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Watts Dismissed from Securities Class Action Lawsuit

20 February 2008
20 February 2008 Washington, D.C., - On February 7, 2008, Judge Pisano of the U.S. District Court for the District of New Jersey ordered the dismissal of Sir Philip Watts, the former chairman of the Committee of Managing Directors of the Royal Dutch/Shell Group of Companies ("Shell"), from a class action arising under United States securities laws.  Sir Philip had been a named defendant in the private lawsuit brought against Shell, Shell's external auditors, KPMG and PwC, and others.  The lawsuit continues against Shell, KPMG, and PwC.

Judge Pisano's Order dismisses all of Plaintiffs' claims against Sir Philip.  Sir Philip has always maintained that he acted in good faith.  Sir Philip was not charged with any wrongdoing by the United Kingdom Financial Services Authority ("FSA") or the United States Securities and Exchange Commission ("SEC"), which both thoroughly investigated the matter.

The class action lawsuit arose after Shell announced the recategorization of proved oil and gas reserves in 2004.  Since that announcement, the FSA conducted a joint investigation with the SEC.  In November 2005, the FSA announced that it had completed its investigation and that no action would be taken against Sir Philip.  In August 2006, the SEC informed Sir Philip that it had terminated its investigation and that no action would be taken against him.

Joseph I. Goldstein, counsel for Sir Philip, stated that:  "The FSA and the SEC investigated every aspect of Sir Philip's involvement in the Shell reserves recategorization and both, after reviewing his conduct, decided not to bring any action against him.  We are pleased that Sir Philip has been dismissed from the United States private class action."  Adriaen Morse, who also represented Sir Philip, stated that "Sir Philip is a person of the highest integrity who acted in good faith at all times during his tenure at Shell." 

In light of his dismissal from the class action, Sir Philip intends to discontinue his action against the SEC aimed at obtaining further disclosure of the reserves accounting process, which he and his experts believe were improperly amended and applied.  (The attached note expands on this matter.)

Further information: 

Joseph Goldstein
Washington, DC
Tel +1 202 263 3344

Adriaen Morse
Washington, DC
Tel +1 202 263 3387

Jo Natabus
Marketing Manager, London, UK
Tel +44 (0)20 7782 8842

Aimee Jasculca
Public Relations Manager, Chicago, IL
Tel +1 312 701 8241

Link to Mayer Brown LLP website:

Press Release SEC Result:

Press Release FSA Result:

  1. Watts issued subpoenas to the SEC seeking documents and witness testimony related to a private civil class action lawsuit pending in federal court in New Jersey.  That lawsuit, from which Watts has now been dismissed, seeks monetary damages from Shell and Shell's external auditors, KPMG and PwC, in connection with Shell's 2004 recategorization of proved oil and gas reserves.
  2. Watts sought documents and testimony concerning whether the SEC complied with the Administrative Procedures Act in amending Rule 4-10, Regulation S-X, which sets the standards for reporting proved oil and gas reserves.
  3. The SEC's Rule 4-10 dates from 1978 and calls for "reasonable certainty" for booking proved reserves.  The term is not defined.  In 2000 and 2001, the SEC Staff issued an outline on their website that changed the common industry view of "reasonable certainty" and added new requirements for booking proved reserves.
  4. Watts contended that, although the Administrative Procedures Act requires public disclosure and comment before adopting or amending agency rules, the SEC Staff's 2000/2001 outline improperly set new and more stringent requirements than set forth in Rule 4-10 for reporting proved reserves without prior public disclosure or comment. 
  5. Watts was not alone in saying that the SEC Staff improperly amended Rule 4-10.  For example, ExxonMobil wrote the Staff in July 2003, saying:
    As we have noted in the past, we believe that a number of the issues raised in the course of our correspondence are best addressed on an industry wide basis.  We remain concerned that, in certain instances, interpretative guidance provided by the SEC staff from time to time can be viewed as effectively amending Regulation S-X without the benefit of the formal rulemaking process, which necessarily involves soliciting input from key parties including industry.  We reiterate our support for the establishment of a joint government/industry technical group as the most effective means to chart a path forward for the benefit of all interested parties and to help ensure transparency in the rule making process.
  1. In the wake of the Shell recategorization, the oil and gas industry, reservoir engineering consultants, and external auditors commissioned Cambridge Energy Research Associates, CERA, to review the SEC proved reserves accounting process.
  2. In February 2005, CERA stated that the SEC staff outline had moved Rule 4-10's "reasonable certainty" standard towards "absolute certainty."  This move caused confusion and uncertainty in the oil and gas industry because it introduced changes to Rule 4-10 and did so without going through the normal consultation required under U.S. laws.  (Reference below).
  3. An insight into the confusion this caused in the industry is provided by the example of the Kashagan field.  The SEC decided that Shell had booked Kashagan too early.  However, the major oil and gas companies who were Shell's project partners took very different positions with the timing of their bookings of Kashagan reserves.  Kashagan was booked by Shell and Total at end 2002 and by ExxonMobil at end 2003.  All believed their actions were consistent with SEC Rule 4-10.  The SEC Staff disagreed, accusing Shell of committing fraud, but did not require other companies to de-book Kashagan reserves.  (References below).
  4. Another example, this time dealing with volumes of reserves booked rather than the timing of bookings, is the Ormen Lange field in Norway.  Different project partners booked different amounts.  On September 30, 2004, Standard & Poor's issued a report (reference below) that established each Ormen Lange joint venture partner's estimate of the total, proved reserves based upon each partner's percent ownership and public disclosure by each company of the volumes of proved reserves owned in the field before and after Shell's February 2004 recategorization, on a full field basis:





