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Royal Dutch/Shell

( RD) has been pumping more than oil.

The international energy giant has been cranking up the value of its proven reserves for at least six years. In a stunning announcement on Friday, Royal Dutch/Shell said it had overbooked its oil and gas reserves -- a key metric for oil investors -- by a whopping 20%. The company uncovered the problems, which date back to 1996, during a broad review of its reserves undertaken in the final quarter of 2003.

Despite the sudden drop in proven reserves -- or the amount of fuel it expects to produce from existing fields -- Royal Dutch/Shell insisted that its financial condition remains virtually unchanged.

"There is no material effect on financial statements for any year up to and including 2003," the company stated. "It is anticipated that most of these reserves will be rebooked in the proved category over time as field developments mature."

Investors nevertheless panicked, sending Royal Dutch/Shell shares down 7.1% to $49.03 and dragging down some other oil giants -- including






-- in the process.

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J.J. Traynor, an analyst at Deutsche Bank in Europe, braced for more bad news to follow.

"Who else has overbooked?" he asked. "Shell's neighbors and partners in the troubled projects identified will all be closely scrutinized."

Most of the overbooked reserves involve undeveloped properties located in Nigeria and Australia. Traynor suggested that ChevronTexaco and ExxonMobil, among others, could be vulnerable to similar revisions in Nigeria at least. He attributed the coming shifts to "the introduction of groupwide standards for reserves booking, rather than leaving this to the discretion of local management."

Still, he pointed out that Royal Dutch/Shell faces its own, company-specific problems.

"Sector sentiment looks eroded, as is Shell's," he wrote. "We will be looking for a more detailed explanation of today's reserves downgrades, which at face value point to a structural reserves replacement issue, and weak management and audit control at Shell."

Traynor described next month's company presentation -- led by outgoing Shell Chairman Philip Watts -- as "crucial" to investor sentiment.

"Can Watts turn a package of $1 billion writedowns and 20% reserves downgrades into a presentation that demonstrates tough, top-down management of an underachieving portfolio?" Traynor asked. "There are clearly new credibility issues."

Traynor went on to list four steps that will either "make or break" the company's performance this year. He said Shell now faces an "overpowering" need to hit its upstream growth targets in 2004. He said the company's downstream business also has hit a critical stage but, with help from recent changes, should deliver strong earnings this year. He's looking for Shell to keep its commitment to reduce costs. And he hopes the company restarts a share-buyback program this year.

Unlike Prudential analyst Michael Mayer, who downgraded the company from overweight to neutral weight on Friday, Traynor did keep his buy recommendation on the stock in place. After an initial hit in London, which sent the shares spiraling more than 5%, Traynor predicted that the stock would hold fairly steady until the company presents its full-year results next month.

"We are sticking to our buy stance on Shell," he wrote, "although after what had been strong outperformance against ExxonMobil and



over the last two months -- at least until today -- we doubt that Shell will outperform ahead of its results."