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Ship “Shell” Hit an Iceberg | Shell Oil Scandal in 2004 | | In 2004, the Shell Company was involved in an oil reserves reporting scandal. It made them caught in low point. | | Ines Chen, Leilani Zhao, Bingchen Wang |

Contents
Background……………………………………………………………………….. 2
Purpose of the case study… ………………………………………………...…2
Shell Company, the oil Industry giants………………………………………..3
The Iceberg ----Shell oil scandal ……………………………………………….. 4
Effect of the Scandal ……………………….……………………………………..6
The Origins of the Scandal …….………………………………………………....7
Weak internal controls, the dual company structure ......……………….…7
The shortage of oil reserves and World oil crisis ……………….....………10
The Closed Corporate Culture…………………………….………………..….11
Conclusion…………………………………………………………………….……14
Works Cited………………………………………………………………………15

Background:

In recent years, Shell was one of the most famous companies of the world because of excellent long-term planning, outstanding technical capabilities and unique management style. Shell, which was the Anglo-Dutch heritage and a twin board structure, once was treaded as textbook example of a multinational company. When people talked about the Shell Company, they always remembered the old corporate slogan, 'You could be sure of Shell'. Yes, this seemed a mere statement of fact. But such the good company liked this also did some bad things from the mid-1990s. The company had dealt with the environmental and human right's problem, and its competitors took this opportunity to grow bigger. In 2004, the company was involved in an oil reserves reporting scandal. They were caught in low point. Most people think this is the result of the twin board structure.

Purpose of the Case Study:

Corporate failure is never the result of a random set of events. It is normally a reflection of deep-seated corporate shortcomings. In this paper, we will try to analyze this example to find that there is a pattern to corporate failure: what is the Shell 2004 oil reserves reporting scandal? Why did the Shell companies choose to do this? Would they think that this failure was just a risk, they had no choice but to accept in the quest for growth and increased profit.

Shell Company, the oil Industry giants

Royal Dutch Shell, which was known as Shell, is a global oil and gas company. The Shell set headquarters in The Hague, Netherlands and also has a registered office in London, United Kingdom. It is the second-largest energy company and the fifth-largest company in the world. According to a composite measure, Forbes magazine said the Shell is one of the six oil and gas "super majors". “It is vertically integrated and is active in every area of the oil and gas industry, including exploration and production, refining, distribution and marketing, petrochemicals, power generation and trading. It also has major renewable energy activities, including in biofuels, hydrogen, solar and wind power.” (ycharts, 2012)

In 1890, Jean Baptiste August Kessler founded Royal Dutch Petroleum Company in Holland. At the age of Henri Deterding, King William III of the Netherlands awarded this small oil exploration and productions company a Royal charter. After that time, the Royal Dutch was known as "Royal Dutch Company for the Working of Petroleum Wells in the Dutch Indies".

As we know, the Royal Dutch Shell Group was created in February 1907. At this time, the Royal Dutch Petroleum Company and the "Shell" Transport and Trading Company Ltd of the United Kingdom made a decision that they would merge their operations, which was the result of competing globally with the dominant American petroleum company, which was called John D. Rockefeller's Standard Oil, and this action was also the need of the global strategy. After that, the new Group had 60% ownership of the new Group to the Dutch arm, and the "Shell" Transport and Trading Company Ltd got 40% ownership.

The Shell Company had a whole and strong supply chain which helped the Shell reduce its costs. The company’s refineries sold the end product to the consumers all over the world, which gave Shell the chance to earn higher revenues than others and improve profitability, because Shell eliminated the commissions fees which needed paid to middlemen in the supply chain. This is an advantage for Shell over competitors like Valero Energy (VLO), because they did not have exploration and production businesses.

