Reserves, Resources and the Evidence Problem

On Friday 9 January 2004 the Royal Dutch/Shell Group announced that it was recategorising about 3.9 billion barrels of oil equivalent of its proved reserves, roughly a fifth of the total, mostly to "probable". Brent crude was about $30–31 a barrel. Nothing in the ground had changed. The volumes were in fields Shell still held, including in Nigeria, Oman and Australia's Gorgon gas project; the question was whether they were "reasonably certain" to be produced commercially under existing conditions, as the US Securities and Exchange Commission's rules required. In Nigeria, OPEC quotas and insecurity meant development would be slow; Gorgon had no approved development plan and no gas sales contracts (reported). Shell did not hold an analyst call, and its chairman, Sir Philip Watts, did not present the announcement, which investors criticised.

The background was a contest Shell was losing. In 1998–2001 BP, Exxon and Chevron had grown through mergers, and Shell had not. Investors watched its reserve replacement ratio, the new proved reserves it booked each year as a share of what it produced, as the best single sign of its future, and managers' incentives were tied in part to reserve additions (reported). Watts had run exploration and production in 1997–2001 before becoming chairman of the committee of managing directors, which governed the group in place of a chief executive under the dual structure created in 1907.

The cuts kept coming. Watts and Walter van de Vijver, his successor as head of exploration and production, left on 3 March 2004, and further revisions in March, April and May took the total to about 4.5 billion boe (reported). A report by the law firm Davis Polk, published in summary in April, showed that van de Vijver had warned in 2002–03 that the bookings could not be supported, and quoted his email of November 2003 saying he was "becoming sick and tired about lying" about the reserves position (as published, reported). On 24 August 2004 Shell paid about $120 million to the SEC and about £17 million to Britain's Financial Services Authority, settling without admitting or denying the SEC's findings. Shareholder settlements followed. The two parent companies merged into a single Royal Dutch Shell plc with one board and one chief executive in July 2005. Gorgon, one of the fields at issue, reached a final investment decision in 2009 and shipped its first LNG in 2016.