Royal Dutch/Shell has defended its decision to commit up to $7.4 billion to secure power and gas tolling deals in the US over the next 20 years, following claims that it made false forecasts. It argued that the deals had been thoroughly assessed and would yield satisfactory returns.
Tolling deals enable a company to buy long-term power generation capacity from power project developers, with the tollee having responsibility for fuel supply and sale of electricity. Shell is making an annual 'capacity' payment to the developers in return for an option to sell their power. It took the decision to step up its tolling deals in 1999 when it put its Coral Energy unit's power assets into InterGen, a joint venture with engineering group Bechtel.
A former employee has alleged that he was told to come up with optimistic forecasts of future power and gas prices which would justify the deals to Shell's head office. George Namur, formerly general manager of Shell's Houston operation, said that in the long term the options could turn out to be worthless. He argued that the downturn in power prices meant that their value could have fallen by billions but claimed that Shell's accounts showed no mechanisms for dealing with the markdown of assets. The company sees no need to - in its 2001 accounts Shell states that the value and effect of the agreements on net income is 'not significant'.
Some analysts have also noted Shell's secrecy about their trading operations, and question the wisdom of engaging in 20-year contracts. Others, however, have spoken out to argue that the company has made no secret of its tolling obligations and is certainly not involved in any Enron-style mis-accounting.
Shell has traditionally taken a conservative approach to its long-term planning, judging oil projects consistently on their profitability at a $16 per barrel oil price, compared to a current industry level of $25.
In response to the allegations, Shell said that the obligations of $7.4 billion are the sum of all fixed price payments associated with the tolling deals. The net present value of the obligations is some $3.7 billion.
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