Philip B. Watts
1945–

Former chairman of Royal Dutch/Shell Group of Companies

Nationality: British.

Born: June 25, 1945, in Leicester, England.

Education: University of Leeds, BS, 1968; MS, 1970.

Family: Son of hosiery factory worker; married Janet (maiden name unknown); children: two.

Career: Royal Dutch/Shell Group of Companies: 1969–1983, seismologist; 1983–1987, exploration director, Shell U.K.; 1987–1991, series of positions in Shell's production liaison and planning operations; 1991–1994, managing director, Shell Nigeria; 1994–1995, regional coordinator, Shell Europe; 1995–1998, director for strategic planning, sustainable development, and external affairs, Shell International; 1998–2001, chief executive officer, Exploration and Production Division; 2001–2004, chairman.

Awards: Knighted by Queen Elizabeth II for services to British business and to the World Business Council for Sustainable Development, which he served as chairman, 2003.

■ Less than three years after taking over the chairmanship of the Royal Dutch/Shell Group, the world's third-largest oil and gas company, Sir Philip Watts was swept out of office in early 2004 by revelations that the company had overstated its proved reserves by nearly 25 percent. Ousted with Watts was Walter van de Vijver, head of Shell's exploration and production operations. A third top Shell executive, chief financial officer Judy Boynton, was forced from office shortly after the departure of Watts and van de Vijver. It was alleged that Watts, van de Vijver, and Boynton had been aware of the reserves shortfall since early 2002 and had conspired to keep the problem a secret from investors.

Watts, knighted in January 2003 by Queen Elizabeth II for his services to British business, succeeded Sir Mark Moody-Stuart in mid-2001 as chairman of Shell's committee of managing directors. Although his appointment was at first welcomed

as a sign that the company was going to move aggressively to reduce costs, Watts soon fell into disfavor with Shell's investors, in large part because of his aloof and uncommunicative manner. Watts had, however, distinguished himself among oil industry executives by speaking out forcefully in favor of developing renewable sources of energy, such as wind and solar.

WARNED OF GLOBAL WARNING

Delivering the keynote address at the opening of the Shell Center for Sustainability at Houston's Rice University in March 2003, Watts called upon the international energy industry to act decisively to solve the problem of global warming. "We stand with those who are prepared to take action to solve that problem," Watts said, according to the Houston Business Journal (March 12, 2003). The Shell chairman said, however, that large-scale development of renewable energy resources probably would not occur until it became widely apparent that hydrocarbons were growing scarce. He predicted that by 2050 roughly one-third of all energy used would come from renewable sources.

Born in Leicester, England, on June 25, 1945, Watts grew up in England's Midlands. His father was a lifetime worker in the region's hosiery mills. Watts attended Wyggeston Boys and Dixie Grammar schools in Leicestershire. He enrolled at the University of Leeds, from which he earned a bachelor's degree in physics in 1968. Taking a brief break from academia, Watts taught briefly in the small West African country of Sierra Leone, a former British colony. He returned to the University of Leeds and earned his master's degree in geophysics. Shortly afterward, he took a job as a seismologist with Shell.

In his early years with Shell, Watts worked as a seismologist in exploration operations in Indonesia and Europe. Among the discoveries in which he was heavily involved was the vast Troll gas field in the North Sea near Norway, discovered in 1979. To familiarize Watts with other areas of Shell's development operations, he was next assigned to head the Shell division responsible for activities in Malaysia, Brunei, and Singapore. In this position he served as a liaison between shareholders and Shell's operating companies in that region.

EXPLORATION DIRECTOR FOR SHELL U.K.

Watts returned to England in 1983 to assume a position as exploration director for Shell U.K. During the next few years he was heavily involved in the development of Shell's holdings in the North Sea. He also played a significant role in developing Shell's highly sophisticated three-dimensional seismic exploration technology. Far superior to the 2-D seismic investigation techniques previously used, the 3-D technology made it easier for those involved in exploration operations to "pinpoint" subsurface hydrocarbon reserves. Although almost all oil companies eventually moved to some form of 3-D seismic exploration, Shell's technology was widely considered the best in the business, sharply increasing the odds of a strike. In Africa's Niger Delta, Shell's methods were so effective that two out of three wells hit oil.

