Crikey has been reflecting on the Shell bid for Woodside in recent sealed sections as Shell’s hell goes from bad to worse:

Reflecting on Shell’s Woodside bid

Sealed section – 23 April

It’s amazing how a few months, and even a couple of years, allows for
things to be put in perspective. Just take the Shell bid for Woodside
that Peter Costello throttled a couple of years ago.

Woodside’s share price has topped it and gone onto bigger things. There
seems more certainty about the company. There’s a new CEO in place,
asset sales have raised a nice dollop of cash and exploration and
careful acquisitions seem to be turning up replacement assets.

All things that Shell was supposed to help happen. But the one big
benefit is that it would have been spared the dead hand of Anglo-Dutch
superiority, the sort of ‘born to rule’ attitude that Shell people from
London or Holland radiate when amongst the colonials.

And why is that a benefit? Because who would have thought that Shell,
that paragon of Anglo-Dutch probity and exactitude, has been sprung
falsifying its crucial proven reserves figures, for years. Leading to
the loss of a chairman, CEO and Chief Financial Officer, and now an
expanded criminal probe by US authorities, led by the Securities and
Exchange Commission and the US Justice department. Criminal authorities
step up US Shell probe.

There’s hardly been a peep out of those fund managers and commentators
who thought Costello was wrong to have blocked the deal. Although he
had no knowledge of what Shell was doing, the decision has saved his
government, Woodside and others a great deal of embarrassment.

For what Shell is accused of is worse than anything alleged at AMP, BHP
years ago, or NAB. It’s knowingly fiddling the reserves figures, which
in turn meant fiddling the books, fraud in other words. Overseen at the
highest level, or so the allegations go. Can oilies imagine the
whispers that would be flowing now about whether the Shell method of
reserves counting had been introduced at Woodside, justified by the
explanation that it was a superior system, because of Shell’s
experience and authority.

And there would be those fee-hungry merchant bankers eyeing the sale of
Shell’s Woodside stake to another party. In fact, the more this goes on
and the deeper the hole in which Shell finds itself, the greater the
chances of Woodside being back in play. BHP-Billiton may have the
chance to right the wrong that Peter Willcox did all those years ago in
selling BHP’s 40 per cent Woodside stake for a miserable $3 a share.

Woodside shares are 18c higher at a record $16.81 today. This is 18.4
per cent the $14.20 off price from Shell and well within the valuation
range of $16 to $18 placed on Woodside by the independent experts at
Deloitte Corporate Finance during the takeover battle.

Woodside has 667 million shares on issue so if the proposal to increase
the Shell stake from 36 per cent to 56 per cent had proceeded, the
shareholders that sold would today be collectively $348 million worse
off.

Shell hell worsens as auditors face sanction

Sealed section – 25 April

Finally, Channel Nine’s Business Sunday caught up with THE biggest
story in international business for sometime today – Shell’s
mis-stating of its oil and gas reserves that has cost the jobs of the
company’s chairman, chief executive and chief financial officer and
plunged one of world business’s blue bloods into crisis. Just like one
of Australia’s blue bloods, the NAB, Shell remains in crisis.

The bought-in story from Britain on Business Sunday this morning was a
good yarn, but didn’t quite convey how this story continues to unfold
and how more reputations will be damaged.

The reserves revision is a cut of almost 25 per cent on last year’s
figure. That has cut the value of the company’s shares, prompted law
suits in the US, brought the US Securities and Exchange Commission into
the act, along with the US Justice Department which is looking at
possible criminal acts. The Financial Services Administration in the UK
is also probing the situation.

What about Australia, well it would have been nice to hear from ASIC,
but they do watch Business Sunday and read the papers, so perhaps
they’re ‘monitoring’ the situation. Now the company’s joint auditors,
KPMG and PricewaterhouseCoopers, are in the gun because of comments
made in Shell’s big statement last week that said there had been
problems in the internal controls and audit.

Why that’s an interesting pairing. They were last together in a similar
situation in the National Australia Bank weren’t they? International
auditing and accounting is a small world, isn’t it?

A bit of background is needed. There are two key companies in Shell –
Shell Trading and Transport based in London and Royal Dutch based in
the Netherlands. Its proper name is Royal Dutch/Shell trading and
Transport.

Part of the two auditors’ problems relate to the verification they must
make that a company’s internal controls are adequate and provide
numbers that can be used in an outside audit. Last week’s report from a
New York law firm to Shell found that the over-booking of reserves was
possible only “because of certain deficiencies in the company’s
internal controls”. It said the internal reserves audit function was
“understaffed and undertrained”.

Ouch. Yes, it does sound both like the NAB and KPMG’s experience inside
the NAB and auditing it. And there was PwC to pick over KPMG’s errors
and the other problems internally in the NAB. Now it’s in the gun over
its Shell efforts.

Finally, the impact of a corporate blue-blood like Shell being involved
in such a disaster cannot be overestimated. In management terms, Shell
has been one of the most influential companies in world business. Its
use of scenario-planning has helped the idea spread to other industries
and companies around the world. The phrase “what if” has sparked a
whole cottage industry as well as abuse by management consultants and
their friends.

Shell, of course, mucked this one up. Two of the scenarios it didn’t
anticipate were the way world opinion would so quickly turn against it
over the problems it had in Nigeria where an activist opposed to the
company’s operations was executed by the Government. And there was also
the silly idea of sinking the dirty Brent Spar production platform in
the North Sea that earned it the opprobrium of environmentalists and
Governments, sufficient to stop the idea.

Shell’s other great management idea has been the use of Matrix
Management reporting method where executives and business groups not
only report vertically in national business groups, but horizontally
and obliquely to executives and groups in other countries. How anyone
can make sense of it is sometimes beyond even the most experienced
Shell executive.

This complexity of management reporting and responsibilities, plus the
grouping of the businesses into two companies under two boards that
meet only eight times a year, is seen as part of the reasons why this
devastating blow to its reputation was allowed to happen and fester for
so long. The Financial Times (ft.com) has a good file of background
material.

The similarities with the NAB are interesting, apart from the audit
area. Blue-blooded boards are obviously no barrier to greed and
incompetence, especially if the senior managers and the boards are
complicit in not wanting to hear bad news. Both companies obviously
paid only lip service to the idea of transparency and good governance,
which does include internal audit controls and risk management.

As Crikey observed late last week, we don’t hear anyone complaining
that the Shell bid for Woodside was stopped by Peter Costello.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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