It is a challenge for the company to Sustain long-term growth in the condition that its reserves continue to decline. It is the especial significance for the other companies which were in the face of competition from rivals such as ConocoPhillips; it increased oil reserves from 2004. (Covestor, 2012)

Even though Shell is the second-largest energy company, it also bears the pressure of the intense competition from national or state-owned public companies. Because of backing by their home governments, these large national oil companies earned greater control over access to oil and gas reserves, but it is difficult for other private companies such as Shell to access these reserves.

But the Shell operation in other countries is not successfully, such as Nigeria, because it was experiencing social and political unrest. During the operation, the company was exposed the problem about the risk of political instability. The Shell Company had no choice but to close four plants in Nigeria in order to ensure the safety of its employees; at the same time, its production in Nigeria decreased by 90 percent.

The Iceberg ----Shell oil scandal: On May 28, 2002 the chairman of the Comity of Managing Directors (CMD) at Royal Dutch Shell named Philip Watts wrote an e-mail to the CEO of Exploration and Production Unit (EP) called van de Vijver. In the e-mail, Philip Watts said that Van de Vijver would bring big trouble to the CMD department shortly. He also hoped the review would include consideration of all ways and means of achieving more than reserves replacement ratio of 100 percent in 2002. To mix metaphors considering the whole spectrum of possibilities and leaving no stone unturned (Kremer, 2005).

On September 2002, Van de Vijver submitted a memo to the Committee of Managing Directors. In the memo, he gave some suggestions to the company to fool the market if credibility of the company was high, medium and long-term portfolio refreshment was real or positive trends could be shown on key indicators.

This email gave people a good explanation of the aggressive policy that an indication could replace oil reserves as quickly as oil was being sold. Actually, this problem did not start in 2002; even the year that van de Vijver got the position for CEO in EP form Philip Watts in 2001. Watts had already noticed that actual situation with oil discoveries it was not optimistic like the company’s report. This aggressive policy to push as much oil reserves into balance sheet as possible was one of the reasons behind the oil reserves scandal that struck one of the oldest and well-established oil companies in the world in the beginning of 2004.

On 9 January 2004, the Royal Dutch Shell Group announced that internal reviews revealed that certain “proven” oil reserves had overbooked its oil and gas reserves by 23 percent. It revised the figure three more times (on 18 March, 9 April and 24 May) before admitting it had overstated its reserves by around 23 per cent (Chartered Institute of Management Accountants , 2012). In the following months, people had seen the title full of scandal about the Shell. The stockholder for Shell oil had seen the value of their investment shrink. When a big bubble bursts, there is a powerful reaction against the values of the era that spawned it. Some top managers, including the chief financial officer have stepped down, and police have been asked to step in to investigate and help resolve the matter. Generally speaking, Shell oil had the problem in oil reserves and reporting regulation.

For a number of years prior to 2004, Shell used a different principle to calculate reserves compared with Securities and Exchange Commission (SEC). After the implementation of the rules, the SEC and the Financial Services Authority (FSA), the UK regulator, examined stated reserves more closely. They became worried about Shell and in 2001 gave the company signal that they felt the digits and information were false, followed by serious warnings in 2002 and 2003. Shell’s senior management appeared to have rejected and even ignored these concerns in order to make more profit by hiding shortage.

A worker named John Donovan worked with Shell. He was an old worker who worked many years in Shell. Once upon a time, in the 1980s, John and his father Alfred Donovan created promotions for Shell customers. Donovan recalled that there were wonderful relationships of trust with the group in the past. But everything changed since Shell hired a new employee in the marketing department. The newcomer suggested many ideas and strategies that Donovan refused to pay.

He exposed the damage information on the super oil giant. The Public thought that was revenge to Royal Dutch Shell that cost the Anglo-Dutch company billions of dollars and well-known reputation. According to Donovan, “We simply ask the leaders of Shell to respect the principles they claim to honor already” (Grison, 2012). These former employees in Shell oil force the manager to stick to its business principles of integrity, honesty and transparency.

