Ground Floor: I was in London last week chatting to some old friends about the UK budget and pretending that I was still a mover and shaker on the financial scene by visiting a wine bar for the first time in ages!
Afterwards I went for cocktails with some publishers in a very trendy hot-spot bar. It used to be that all the coolest places were in the City but not any more - we were in the West End.
Interest in Gordon Brown's budget was fairly minimal, both with the dealers and the publishers. Most of the dealers believe that it's a populist sort of pitch from Gordon and the concern is that the Bank of England may feel the need to hike rates again next month as the economic backdrop remains supportive of consumer spending. A number of analysts have cited the chancellor's forecasts as being on the over- optimistic side and reckon that his belief that the government should borrow only to fund investment over the economic cycle will end up being scuppered following his announcements on increases in health and education spending.
The budget, according to most City people, has a lot more to do with politics than economics. The chancellor is continuing to forecast deficits in funding for this year and next but he argues that the deficits are cyclical; so the Treasury is forecasting a rise in tax revenues from 37.8 per cent of GDP now to 39.9 per cent of GDP in 2006/07. Not everyone is convinced.
Roger Bootle of Capital Economics is calling it the "great growth gamble". It is almost inevitable that taxes will go up after the next election if Labour retains power.
Actually, there was more talk about the Shell debacle than anything else. I didn't take as much notice as I should have when the (now ousted) chairman, Sir Philip Watts, said there was "significant concern and outrage" after he revealed the company had overestimated its reserve base. Even though the company was, at the time, reporting net profits up by 27 per cent, the share price fell.
Since then, though, there have been further revelations about Shell's reserves. In addition to the 3.9 billion barrel reduction announced in January, it announced another cut of 250 million barrels for proved reserves in 2002. And an assessment of 2003 reserves was overstated by 220 million barrels.
The chairman and the head of exploration, Walter van de Vijver, have lost their jobs. The shareholders are in shock. The accounts, which should have been released last Friday, have been held back until May and the a.g.m., which should have been in April, will now be held in June.
All of this could be put down to mismanagement, and analysts might mutter about a good company with poor people but a further can of worms was opened with the revelations that executives were encouraged to inflate the stated reserves in Nigeria with the prospect of increased bonuses.
I'm reminded of the Barings Bank scandal and the "rogue trader, Nick Leeson" who was blamed for bringing down the bank. If everyone else had been doing their jobs, they would have known that he couldn't have been making the profits he was reporting while simultaneously requesting huge sums of money for margin calls. Whether it's true or not, the consensus is that given the enormous bonuses that everyone stood to gain out of Leeson's stated profits, no one wanted to rock the boat until the payments were made.
In Shell's case, it seems that the Nigerian government offered tax breaks to companies that declared they had uncovered oil reserves and the greater the reserves, the greater the tax break and, ultimately, the greater the bonuses. About 60 per cent of the overstated reserves last January are believed to be in Nigeria, though the company's website statement more specifically refers to overstatements relating to the Ormen Lange field in Norway.
The impact of the reduction in reserves on earnings is estimated at approximately $20 million. (And it's a sad indictment on the world of business that when I first read that amount, I thought that things could've been worse!) The Justice Department in the US has now opened an inquiry into whether Shell's executives violated the law by not disclosing the discrepancy in the reserves earlier. Documents taken from the company refer to shortfalls of two to three billion barrels of reserves two years ago.
Class action suits have now been filed in the US against past and present directors of the company. The new chairman, Jeroene van der Veer, has called the past few weeks "challenging" for the company and "disappointing" for investors. He is promising to fast-track Shell's improvement in governance and controls, begun in the mid-1990s, and has appointed an independent counsel to carry out a review.
Will it let Van der Veer off the hook? He claims not to have known about incorrect bookings although he admits that he was aware that the company was "low" on reserves. Right now, it's low on credibility. And it'll be a while before those particular reserves are replenished.
