U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18844 / August 24, 2004
Accounting and Auditing Enforcement
Release No. 2086 / August 24, 2004
Securities and Exchange Commission v. Royal Dutch Petroleum Company and The "Shell" Transport and Trading Company, p.l.c., Civil Action No. H-04-3359, U.S.D.C./Southern District of Texas (Houston Division)
In the Matter of Royal Dutch Petroleum Company and The "Shell" Transport and Trading Company, p.l.c., Exchange Act Rel. No. 34-50233 (August 24, 2004).
SEC Settles Securities Fraud Case with Royal Dutch Petroleum Company and The "Shell" Transport and Trading Company, p.l.c. Involving Proved Reserves Overstatement of 4.47 Billion Barrels
Companies Will Pay a $120 Million Civil Penalty
The U.S. Securities and Exchange Commission today announced settlement of an enforcement action against foreign-based oil companies Royal Dutch Petroleum Company ("Royal Dutch") and The "Shell" Transport and Trading Company, p.l.c. ("Shell Transport" and, together with Royal Dutch, "Shell"), in connection with their overstatement of 4.47 billion barrels of previously reported proved hydrocarbon reserves. Royal Dutch is a Dutch corporation headquartered in The Hague, while Shell Transport is an English corporation headquartered in London.
Royal Dutch and Shell Transport agreed to settle these proceedings by consenting to a cease-and-desist order finding violations of the antifraud, internal controls, record-keeping and reporting 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 in Houston. 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.
According to the Commission's order and complaint, Shell overstated proved reserves reported in its 2002 Form 20-F by 4.47 billion barrels of oil equivalent, or approximately 23%. The order further concludes that Shell overstated the standardized measure of future cash flows reported in this filing by approximately $6.6 billion. The Commission's order also finds, and the complaint alleges, that, for the years 1998 through 2002, 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 one-, three- and five-year periods through 2002 would have been materially different from what it originally reported.
The Commission also found and alleges that Shell's overstatement of proved reserves, and its delay in correcting the overstatement, resulted from (i) its desire to create and maintain the appearance of a strong RRR, (ii) the failure of its internal reserves estimation and reporting guidelines to conform to SEC requirements, and (iii) 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 cease-and-desist order finds and civil complaint alleges that Royal Dutch and Shell Transport violated Sections 10(b), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act 0f 1934 and Rules 10b-5, 12b-20, 13a-1 and 13b2-1 thereunder
The Commission's investigation continues as to other individuals and entities.
SEC Complaint in this matter