Effect of the Scandal:

This well-known scandal brought numerous losses for the Royal Dutch Shell, loss of company’s credibility stand in the breach. Royal Dutch Shell was a long-established FTSE 100 company. It was also a one of the largest international energy companies, operating in at least 90 countries. So, it always has been seen as the safest of havens for money typically invested by insurance company and pension funds (Messenger, 2004). They organized money in small savings, pension plans, and insurance policies by every common person. The investors had full confidence for Royal Dutch Shell, because Royal Dutch Shell could return the steady and safe money. Moreover, public reliance on the steady supply of energy for Royal Dutch Shell Group, even more than it depended on the integrity of corporate financial reporting. Just like their slogan declares: always be sure of Shell. However, the Shell oil reserves scandal have subverted their thought in the past.

It also led to the decrease of share price in the Royal Dutch Shell. 9 November 2003 in which the people in exploration said he was “sick and tired of lying about the extent of our reserves issues”. The revision on January 2004 caused Shell’s share price to drop by nearly 9 per cent. It trailed the FTSE Oil & Gas Producers sector thereafter – as shown in the chart in the following paragraph. The dramatic drop of the share price caused the company hard to issue a share rights in order to raise future capital. The company became subject to take over, especially if the collapsing share price was due to bad management and other people think they could run the company better.

(source:www.fm-magazine.com/feature/depth/understanding-causes-corporate-failure)

Moreover, the internal structure of Shell has changed. It caused the resignations of top managers Philip Watts and a series of senior staffs to leave. The fines imposed by the regulators also undermined the company’s constitution. A financial penalty of £17million for market abuse by Shell as a result of announcements made for breaches of the FSA's listing rules and was considered a big amount for the whole company. Furthermore, a court hold in Amsterdam required the payment of 450 million to the non-American shareholders in 2007.

The Origins of the Scandal:

It wasn't an accident, even if this thing did not happen; there exists serious crisis for the Shell Company

* The First one: weak internal controls, the dual company structure

Shell is unique because its structure is a joint venture of internationality. The Shell Company has been listed as one of the world’s three most international organizations; the other two are the Roman Catholic Church and the United Nations. In fact, one of Shell’s outstanding features was the dual ownership structure.

What is the Dual-Class Ownership? According to the dictionary, the Dual-Class Ownership is a type of share division. In those companies, they have differing rights to issue shares. Because they have a dual class ownership structure, the company can issue two classes of shares, called Class A and Class B. Even if these classes may have different rights to vote, they stand for the same foundation ownership in the company. (Investopedia, 2012)

In Shell, this structure date from the 1950s, the presidency of the Shell Company, Loudon initiated this new model. At that time, McKinsey, an external consultant of the Shell Company, did the self-examination about the Shell's management structure. So it led to remodeling of the Shell's organization in 1959. When they established the decentralized operating companies, they delegated responsibilities and authorities to a formal Committee of Managing Directors which was established to give the function of reaching consensus and coordination in the TMT. In principle, the CMD set up a Chairman and a Vice Chairman and also had some other members of the Managing Directors. The chairmanship of the CMD could be either chose from the president of Royal Dutch or the Managing Director of Shell Transport and Trading. Royal Dutch is entitled to have its nominees elected as a majority, and Shell Transport is entitled to have its nominees elected as the balance of the members of the Boards of Directors of the two Group Holding Companies. Every member of the Board of Management of Royal Dutch and every Managing Director of Shell Transport is also a member of the Presidium of the Board of Directors of Shell Petroleum NV and a Managing Director of The Shell Petroleum Company Limited. As such, they are generally known as “Group Managing Directors”. They are also appointed by the Boards of Shell Petroleum NV, while the Shell Petroleum Company Limited is appointed by a joint committee known as the Committee of Managing Directors, which considers and develops objectives and long-term plans.

Dual-ownership structure made the boards of both companies disagreeable and many mergers and acquisition delay could not be implemented.

