Sir Philip Watts, chairman of the world’s fourth-largest oil group, Royal Dutch Shell, has never trained for the stage. The 58-year-old Leicestershire physicist has spent most of his career buried in books, but last weekend he had to take a crash course in acting.

Watts spent two days holed up in the group’s London headquarters learning the art of expressing humility, and he knew he couldn’t fake it. The following Thursday at London’s Tower Thistle hotel, just yards away from the scene of many brutal executions at the Tower of London, he had to face a crowd of angry shareholders at the annual results presentation. The next day he would have to repeat the exercise in New York.

Watts knew the results, however good, would be eclipsed by one issue. He would have to explain away a public relations disaster that had inflicted huge damage both on himself and the company. Shell announced last month that it was slashing 3.9 billion barrels off its proven reserves, equivalent to one-fifth of the oil reserves it had previously stated.

The revelation stunned the City and led to a class action from American investors. The damage was compounded by the fact Watts and his finance director, Judy Boynton, had refused to talk either to shareholders or the media. Instead they left it to an ill-equipped investor-relations executive. Watts went to ground, which led the press to mount a “Where’s Watty” campaign.

When Watts took to the stage at the London hotel, the room was packed with 400 people and the atmosphere was electric. He looked tired and humbled, but he gave the crowd what they wanted to hear. He said: “I’m sorry I got it wrong”.

On Friday he gave the same speech in New York, although the setting could not have been more of a contrast to the Tower Thistle. The St Regis Hotel on Fifth Avenue and 55th Street is so posh even the lifts have crystal chandeliers. In the hotel’s Louis XVI meeting room, analysts and investors sat on gilt chairs and breakfasted on mini-muffins as Watts explained what had gone wrong. “Today was supposed to be about the results and I was going to talk about how 2003 in total seemed to be a good year,” he said. “But sadly this meeting is overshadowed by other questions.”

He apologised for not attending the inital teleconference when the reserve catastrophe was revealed. “Frankly, with hindsight, that was a mistake. I regret that I wasn’t there and I hope today will make amends.”

His colleagues later took over the presentation and Watts sat down, but a hint of relief was visible across his face. For the time being he has saved his job, but at a price. As part of his apology Watts said he would re-examine the Anglo-Dutch group’s antiquated, dual-board structure and make bold changes.

THE decentralisation of Shell, with its committee of managing directors and plethora of individual country managers used to be a source of praise rather than shareholder activism. But times have changed, and the opaque organisation has become a cause of growing concern for shareholders. Up to now, Shell has been in a position to arrogantly dismiss critics, but it no longer enjoys this privilege. It has been overtaken in the global league tables by Exxon Mobil and BP, and the group has stored up big problems trying to maintain its oil production and reserves following years of underinvestment.

Last month’s shock reserves warning highlighted why investors have had these concerns over the internal reporting lines. In 1997, local managers working on Gorgon, a frontier Australian field, started booking reserves of oil and gas as “proven”, when Exxon Mobil, its partner on the project, did not. Similar events took place in other major fields, including Ormen Lange in Europe, Kashagan in Kazakhstan, Nigeria and others. Alarm bells started ringing late last year when an analysis of the Nigerian interests found that at least part of the booked reserves did not meet the requirements under the guidance set down by the Securities and Exchange Commission (SEC). Proved reserves means that there is reasonable certainty that the oil or gas can be delivered.

The results were devastating, and 20% of the reserves were found to have been prematurely booked. “Judgments were made in the past that would not be made today,” said Walter van de Vijver, head of Shell’s exploration and production division, at last Thursday’s meeting.

He explained that in some cases, such as Kashagan, the booking took place because of an agreement with the government that the fields would be developed quickly, but instead those negotiations had to go back to the drawing board. In Shell’s defence, he said the material impact of the reclassification on the bottom line added up to only $86m (£47m) — hardly a wrinkle on the face of the organisation.

Nevertheless, having to restate a big percentage of the reserves, and attracting the interest of the SEC, has highlighted all too clearly the gap that has opened up between central management and their staff.