In a 1998 speech to a Rio de Janeiro conference of the American Association of Petroleum Geologists, Watts reviewed the evolution in the exploration and production of deepwater reserves that began in the late 1940s. He revealed that over the previous two decades Shell and its affiliated companies had invested more than $500 million in deepwater research, seeking to find—by trial and error—the ideal designs for platforms, pipelines, and risers to be used in deepwater exploration and production. "We remain committed to such long-term investment—even in tough times," he told the conference. "This industry's commercial dynamic drives the relentless pursuit of innovation and improvement."

After his stint as exploration director for Shell U.K., Watts went to corporate headquarters in the Hague, where he worked his way through a series of positions in production liaison and planning that got him more deeply involved in Shell's worldwide exploration and production activities. In 1991 he returned to West Africa, where he had taught briefly in the late 1960s. This time he was based in Nigeria as managing director of Shell's growing operations in that country.

ALLEGED CONSPIRACY IN NIGERIA

Watts's tenure as managing director of Shell Nigeria in the early 1990s was to come back to haunt him a decade later. One of Shell's major areas of exploration in Nigeria under Watts targeted the oil-rich Niger River delta. During the course of that development, Shell came into conflict with the Ogoni people who lived in the region. According to a Reuters wire service report (March 25, 2004), a class action lawsuit was filed in 2002 by the Philadelphia law firm of Berger & Montague alleging that Shell "engaged in militarized commerce in a conspiracy with the former military government of Nigeria." The suit, Reuters said, charged Shell with "purchasing ammunition and using its helicopters and boats and providing logistical support for … a military foray into Ogoniland designed to terrorize the civilian population into ending peaceful protests."

Although a spokesman for Shell dismissed the allegations as groundless, Watts was questioned in London by representatives of Berger & Montague in mid-April 2004. Watts was not named a defendant in the lawsuit, which was brought solely against the company. Other major oil producers that were active in the same region of Nigeria included ChevronTexaco, Exxon Mobil, and France's Total. The conflict with the Ogonis eventually culminated in the execution by Nigeria of Ogoni activist Ken Saro-Wiwa. Nigeria also figured prominently in the scandal that swept Watts from office. Roughly 1.3 billion barrels of the company's overstated reserves were booked in the African country.

After three years in Nigeria, Watts returned to the Hague to become the company's regional coordinator for Europe. After a year in that position, he was named director for strategic planning, sustainable development, and external affairs of Shell International. During the late 1990s Shell found itself at the center of increasing environmental concerns because of its involvement in two earlier projects. The company came under fire for its failure to clean up after its exploration operations in Nigeria and in 1995 went head to head with Greenpeace over Shell's plan to sink its abandoned Brent Spar oil storage platform in the North Sea. Eventually Greenpeace prevailed in the latter standoff, and Shell agreed to tow the platform to shore in Norway, where it was dismantled and recycled for use as the foundation for a ferry terminal at Mekjarvik.

DEFENDING EXPLORATION IN RAINFORESTS

After Shell's confrontations with environmentalists over its activities in Nigeria and the North Sea, it came as something of a shock when the company began drilling for oil in the rainforests of eastern Peru, one of the world's last untouched wilderness areas. Shell tapped Watts to explain to the world the steps the company was taking to ensure that the Peruvian project's impact on the environment would be minimal. He announced that Shell, along with its partner in the venture, Mobil, had agreed to independent, third-party monitoring of the project. The oil companies also commissioned studies of the region's existing species by local universities and the Smithsonian Institution to help determine how drilling might affect these populations. According to Fortune, Watts promised that to discourage other development in the area, no roads would be built. "This is a whole new approach. We know the eyes of the world are on us there" (August 4, 1997).

