The fact that the value of the massive and seemingly solid corporations is based on something as flimsy as a story was dramatically demonstrated last Friday when Royal Dutch Shell announced that its current assessment of its oil reserves was 20% less than than its previous assessment. The announcement changed nothing in the real world - Shell's oil reserves were still what they always were - but the story that Shell, and hence investors, were telling about those reserves was different. As a result, Shell's value as a company declined by US$8 billion, and the value of BP and Exxon also fell by a combined $7 billion. The result - a US$15 billion difference just from Shell's telling a revised story.

This was front page news in the Financial Times on Friday January 9: its headline read "Shell sends shockwaves through markets." It was also the lead story in the Wall Street Journal on Monday January 12.  The news according to the WSJ "rattled energy investors and is raising questions about whether the oil industry has inflated a lifeblood measure of its future prospects."

Shell, one of the world's largest publicly traded oil concerns, said Friday that it had erroneously overbooked its proven oil and natural gas reserves by the equivalent of 3.9 billion barrels of oil. The oil portion alone, about two-thirds of the revision, represents some $67.5 billion in potential future revenue, assuming moderate oil prices of $25 a barrel. Reserve calculations, though technical and arcane, drive an oil company's prospects, much like revenue growth drives a technology company's outlook.

The WSJ reports: "Shell officials said engineers acted "in good faith" in booking the reserves. But the disclosure comes as the U.S. Securities and Exchange Commission has intensified its scrutiny of oil-company reserves, prompting concerns that others may follow Shell's move. The agency's petroleum engineers, charged with investigating reserve calculations, have focused particularly on how companies book properties in costly deepwater fields in the Gulf of Mexico, where some companies have used less traditional measures to assess how much oil and gas can be extracted. Deepwater fields in the Gulf and off the coast of Africa are among the world's hottest oil spots as new reserves become harder to find."

Exxon Mobil and BP announced on Friday that they didn't expect to reclassify their reserves, and by the end of the day on January 9, their shares had - for now, at least - recovered most of the lost value. Thus by the end of the day, investors were distinguishing the story of Shell from the stories of BP and Exxon: the story they were telling themsleves now located the overstatement in Shell and not in the oil industry in general. 

WSJ reports that "Shell's disclosure has larger significance for the trillion-dollar global oil industry, which has struggled for decades with the murky science of estimating reserves." But the "science" of assessing oil reserves is less like science and more like interpretation, i.e. a story.

Though the SEC provides some guidance, companies are required to show only "reasonable certainty" in classifying proven reserves. Regulators cracked down on energy companies in the 1970s when it appeared they were being cavalier with their disclosures. In industry forums recently, SEC engineers have cited red flags that could prompt closer examination, such as reserves booked in nations where the government hasn't yet blessed the project. But ultimately companies must make their own geological and financial assumptions in calculating reserves, giving them considerable leeway. The SEC doesn't require third-party certification of a company's reserves. "There's still room for interpretation," said Dan Olds, a petroleum engineer with industry consultant Ryder Scott Co. in Houston. 

Recently, Shell has fared poorly against its two closest competitors, Exxon Mobil of Irving, Texas, and London-based BP, in reserve replacement, triggering sharp criticism of Philip Watts, Shell's chairman. According to the WSJ, because of Shell's disappointing results, Sir Philip has been under fire almost since taking the top Shell job in 2001. Investors and analyst also fault him for poor communication. He was absent from a conference call Friday explaining the reserve issue, though Shell officials said that was because the company is in a "closed," or quiet, period before releasing year-end earnings. The reserve issue has reignited questions about Sir Philip's future, especially since he led Shell's exploration business for much of the period that the company said it overbooked reserves.

Thus as investors try to make sense of the news, they try to put together a story of what must have happened. The size of the overstatement has caused one analyst, Lynn Turner, a former SEC chief accountant, to develop a less-than-benign story, not merely a mistake. Turner said "A 20% restatement of proven reserves is a humongous error," he said. "For a company like Shell to have missed its proven reserves by that much is not an oversight. It's an intentional misapplication of the SEC's rules." If this story were to be more broadly accepted, clearly Shell and its chairman will be in for even more rough sailing in the future.

A Shell spokesman said that judgment had to be used in assessing reserves and that employees believed they were working within SEC guidelines. The spokesman said it would be inappropriate to comment about the prospect of further regulatory scrutiny, but said, "as you would expect, we have been in communication with the SEC about this matter."

Whatever the eventual outcome, there is bound to be a whirlwind of storytelling around Shell over the coming months, as the financial world and the company struggle to figure out - what is the story?

Adecco loses 40% of value as a result of announcement

In a similar development in a different sector, an announcement by Adecco, the world's largest personnel company based in Switzerland, that it was delaying publication of its 2003 audited results due to unresolved control and compliance issues in certain countries, including the U.S. was enough to wipe out about 40% the share value of the company. 

No details have been announced. But clearly the delay is enough to change the story that investors have of Adecco from a well-run organization with sound business practices to story of a company with possible massive accounting problems, even as severe as the imploding Parmalat. 

The world's largest personnel company ahead of U.S. competitor Manpower Inc. said its Audit and Finance committee, which is chaired by board member Conrad Meyer, has appointed an unspecified independent counsel to investigate the issue.

"The company isn't yet able to predict when the 2003 audit of its consolidated financial statements will be completed," Adecco spokesman Francois Vassard said. The publication was previously scheduled for Feb. 4. 

The mere uncertainty over the accounts hasn't changed anything in the real world, but it is enough to create a new story of Adecco that wipes out almost half its share value.

Go to the article on Shell in the Wall Street Journal
Go to the article on Adecco in the Wall Street Journal
Go to the article on Shell in the Financial Times
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For more examples of Storytelling in The News, go to the Archive