Fuel for thought over Shell

THE people most likely to be feeling queasy after a week of astonishing revelations about Shell, and how it came to put an incorrect value on its reserves, might well be the insurers of Lloyd's of London. It looks increasingly likely that, somewhere down the line, they will be asked to pick up a large bill.

There are two routes to this conclusion. The first is that while much is made of the premise that valuing reserves is as much an art as a science, it is not total art. There are usually benchmarks. Either there is a signed-up customer for the product of a field or there is not - something that is particularly valid in the case of gas, where the cost and method of transportation to market is a major factor in the value ascribed to a field.

If there is a customer, there is a value. If not, in the case of gas, it is best to assume no value. Equally, it is relatively rare for large fields to be the province of one company. If there are other partners in a discovery, or in a neighbouring field with similar geology, they will also form a view of what their share of the reserves is worth, and valuations can be compared. Shell had partners where this tactic might have been employed.

This is where the auditors come in. One of the so far unanswered questions about Shell is the extent to which the auditors sought to challenge its valuations or verify them by reference to some of these external measures. The information is not publicly available but it may well turn out to be an important point.

It is probably only a matter of time before a disgruntled shareholder group comes looking for evidence that the auditors did not perform all the checks that might have been expected, and it will certainly seek to examine in detail the procedures to verify the accuracy of these valuations as it searches for a basis for legal action against the profession.

Even if it is not successful, there will be costs, which will ultimately fall on the insurance - either the inhouse insurance most of the big firms have or the external cover in places such as Lloyd's.

The other strand comes from the shareholder class actions that have already been launched against the company. It is early days yet in cases that might well drag on for years, and it is possible as time passes that the oil giant may try to transfer primary responsibility for the defence from its corporate self and to the shoulders of some of its past and present officers.

But whether or not that succeeds, it is likely that directors' errors and omissions policies, which again are a major staple of Lloyd's, will once again have to come into the picture. And to the extent that one day they may have to pay out, it will make directors' E&O cover even more scarce and expensive for everyone else.

Ahead of the field

HARD though it is to believe, May will soon be upon us and with it the annual ritual of the Press release extolling the virtues of the old Stock Exchange adage 'Sell in May and go away: return again on Leger day'. Those who don't follow horse racing might need to know that the St Leger is normally run on the second Saturday in September.

First out of the stalls this year was ADVFN, the AIM-quoted company that runs a website for investors. It dug into the archive and worked out that someone following this advice since the 1984 launch of the FTSE 100 index would have done more than half as well again as an investor who stayed in the market all the time.

ADVFN's figures show the FTSE 100 rose 3157 points between 1984 and the first trading day after last year's St Leger. However, in the periods between the first trading day of May and St Leger day, the market has dropped a total of 1747 points. This means if investors had sold and re-bought on the days suggested, they would have enjoyed a profit of 4904 points instead of the 3157-point return received by those that held on the whole time.

It is true that, more often than not, the market drifts off between May and September. It does not happen every year, of course - it certainly did not happen last year when the market soared following the apparent end of the Iraq war.

But investment activity winds down in more normal years. People - and stockbrokers in particular - take more time off, what with Henley, Ascot, Wimbledon and Goodwood, to say nothing of shooting, test cricket and Glyndebourne. Fewer companies report or issue trading statements in the summer months, so there is a reduced news flow too.

On average the market loses 1.8% of its value each summer which, when compounded over a couple of decades, makes for a tidy sum.

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