The Sunday Telegraph (UK): The day Shell bit the bullet: “Shell revealed that it may have to reclassify a further 900m barrels of proven reserves, bringing the amount of overbooked oil to a massive 5.4bn barrels, or almost one third of its reserves. Shell has just 10 years of reserves, compared with 14 years for both BP and ExxonMobil. Worryingly, Shell's production is expected to be flat between now and 2009.” (ShellNews.net)
(Filed: 31/10/2004)
The oil giant's merger of its Dutch and British arms took the market by surprise. Its first ever chief executive, Jeroen van der Veer, tells Sylvia Pfeifer how the decision was made
W hen the crunch finally came, after months of debate, it took Shell's board just 20 minutes to wipe out years of history.
At a meeting on Wednesday, executives from the Anglo-Dutch oil giant agreed to dismantle its historic dual structure and merge its two operating companies into one, with one board and one chief executive. The radical move by a company known for its conservative, almost civil-service type mentality goes far beyond the demands of investors.
Most had been pressing for a combination of the boards of the two companies, Royal Dutch and Shell Transport & Trading, after the company's shock revelation earlier this year that it had overbooked its proven oil and gas reserves by 25 per cent.
The announcement - and subsequent discovery that Shell ignored internal warnings for several years that it was overstating reserves - led to the departure of its three top executives, including Sir Philip Watts, the chairman.
Shell promised to overhaul its corporate structure, but few thought it would be quite so radical. Nor did anyone think Jeroen van der Veer, who took over from Watts in March and who is now the company's first-ever chief executive, would be the person to drive such dramatic change.
Sitting in his office on the 23rd floor of the Shell Centre in London just a day after unveiling the new-look company, van der Veer looks anything but a radical and more like the Shell lifer he is. He is decked out in the company's regulation kit - you can't miss the Shell tie, the Shell cufflinks and even the Shell belt - but when he starts to talk you realise he is far from sentimental about last week's momentous decision.
Van der Veer says Shell had always vowed never to rule anything out from the start. However, the real turning point came in June when the board started to contemplate the previously unthinkable: scrapping 100 years of tradition and merging the two companies.
"In June, when I sat with my executives, we said: 'Oh, if that would be possible, wouldn't that be a very powerful way to take the company forward!' "
The idea was planted and last week's relatively short board meeting - "a tour de force" according to van der Veer - was testament to all the hard work that took place before Thursday's announcement.
Shareholders may have welcomed the corporate shake-up, but Shell still has much to do. As a plc it may now look like BP, but operationally it is lagging behind.
"The corporate governance is right on the money, management bit the bullet . . . and they are now really going into the 21st century," says Fadel Gheit, an analyst at Oppenheimer & Co in New York. "But Shell is not out of the woods yet, it is still a lot less efficient than BP or ExxonMobil. We need to see the implementation, we want to see the results."
The new company - Royal Dutch Shell - will be headquartered in the Netherlands but will have its primary stock market listing in the UK. With an estimated market capitalisation of £105bn, it will compete with BP for the top spot in the FTSE100 index.
Dutch and British shares will be split into A and B categories - each with their own domestic dividend - effectively ensuring neither set of shareholders suffers any tax disadvantages.
Nevertheless, the fact that, initially at least, the new company will be run by two Dutchmen - Aad Jacobs, the chairman, and van der Veer - and that the majority of its non-executives come from Royal Dutch, has prompted accusations that this is nothing more than a Dutch takeover.
Not so, says van der Veer. "Don't get it wrong! It is a British company under the British Combined Code under the British authorities, with headquarters that will be in the Hague. That is the innovation. We are a very global company but we continue to have roots in two countries."
For once, van der Veer's investors appear to be on his side. According to Eric Knight of Knight Vinke Asset Management, the UK side has, in fact, scored a victory. He argues that under the old arrangement the UK arm was little more than a passive 40 per cent shareholder. Under the new scheme it will be a 40 per cent partner with real clout.
For van der Veer and his team the most important consequence of the new structure is that it will offer greater accountability to shareholders and guarantees against a repeat of Shell's auditing problems.
Critics have argued that the dual structure was deeply flawed and contributed to the overstatement of reserves. Van der Veer disputes this, saying the structure did not cause the reserves debacle, but he admits the ensuing crisis acted as a catalyst for change. The new structure will be "more performance-oriented, more competitive and less complex".
"Saying farewell to the collegiate system will enable me to speed up the decision making and make sure that we have the right project delivery," he says.
So what kind of CEO will he be? The question seems to take him by surprise but he is quick to resort to one of his favourite acronyms: "LAT", or Leadership, Accountability and Teamwork.
He won't talk about his own pay - "I smile because I think, hang on, we are here cutting a company out of a crisis" - nor does he want to discuss what kind of strengths a new, external chairman should have.
Shell's present chairman, Aad Jacobs, will retire in 2006 and the search will be on for a successor as soon as a headhunting firm is signed up. The headhunters, he laughs, are already queueing up outside Shell Centre.
Van der Veer's priority is to make Shell a "first enterprise culture". As a result, the company will introduce a new group-wide bonus scheme next year, one that will no longer be linked to the amount of oil and gas the company discovers. Instead, it will measure performance against that of competitors like ExxonMobil and BP.
But while van der Veer may now have the right structures in place, last week's third quarter results have highlighted once again just how far Shell is lagging behind its competitors.
Shell revealed that it may have to reclassify a further 900m barrels of proven reserves, bringing the amount of overbooked oil to a massive 5.4bn barrels, or almost one third of its reserves. Shell has just 10 years of reserves, compared with 14 years for both BP and ExxonMobil. Worryingly, Shell's production is expected to be flat between now and 2009.
So how will Shell deliver? Van der Veer points to the $15bn a year in capital expenditure that Shell plans between now and 2006, noting that a big share, $1.5bn, will go on exploration. The company will focus on "big cat" fields - those that guarantee more than 100m barrels of oil or gas.
Crucially too, the new structure means that Shell can now use its shares as an acquisition currency, something van der Veer does not rule out.
"When oil prices are high, the most logical way to grow the company is organically . . . Wall Street constructions, as I call them, are very expensive but having said that, if we would like to do Wall Street constructions, we are now on a level playing field with competitors."
For now, however, acquisitions are not uppermost in his mind. Van der Veer is off to the Hague to give a speech to Shell employees - and no doubt explain why, after 33 years at Shell, he thinks last week's historic decision was the right one.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2004/10/31/ccshell31.xml