Shell agreed to settle these proceedings by consenting to a cease-and-desist order finding violations of the antifraud and other provisions of the federal securities laws, and by paying $1 disgorgement and a $120 million penalty in a related civil action the Commission filed in U.S. District Court. Shell also has undertaken to commit an additional $5 million to develop and implement a comprehensive internal compliance program under the direction and oversight of the Group's legal director. The companies settled without admitting or denying the Commission's substantive findings.
Shell simultaneously agreed to pay £17 million to settle a market abuse enforcement action initiated by the Financial Services Authority (FSA), the primary financial market regulator in the United Kingdom.
Commenting on the Commission's enforcement action, Harold F. Degenhardt, Administrator of the Commission's Fort Worth Office, said, "Shell's overstatements of its oil reserves, which occurred over an extended period, mandate a strong enforcement response, including imposition of significant civil penalties, to deter Shell and others from engaging in similar misconduct. As our investigation continues, we intend to focus on, among other things, the people responsible for Shell's failures."
Added Spencer C. Barasch, Associate Administrator of the Commission's Fort Worth Office, "Accurate disclosures about proved reserves and reserve replacement are critical to investors in oil and gas companies. Today's enforcement action reinforces that public companies in this industry must ensure that their proved reserves disclosures are reliable and comport with Commission requirements."
The Commission's staff has coordinated its investigation closely with the FSA and the Autoriteit Financiële Markten, the primary financial market regulator in the Netherlands.
"The degree of international and interagency cooperation in this case has been extraordinary and sets an important precedent for investors that regulatory efforts to police the financial markets will transcend national borders," said Stephen M. Cutler, Director of the Commission's Division of Enforcement.
According to the Commission's order, Shell overstated proved reserves reported in its 2002 Form 20-F by 4.47 billion barrels of oil equivalent (boe), or approximately 23%. The order further concludes that Shell also overstated the standardized measure of future cash flows reported in this filing by approximately $6.6 billion. Shell corrected these overstatements in an amended filing on July 2, 2004, which reflected the degree of Shell's overstatements for the years 1997 to 2002.
| Year | Proved Reserves Overstatement | % Overstatement | Standardized Measure Overstatement | % Overstatement |
|---|---|---|---|---|
| 1997 | 3.13 boe | 16% | N/A | N/A |
| 1998 | 3.78 boe | 18% | N/A | N/A |
| 1999 | 4.58 boe | 23% | $7.0 billion | 11% |
| 2000 | 4.84 boe | 25% | $7.2 billion | 10% |
| 2001 | 4.53 boe | 24% | $6.5 billion | 13% |
| 2002 | 4.47 boe | 23% | $6.6 billion | 9% |
The Commission's order also finds that, during this period, Shell materially misstated its reserves replacement ratio (RRR), a key performance indicator in the oil and gas industry. Had Shell properly reported proved reserves, its RRR for the five-year period 1998 through 2002 would have been 80%, rather than the 100% Shell originally reported, and its annual and three-year RRR over this span would have been as follows.
| Year | 1-Year RRR | 3-Year RRR | ||
|---|---|---|---|---|
| Original | Restated | Original | Restated | |
| 1998 | 182% | 134% | n/a | n/a |
| 1999 | 56% | -5% | n/a | n/a |
| 2000 | 69% | 50% | 102% | 60% |
| 2001 | 74% | 97% | 66% | 48% |
| 2002 | 117% | 121% | 87% | 90% |
| 2003 | n/a | 63% | n/a | 94% |
As the Commission's order outlines, Shell's overstatement of proved reserves, and its delay in correcting the overstatement, resulted from its desire to create and maintain the appearance of a strong RRR, the failure of its internal reserves estimation and reporting guidelines to conform to SEC requirements, and the lack of effective internal controls over the reserves estimation and reporting process. These failures led Shell to record and maintain proved reserves it knew or was reckless in not knowing did not satisfy SEC requirements, and to report for certain years a stronger RRR than it actually had achieved. Indeed, Shell was warned on several occasions prior to the fall of 2003 that reported proved reserves potentially were overstated and, in such critical operating areas as Nigeria and Oman, depended upon unrealistic production forecasts. In each case, Shell either rejected the warnings as immaterial or unduly pessimistic, or attempted to "manage" the potential exposure by, for example, delaying de-booking of improperly recorded proved reserves until new, offsetting proved reserves bookings materialized.
In accepting Shell's settlement offer, the Commission took into account Shell's cooperation with the staff's investigation and the remedial actions Shell has undertaken, as outlined in the order.
The Commission's investigation continues as to other individuals and entities.
Additional materials: Administrative Proceeding Release No. 34-50233
