Hi Maurice, on a separate note. An alert to my portfolio as it is about to suffer another skimming. This time, Royal Dutch Shell. Getting ripped off by ZIM eventually, as opposed to getting cheated by RD now, feels about the same:
news.ft.com
Ex-Shell executive questions energy bets
By Julie Earle in New York
Published: July 14 2002 21:56 | Last Updated: July 14 2002 21:56
Royal Dutch/Shell's Houston energy trading business has made $7.4bn of bets on future US power prices that could prove worthless, a former executive who worked on the deals claims.
George Namur, a former general manager at the Houston operation, alleges he was told to come up with optimistic forecasts of future power and gas prices that would justify the deals to Shell head office. He also questions the way the transactions are treated in the group's accounts.
The deals were part of Shell's rapid expansion of its energy trading business in Houston. Many of its rivals are now scaling back their trading operations after the Enron collapse.
The expansion has caused concern among some analysts, who claim Shell does not disclose enough information about the trading business. Fadel Gheit, an energy analyst at Fahnestock and Co, a New York brokerage, said Shell declined to give details of Shell Trading's operations, saying they were "insignificant" and "too complicated".
"It is a closed door and we don't know what is behind it, but the company says 'trust me, trust me'," he said.
Shell insists that the accounting treatment of the deals is "conservative". It says the deals were a response to customer demand and should be seen as part of its overall US gas and power strategy.
Shell is committed to paying $7.4bn over the next 20 years on so-called "tolling" agreements with power station developers, made at the top of the US power market three years ago. Average US power prices have since fallen by more than half.
Under the deals, Shell makes an annual "capacity" payment to the developers in return for an option to sell power generated from its own gas. Shell will exercise the options and turn on the plant only if power prices are higher than the cost of generation using its gas.
Mr Namur, who worked in structured transactions for Shell Trading, said the options could turn out to be worthless. "If power prices collapse or even stabilise, there is potentially zero return on investment."
He said the deals were justified internally by using aggressive accounting and questionable forecasts to produce a projected return above the 15 per cent level required by Shell's head office.
"We knew what our capacity payments would be and then had to use highly optimistic power price forecasts and other creative items to exceed the 15 per cent return rate," he said.
Mr Namur argued that the downturn in power prices meant that the value of the agreements had fallen by billions of dollars, but "there seems to be no mechanism for the markdown of the assets and the booking of losses" in Shell's accounts. |