2000-2001 oil industry launched a large-scale M & A trend, when British Petroleum, TOTAL and other competitors, non-stop expand in the overseas, but Shell stopped its steps, because Shell was involved in the strategic alliance negotiations with Gazprom as early as seven years ago. Until today, they are still in negotiations, while BP has finished the two acquisitions in Russia. Because of missing the opportunities, it has a big influence for Shell and also makes it goes from ranked first in the world suddenly dropped to third in the world.

The Shell Company was the lack of uniform standards in the areas of the delineation and measurement of reserves; what’s more, the various business sub companies also used their own set of standards. But we cannot ignore such a fact that the past 15 years, British Petroleum and other large oil companies had unified standard in their Company, even including their sub companies.

These are not the only problems. When we see the performance of the Shell Group, we cannot see the Group's per share profit on the performance paper. Instead of this we just can see that how much numbers for the Royal Dutch and how much numbers for the Shell Transport. This performance gave people the impression that this does not seem like the Shell Group's performance report, but it looks like the comprehensive performance paper which can divide into those parts: the two parent company's performance report and each business sub companies' reports. In addition, the Corporation to give managers stock options also can divide into two shares of the parent company. * The Second: The shortage of oil reserves and World oil crisis

Even if the oil reserves are the renewable resources, we have managed to burn probably half of all global oil reserves in the last 125 years or so. Until right now, people just found that Oil is a finite commodity that will gradually deplete. Recently, when people had run out of $5 barrel oil, then they used $10 barrel oil, and people just can be now running out of $20 barrel oil or more.
In order to solve this problem, the oil companies started more increasingly aggressive exploration in recent years, but the result of the search has been disappointing in the last 30 years, they said that all major new discoveries have been under water but it is very expensive to produce. People had no choice but accept this fact that most countries oil production in the world had peaked in the last three decades, and world oil production will peak sometime during 2001-2003. When people began drilling the first well, right now the oil production are at a high rate of over 30 billion a year, those meaning the world oil production is nearing its production plateau. So it meant that after 2003, the number of the oil production would be slow and manageable.
According to the data, world now uses 85 million barrels of oil per day, or can said are 40,000 gallons per second. With the time goes by, the demand of oil is growing exponentially. During this time, people just found that they have used more than half of the world’s total reserve. There is no doubt that recently more than 95 percent of all recoverable oil has now been found all over the world by the people. But the serious situation people had to face is that the Oil had been used four times faster than discovered.
Despite the oil had high profits, the big oil companies have failed to use enough money to invest in new development in order to ensure sufficient output, so that the current requirements of the world capitalist economy are not met. No only this, they had not seriously invested in finding the alternative, renewable sources of energy. The world oil crisis would start to form slowly.
By using the Scandal, the Shell Company can have more oil reserves than other competitors; it can get more influence on the world energy markets. Because of the more oil reserves, the stockholder and customers can have more confidence on the Shell Company rather than others, so that the Shell Company can get more market share. To face the huge beneficial temptation, the senior levels of Shell Company made the decision which let them spend their rest of lives from regretting and hiding their shame.

* The Third: The Closed Corporate Culture.

Shell gets a reputation which said they were arrogant with the business partners and also they bully their employees.

Criticism of Shell on its closed corporate culture is nothing new. From the history, people can see that in the first three decades of the twentieth century, Royal Dutch Shell did everything to control the price of oil by limiting competition. They wanted to be dictatorial business leader in the area of the oil. There was once an annual general meeting being disrupted by the protesters because of the sanction breaking.

From the people who ever worked in the Shell Company, they feel that they did not work in an open environment. People were not relaxed and can be free to criticize. Most of the high-level leaders did not like the soul-searching about the actions.

In Shell Company, people could not bear "bullying" within the company, their business partners always admitted that during cooperative process the people who came from the Shell company show that they are all "arrogant". Not only did they believe their technology; also they did everything arrogant of their bones.

