000 - 2005
Organization : Royal Dutch | Shell
Pub Date : 2005
Teaching Note :Not Available
Countries : UK, Netherlands
Themes: Corporate Governance
Industry : Petroleum and Petrochemicals

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"This is the end of 60:40; we become one company with one share. There is one set of directors, one chief executive, one person who has to take full accountability."1

- Jeroen Van der Veer, Chairman of the Royal Dutch/Shell Group's board of managers.

'Oil Reserves' Scandal

On January 09, 2004, following an internal review, the management of Royal Dutch/Shell Group (Shell), announced that the company's financial statements had shown inflated oil reserves in the earlier years. Shell, the third largest oil exploration and production company in the world, further stated that it would downgrade nearly four billion (bn) barrels2 of its 'proven'3 oil and gas reserves to the 'probable'4 category. This accounted for nearly one-fifth of the total 'proven'oil reserves of Shell, the largest ever reserves re-categorization5 for any oil company in the world. Soon after the announcement, Shell's stock price nose-dived (Refer Exhibit I for Shell's stock price before and after the oil reserves scandal).

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The Securities and Exchange Commission (SEC)6 started an investigation into the overstatement of oil reserves by Shell. In addition, British financial regulators led by the Financial Services Authority also launched an investigation. Recognizing the need to restore investor confidence and the credibility of the company, Shell also appointed Davis, Polk & Wardwell7 to act as an independent counsel to investigate the problem.

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1] Jane Wardell, "Royal Dutch/Shell Unveils Surprise Merger, rise in 3Q,", November 07, 2004.

2] Barrel is a unit of measure for oil and petroleum products and is equivalent to 42 gallons.

3] Proven reserve is the "oil that can be reasonably considered to be able to extract in the future from the known physical resources, with known techniques and in the present economic conditions."In this case, the existence of underground oil is physically proven, but the possibility is not considered.

4] Probable reserve means the oil whose existence underground is considered as probable, given the geology, the discovery of oil nearby etc., but has not yet been discovered.

5] To know more about Shell's oil reserves scandal, refer to "Royal Dutch/Shell 'Oil Reserves' Controversy"case study (ECCH Reference No. 704-049-1).

6] SEC is a civil law enforcement agency operating in the US. SEC's mission is to administer and enforce the federal securities laws in order to protect investors, and to maintain fair, honest, and efficient markets.

7] Based in New York, Davis Polk is among the world's leading law firms offering a range of services, including corporate and finance transactions and litigation matters. It has more than 650 lawyers in nine offices in different parts of the world.


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