In a major management shakeup in December 1998, Watts was named chief executive officer of Shell's Exploration and Production Division. At the same time, Mark Moody-Stuart, chairman of Shell's committee of managing directors, announced the appointment of Paul Skinner to lead the company's Oil Products Division. With the oil industry under increasing pressure worldwide, Moody-Stuart said, "we have entered a new period where executive decisions have to be made rapidly and business accountability must be absolutely clear" (Birmingham [U.K.] Post, December 11, 1998).

Over the next couple of years, under Watts's direction, Shell aggressively expanded its worldwide exploration and production operations. In 1999 the company announced its intention to focus Nigerian exploration on the search for offshore reserves, reducing its activities in the Niger River delta area, where it had encountered considerable resistance from the local population. In 2000 Shell's oil production increased 5 percent from the previous year, while gas production jumped by 7 percent. The increase in oil production reflected not only output from new fields in the Canada, Oman, the United Kingdom, and the United States but a reduction in the local community disturbances that had limited the company's Nigerian production in previous years. The increased oil flow from Nigeria and new fields more than offset production declines attributable to decreased flow from older fields. Gas production increases in 2000 were attributed to gains in Egypt, Nigeria, Oman, the United Kingdom, and the United States that more than made up for lower output in Germany and the Netherlands.

TAKING OVER AS CHAIRMAN

In late December 2000 Watts was named to succeed Moody-Stuart as chairman when the latter retired in mid-2001. The announcement of Watts's imminent elevation to the top post at Shell was generally welcomed by analysts and investors. According to a report (December 19, 2000) posted on the Web site of Alexander's Gas & Oil Connections, a Merrill Lynch research bulletin observed that "Watts is keen on cost cutting and is seen by us as a good replacement." Equally upbeat was an assessment from a fund manager who attended the Shell strategy presentation at which Watts's appointment was announced: "He's the cost cutter, and he's the one for the upstream. All in all, I think it will be good for (Shell)."

For Watts, the honeymoon with investors and analysts was short-lived. In August 2002, just a little more than a year after he took the helm at Shell, Watts came under fire for the company's disappointing performance during his first year as CEO. Singled out for criticism was Watts's downward revision of Shell's targets for increases in oil and gas production, a decision that was made shortly after Watts became chairman but that was not disclosed to the market for several weeks. Watts also took flak for his failure to communicate well with investors, one of whom told the Independent of London (August 23, 2002) that he found Shell's new chairman "brusque, a poor communicator, and generally defensive when dealing with critical questions."

Although he was winning few friends among Shell's investors, Watts did make environmentalists happy with his dire warnings about the dangers of global warming. In his keynote address at the opening of the Shell Center for Sustainability at Rice University, Watts announced that Shell was investing heavily in the development of such renewable sources of energy as solar and wind. Of the continuing debate over global warming, Watts said, "We can't wait to answer all questions beyond reasonable doubt," according to the Houston Business Journal (March 12, 2003). He said that Shell, for its part, had seen enough to accept that emissions of greenhouse gases, "largely from burning fossil fuels," were behind climatic changes that threatened the world.

CRISIS AND RESIGNATION

Over the next year or so, pressure on Watts increased as Shell failed to meet its goals for expanding oil and gas production, but those difficulties paled by comparison with the shocking revelation on January 9, 2004, that the company was cutting its estimate of proven oil and gas reserves by roughly 3.9 billion barrels, close to 20 percent of total reserves. Investors began calling for Watts to resign, but at a London analysts' meeting on February 5, 2004, the beleaguered Shell chairman was still hanging tough, telling analysts that he fully intended to finish out his term, which was not scheduled to end until August 2005. Particularly galling to many Shell shareholders was the fact that the bulk of the overstatement of reserves had occurred during Watts's tenure as CEO of the company's Exploration and Production Division.

Less than a month after announcing his intention to stay on at Shell, Watts abruptly resigned on March 3, 2004. Walter van de Vijver, who had succeeded Watts as head of the company's Exploration and Production Division, also tendered his resignation. Two days after Watts and van de Vijver stepped down, Jeroen van der Veer, Watts's successor as chairman, refused to rule out the possibility that the ousted executives had acted illegally. Shortly after van der Veer's pronouncement, the Associated Press on March 9, 2004, carried reports of internal memorandums indicating that many of Shell's senior executives had been alerted about 18 months earlier to the likelihood that the company's proven reserves had been overestimated.