The result of this scandal

The oil company has been shocked by the scandal since Royal Dutch/Shell, because the Royal Dutch/Shell was overstated its reserves by around 23 percent. This scandal not only seriously affected the economy of the company, but also influenced the economy of the world. After the 2004 Shell Oil Scandal, Royal Dutch/Shell Group began to re-examine the structure and personal training mechanism. In the staff management, one of the most important things was to regain employees’ confidence.

The former chairman of Royal Dutch/Shell Group Philip Watts felt so sorry about this scandal. He apologized to the public. This scandal wakened the Royal Dutch/Shell Group to take measures, and pushed the company to re-examine the structure and employees’ training mechanism.

The double structure of board of directors was not suitable for the further development of the Royal Dutch/Shell Group, with the pressure of investor, customers, and the general public. Jeroenvander Veer changed the double structure of board of directors to single structure of board of directors, which meant that the company was manage by a board of directors and a CEO. The double structure of board of directors induced bureaucratic inertia, and made the ambiguous lines of responsibility, so the double structure of board of directors decline the efficiency of the company , which was why the Shell Company need to change double structure of board of directors to the single structure of board of a director. July 20, 2005, after the passage of the merger proposal of the board of directors of two companies, Royal Dutch and Shell Transport and unity, the new company named Royal Dutch Shell, which ended the 98 years’ double structure of board of directors. Under the leadership of one person, the Royal Dutch Group became more and more competitive in the management, and improved the efficiency of work in the company when dealing with the serious problems.

Jeroenvander Veer was became the new CEO in July, 2000. He had improved the exploration department, and began implementation plan of Big Cats, which meant that the company would use $1.8 billion on exploration expenditures in one or two years. According to the statistics of Wood Mackenzie, the exploration expenditures were the highest in the industry. Moreover, Jeroenvander Veer also invested $10.5 billion in the production department, in order to search for new oil reserves. As we all know, the oil resource is precious for people’s lives. With the development of society and industry, the demand for oil is increasing more and more increase in the contemporary society, but the oil reserves are becoming lower and lower. We can see these measures were so important for Royal Dutch/Shell to recover the company like before, which can help the Shell Company recover the economy, and then attract more investors, so this is a plan which can rebuild the reputation by ensure the interests of shareholders.

At the same time to improve the corporate governance structure, Royal Dutch/Shell also needs to be aware of the company's internal staff to withstand the enormous pressure and doubts. The 2004 Royal Dutch/Shell scandal was deeply destroyed the confidence of employees and investors. The employees’ confidence significant declined from the leadership, so the Shell Company needed to regain the confidence from employees, and also from the investors. Rick Brown, who was the HR director, visited 3000 global workers, and expanded the changes about talent reserves, training, and retention. The Shell Company began a plan called “Enterprise First”, which means that employees not only needed to think about their own areas, but also need to think about how their own work can effect on other areas. The department would put more money, time, and effort on leadership assessment and development. The employees need more communication with the senior leaders, which allowed the employees and senior leaders to realize more about each other through the world.

All these effective measures took Royal Dutch/Shell Group gradually out of the shadows, and it is still one the most renowned companies in the world. To rebuild the reputation of Royal Dutch/Shell Group, these measures need more time to be completed.

Conclusion

Because of hitting an iceberg, the unsinkable Titanic, right now it was plunging into 12, 000 feet of water near the coast of Newfoundland. One ant hole may cause the collapse of a thousand-li dyke. Because of the 2004 oil scandal, the Shell Company faced their biggest shock for 98 years. Royal Dutch/Shell has an enviable reputation and a proud history, why the good companies do the bad thing. Shell is not the first one and the last one. Companies chose to do this not because they were in the quest for growth and increased profit. This is a role of warning for the other companies. We hoped the same things would not happen in the future.

Works Cited
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