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Shell cuts proved reserves by 20 percent Move sends shock waves through oil industry Petroleum News
Shell’s decision to reduce its proved reserves by 20 percent or an astonishing 3.9 billion barrels of oil equivalent has cast a cloud over oil and gas companies worldwide and the manner in which they book reserves, a key factor in valuating a publicly traded company.
Shell’s Jan. 9 disclosure also came at a time of increasing scrutiny by the U.S. Securities and Exchange Commission, which is said to be calling on companies big and small to account for their bookings. The SEC recognizes only proved oil and gas reserves, or those that can be economically produced.
In a conference call with analysts, Shell said it had talked to the SEC but did not say whether the agency had pressured the company into reclassifying reserves. Rather, Shell said “a number of in depth studies” conducted by Shell and concluded in the 2003 fourth quarter prompted the company to make changes.
“It is anticipated that most of these reserves will be re-booked in the proved category as field developments mature,” Shell said in a prepared statement, adding that reclassification of proved reserves would not “materially change” its estimated total hydrocarbons in place, nor volumes the company expects to ultimately recover.
Shell said its action also would have “no material effect on financial statements for any year up to and including 2003.” Affected reserves in Nigeria, Australia Reserves affected by Shell’s action are located primarily in Nigeria and Australia, in particular the $8 billion offshore Gorgon natural gas project in northwest Australia, where Shell has booked reserves for years, despite the fact the project has not yet evolved into a commercial operation. Shell holds a 28.6 percent stake in Gorgon.
One analyst told Petroleum News that Shell’s “recategorisation” of proved reserves likely was a “pre-emptive strike” designed to avoid further SEC scrutiny and to appease investors, a strategy which at least partly failed. Shell’s stock plummeted on the news, dragging down the shares of other oil and gas companies as well, including Gorgon partner ChevronTexaco, a 57.1 percent stakeholder in the LNG project. ExxonMobil holds a 14.3 percent share of Gorgon.
Shell’s announcement also prompted an immediate response from ChevronTexaco, which asserted in a prepared statement that Shell’s decision would not affect its current worldwide reserve categories, including Nigeria and Australia. ChevronTexaco noted thus far it had not booked any reserves at Gorgon.
Of the 3.9 billion barrels of equivalent reserves taken off the books by Shell, 2.7 billion barrels involved crude oil and natural gas liquids and 7.2 trillion cubic feet of natural gas, Shell said. Over 90 percent of the total change entailed a reduction in the proved undeveloped category, and the rest in the proved developed category, the company said. Reserves booked between 1996 and 2002 The company did not provide a regional breakdown of the reserves, but did say they were booked between 1996 and 2002. “A significant proportion of the recategorisation relates to the current status of project maturity,” Shell said.
Some industry observers believe the SEC is partly at fault, charging that the agency has failed to issue clear industry guidelines when it comes to booking reserves. “The fact Shell booked reserves at Gorgon and ChevronTexaco didn’t, makes no sense,” one analyst said, suggesting the SEC “needs to establish speed limits so people will drive the speed limit.”
He said there is little doubt the SEC is putting the screws to industry on the reserve issue. “I’ve heard from several companies that the SEC is putting tremendous pressure on them to come clean,” he added.
Meanwhile, investment banks like Deutsche are trying to figure out whether Shell’s problem is contagious.
“Shell’s shocking announcement ... has thrown the spotlight on one of the sector’s most important — but in many ways opaque — measures,” Deutsche Bank said in a notice to investors. “We know that annual reserve replacement and finding costs are not reliable guides to value or earnings, but they are crucial metrics of corporate success and management — and thus crucial guides to relative valuation.”
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