In April 2004, the U.S. law firm of Davis, Polk and Wardwell released a report on its independent review of Shell's reserves overbooking crisis. The report, commissioned by Shell's non-executive directors, revealed that top company executives, including Watts, had known about the reserves shortfall for years and had begun to worry in the fall of 2002 about how much longer the situation could be kept a secret. According to a Reuters report (April 19, 2004), van de Vijver had outlined his concerns about the problem in a September 2002 memo to top Shell executives. In part the memo read: "The market can only be fooled if (1) credibility of the company is high, (2) medium- and long-term portfolio refreshment is real, and/or (3) positive trends can be shown on all key indicators." Van de Vijver went on to say that at that time Shell was struggling in all three areas, making it problematic how much longer the secret could be maintained.

The law firm's report also disclosed that in a November 2003 memo to Watts, van de Vijver had declared that he was "sick and tired about lying about the extent of our reserves issues," Reuters reported (April 19, 2004). It was also revealed that the CEO of Shell's Exploration and Production Division had instructed staff members in December 2003 to destroy a document that outlined the extent to which 2.3 billion barrels of reserves were out of line with regulatory guidelines.

AFTER THE FALL

In April 2004 Shell lowered its reserves estimate even further, indicating that the total overbooked to reserves was roughly 4.85 billion barrels–4.35 billion for 2002 and an additional 500 million in 2003. In issuing the downward revision in proven reserves, Shell also announced the firing of Judy Boynton, the company's chief financial officer. Despite Shell's attempts to come clean on the reserves problem, many in the financial community questioned whether the company could weather the storm, suggesting that it might have to reorganize to win back investor confidence.

As for Watts, his unceremonious departure from Shell in March 2004 seemed unlikely to end his problems. In mid-April he was grilled by a U.S. law firm in London about his role in Shell's alleged conspiracy with the former military government of Nigeria in a scheme to deprive the Ogoni people of their human rights. On top of that, Shell and Watts were both under investigation by the U.S. Justice Department and the Securities and Exchange Commission for allegedly misleading the stock market by allowing the overstated reserves figures to stand. On the brighter side, Shell announced in late May 2004 that, despite the circumstances of his hasty departure, Watts would receive a severance package of £1 million.

See also entry on Royal Dutch/Shell Group in International Directory of Company Histories.

sources for further information

"As the Commanders Scuffled on the Bridge, the Shell Supertanker Sailed Blindly On," Daily Telegraph (London), April 20, 2004.

Barker, Sophie, "Cost-Cutting Scientist Chosen to Take Helm at Shell," Daily Telegraph (London), December 19, 2000.

Beaton, Graeme, "Shell Chief 'Had a Private Army,'" Mail on Sunday (London), April 4, 2004.

Becker, Elizabeth, "Shell Strives to Clean Up Its Act," New York Times, December 3, 2003.

Callus, Andrew, and Janet McBride, "Shell Report Exposes Lies; CFO Sacked," Reuters, April 19, 2004.

"Cool City Response to Shell's Strategy Move," Evening Standard (London), December 17, 2001.

Cope, Nigel, "Business Analysis: City Attacks Shell's 'Brusque" Chairman," Independent (London), August 23, 2002.

Drawbaugh, Kevin, "Ex-Shell Head Watts to Face Nigeria Case Questions," Reuters, March 25, 2004.

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Foss, Brad, "Report: Shell Execs Hid Reserves Problem," Associated Press, March 9, 2004.

Gardiner, Beth, "Shell Woes Could Force Reorganization as Company Tries to Rebuild Trust," Associated Press, April 20, 2004.

Guyon, Janet, "From Green to Gold: Shell's Improving Social-Responsibility Record Makes the Oil Giant Attractive to Investors," Fortune, November 10, 2003.

——, "The Game's On at Shell," Fortune, February 23, 2004.

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—Don Amerman