      1.92 bln boe*



      1.92 bln boe

      Norsk Hydro

      1.86 bln boe


      Norsk Hydro

      1.29 bln boe


      1.4 bln boe



      805 mln boe


      805 mln boe



      799 bln boe


      799 mln boe



      529 mln boe

            *boe = barrels of oil equivalent 
    The range of volumes for the full field is remarkable, with BP reporting reserves that are 360% greater than Shell's restated amount.  Shell had been in the middle of the pack before its restatement and became the most conservative after its restatement.  Shell moved from "reasonable" towards "absolute" certainty.
  1. Throughout the class action and governmental investigations, Watts contended he acted properly at all times and that Shell in good faith reported its proved reserves believing them to be in compliance with Rule 4-10.  The reserves debooked included reserves booked as early as 1986.  In fact, more than 50% of the reserves recategorized in early 2004 were booked before 1997, when Watts became head of Shell's Exploration and Production business.  Some were booked when he was head of EP, and some were booked after he was head of EP.  Most of the reserves had been booked before the SEC staff informally changed Rule 4-10 in 2000/2001.  After thorough investigations, the FSA and SEC determined not to initiate any enforcement action against Watts. 
  2. The Shell reserves recategorization occurred in a confused regulatory environment.
  3. In February 2006, the second CERA report recommended that the rule making and enforcement roles of the SEC be separated with the industry's Society of Petroleum Engineers having the key role in rule making.
  4. On October 3, 2007 the SEC Division of Corporation Finance announced the appointment of an expert who will undertake "a review and evaluation of [the SEC's] current disclosure requirements for oil and gas reserves."  (Reference below).
  5. In its concept release dated December 12, 2007 on possible revisions to the disclosure requirements relating to oil and gas reserves (reference below), the SEC:
    • Acknowledges that "The extent and pace of changes in the oil and gas industry, and public concern that our oil and gas reserves disclosure requirements are not fully aligned with current industry practice, have led us to reconsider those requirements."
    • States that "Rule 4-10 [promulgated in 1978] defines what constitutes oil and gas producing activities and proved reserves."
    • Admits that Rule 4-10 does not define a succession of technical terms, for example,
      ". . . the rule does not define 'reasonable certainty' . . ." 
      ". . . Rule 4-10 does not specify the price a company should use to make [the] determination [that reserves can be economically produced] . . ."
      ". . . absence of a definition of 'existing operating conditions,' . . ."
      ". . . conclusive formation test . . . not defined in Rule 4-10 . . ."
    • Adds for each of these examples a phrase such as "the staff has interpreted this . . ." often with a reference to the SEC staff outline dated November 14, 2000.
  1. When issued, the November 14, 2000 SEC staff outline, like those in June 2000 and March 2001, included a disclaimer because it was non-binding staff commentary:
    "The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any of its employees. This outline was prepared by members of the staff of the Division of Corporation Finance and does not necessarily reflect the views of the Commission, the Commissioners, or other members of the staff."
  1. In Commissioner Atkins' speech to the American Institute of Certified Public Accountants on December 5, 2005, he addressed the issue of enforcement actions based on staff interpretations and stated that the SEC "should not foster a regulatory environment that relies on informal guidance as a basis for enforcement action."  Commissioner Atkins also recognized that "Enforcement actions should not be built around staff pronouncements" and that this view "happens to be the law of the land."
  2. When arguing his case with the SEC, counsel for Watts submitted an August 1, 2006 letter which addresses all of the issues covered in the concept release and others.  The letter demonstrates, using documents obtained by subpoena from the SEC, that the SEC required companies to comply with the staff comments contained in the SEC staff outline, even though such comments were not part of Rule 4-10.  Despite their own contrary understanding about Rule 4-10, in the face of the SEC staff's insistence, oil and gas companies reluctantly acquiesced to the SEC staff's views.  This letter has been submitted to the SEC as a comment letter on the recent concept release and is expected to be displayed on their website along with other letters commenting on the release.  (Reference below).


  1. The SEC has obligations to the public to amend rules publicly and transparently, and not to impose new and more stringent reporting requirements without public notice and comment.
    1.  CERA Report Summaries 
    a. "In Search of Reasonable Certainty: Oil and Gas Reserves Disclosures" (Feb. 23, 2005).
    b.  "Industry Consensus: Repair Outdated Reserves Reporting by Moving to SPE Standards" (7 Feb 2006)
    2. ExxonMobil Public Statement re Kashagan
       ExxonMobil Corp., "Presentations and Q&A Session, Analyst Meeting," at pages 34-34 (Mar. 10, 2004) (quoting Rex Tillerson, then ExxonMobil's President).
    3. Total Public Statement re Kashagan
       Tom Cahill, "BP sees More Reserves Than Shell From Stake in Norwegian Field," (Apr. 1, 2004) (quoting Thierry Desmarest, Chief Executive of Total, "We have every reason to book these reserves, we had every reason to book them last year").
    4. Standard & Poor's Report on Ormen Lange
       Standard & Poor's, "Oil and Gas Reserves Revisions Call for Better Disclosure" (Sep. 30, 2004). 
    5. SEC Press Release (Oct. 3, 2007)
    6. SEC Concept Release (Dec. 12, 2007)
    7. Sir Philip Watts Comment Letter to SEC submitted by Joseph I. Goldstein (Feb. 5, 2008)
       (Should you have any questions about the comment letter, please contact us.)

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