Shell credibility gap widens

NO ONE could have imagined the scale and the depth of the crisis enveloping Shell. For a company which has been around since 1897, which gushes billions of pounds of profits and bestrides the world, to withhold publication of its accounts for two months is frankly astonishing.

It suggests the deficiencies in accounting for oil reserves, which are at the heart of the present imbroglio, are much more deepseated than anyone imagined.

Plainly the directors, led by chairman Lord Oxburgh, and the auditors PricewaterhouseCoopers felt they could not in good faith sign off the accounts with their present state of knowledge.

If this were a small speculative explorer, that it would be serious enough. But for this to happen to a grand old dowager like Shell is public humiliation.

Shareholders also are in retreat. Since the company revealed in January that it was downgrading its reserves by 20%, the shares have fallen 10% wiping some £10bn off the joint value of the British and Dutch arms.

By the standards of the first write- down, the latest 470,000 barrels of lost reserves are a mere bagatelle. But it exposes fundamental systems weaknesses which are almost inexplicable in a company that has been around for so long and was believed to be scrupulous if over bureaucratic in its management.

Fears also have now been aroused that all the bad news is not yet out there in the public domain. That hundreds if not thousands of managers are to be retrained in how reserves are to be accounted for in the future speaks volumes as to how the culture-of the group has let it down. New chairman Jeroen van der Veer at least had the good sense to come before the press and analysts and confess all at the earliest possible opportunity. But he is personally not out of the woods.

Leaks coming out of the Securities and Exchange Commission process in the United States and legal documents from the classaction suits launched by shareholders put him in the firing line, though he says he knew nothing about the overbooking.

It looks as if the board is circling the wagons around group finance director Judy Boynton, giving her increased responsibilities for monitoring all accounting.

Shell is not another Enron. It has gotten some of its reserve accounting grossly wrong and sent false signals to the stock market, but it is a company which is fundamentally sound. It does, however, need radical governance reform and management streamlining from top to bottom. Even with this, it has critical problems to address including its lack of success in exploration.

One would have thought that Shell is far too big and its structures far too complicated to be considered a takeover candidate. But the financial markets can be unforgiving places and Shell is now vulnerable to all kinds of outside pressure which would have seemed inconceivable at the start of the year.

Bank warning

THE ink is barely dry on Gordon Brown's Budget and the serious problems glossed over in the Chancellor's glorious gallop through his economic successes already are evident. Nothing has yet happened to squash the consumer boom which is making for such an unbalanced economy.

Retail sales remain very buoyant on a year- on-year basis after a sharp upward revision in the January figures. They are now climbing at an annual rate of 6.5%.

Demand is being fuelled by intense competition among retailers which means more attractive prices and strong average earnings growth which increases the capacity to spend. Demand for overdrafts may be down, but credit card borrowing is as strong as ever despite the current bad publicity for plastic coming from the House of Commons.

Where does the Bank of England stand in the debate about an economy out of balance?

On the cautious side, judging from the latest Quarterly Bulletin released today. It notes that house prices have risen rapidly in recent years.

Echoing the March minutes of the Monetary Policy Committee, it goes on to say: 'There is little doubt that such rates of increase are unsustainable.'

The Bank says that at present the ratio of house prices to net rentals is well above the long-term average. In the past such a mismatch has led to a fall in house prices. We do not know what the trigger for that fall is going to be.

Now that the government has ruled out using fiscal policy to slow the economy, the burden will fall on monetary policy and the independent Bank of England.

Prepare for interest rates to rise in the coming months as the Bank seeks to slow the housing and consumer boom.