March 4 (Bloomberg) -- Royal Dutch/Shell Group Chairman Jeroen Van der Veer, appointed yesterday, needs to find new oil and gas sources to revive investor confidence in Europe's second- biggest oil company after the shares tumbled following a surprise reserve cut under his predecessor, Sir Philip Watts.

``A new guy isn't going to be able to raise production,'' said Robert Goodof, who helps manage about $50 billion, including Shell stock, for Loomis Sayles & Co. in Boston. ``These guys have still got basic problems. They're reeling.''

Shell, based in London and The Hague, replaced Watts, 58, with Van der Veer, 56, after investors such as Robeco Groep NV and Brittanic Asset Management called for management changes because of the surprise reserve cut by a fifth in January. He is the first Dutchman to head Shell in almost six years. Watts left by ``mutual consent,'' the company said in a statement.

Investors said the Jan. 9 reserve cut, which helped drag down Shell's Dutch shares by as much as 12 percent in a month, underscores a bigger issue: Shell has been slower to find new sources of oil and gas than its rivals under Watts's watch.

Shell, which was overtaken by BP Plc as Europe's biggest oil company last year, has failed to replace output for three straight years and expects production to fall through 2005 as it develops new fields to supplement older projects.

Ratings Concern

After the reserves cut, Standard & Poor's and Moody's Investors Service, the ratings companies, said they may lower Shell's AAA credit ratings, and the U.S. Securities and Exchange Commission said Feb. 19 it has begun a formal investigation.

In addition to the departure of Watts, Walter van de Vijver yesterday stepped down as the head of Shell's exploration and production unit. He will be replaced by Malcolm Brinded, who already runs the group's gas and power division.

Management is ``less of an issue than their production profile and exploration strategy,'' said Gene Pisasale, senior investment officer at Wilmington Trust Corp., which has 1.6 million Shell shares. ``The production profile has been weak.''

Andy Corrigan, a Shell spokesman in London, said Van der Veer wasn't available to comment for this story.

Shell's shares have fallen 35 percent since Watts became chairman on July 1, 2001, compared with a 24 percent decline in shares of London-based BP and a 4.6 percent decline at Exxon Mobil Corp., the world's largest publicly traded oil company.

In its latest quarterly earnings report a month ago, Shell said it replaced 98 percent of production with new reserves in 2003. By contrast, BP said it replaced 122 percent of its reserves in 2003, or 158 percent including its new Russian joint venture, TNK-BP. France's Total SA, Europe's third-largest oil company, replaced 145 percent, it said when it reported profits.

Simple Medicine

``The medicine for this company is pretty simple: better start finding oil and gas in large quantities, fast,'' said Fred Leuffer, an analyst at Bear Stearns & Co. in New York, who rates the shares ``market underweight.''

Shell's reserve replacement for the past four years was the worst of all large oil companies that pump oil, process it and sell refined products, Leuffer said.

That was before Shell removed 3.9 billion barrels of oil from its proved reserves because they had been booked before final investment decisions were made. The change, which mainly affects reserves added from 1996 to 2002, cut the total to 15.5 billion barrels at the end of 2002 from 19.4 billion.

Career in a Nutshell

Van der Veer joined Shell in 1971, working on the maintenance team at the Pernis refining and chemical complex near Rotterdam. Twenty-one years later he oversaw the plant as managing director of Shell Nederland BV. Other postings placed him in Curacao, Africa, the U.K., the U.S. and Canada.

He became a managing director of the Shell group in 1997 and since June 2000 has been president of Royal Dutch Petroleum Co., which owns 60 percent of the Shell Group. Shell Transport & Trading Co., based in London, owns the other 40 percent.

Van der Veer is the first Dutch chairman of the Shell group's committee of top managing directors since C.A.J. Herkstroter retired in June 1998 and was replaced by the U.K.'s Mark Moody-Stuart, Watts's predecessor.

Some investors are pushing the company to consider uniting the company's British and Dutch businesses under a single board. The dual structure, which dates to the 1907 merger that formed the company, requires executives to report to two different boards and two sets of shareholders.

`Double-Headed Monster'

``The problem with Shell hasn't been personality, it's structure,'' said Fadel Gheit, an analyst at Oppenheimer & Co. in New York with a ``buy'' recommendation on Shell. ``This structure is a double-headed monster that should be slain forever.''

The joint company's strategy is decided by the so-called committee of managing directors, which is drawn from executives of both companies. That committee now comprises four members, headed by Van der Veer, whose vote carries no more weight than other members.

Shell's management by consensus may make it less nimble than rivals such as BP, led by Chairman Lord Browne.

``The difficulty with that collegiate structure is no one is really in charge,'' said Eric Knight, managing director of New York-based Knight Vinke Institutional Partners, which holds about $75 million in Shell shares. ``It's an appropriate way to run a club, but is it an appropriate way to manage a major blue-chip multi-national?''

Advocates of the dual structure say the company's links to two nations, the Netherlands and the U.K., offers it greater political protection when operating in different countries.

Changing the structure ``would be more of a cosmetic solution to the underlying problem of simply finding more oil and gas,'' said Bear Stearns's Leuffer, who met with Watts twice in the past month.

To contact the reporter on this story: Tom Cahill in Paris at tcahill@bloomberg.net

Last Updated: March 3, 2004 19:07 EST