Oil Patch Insider

After all, it’s just a numbers game

At first glance, it looks like a calamity — reserves write-downs of 420 million barrels by Suncor Energy, 182 million by Shell Canada and 114 million by Husky Energy.

But all three Canadian heavy oil producers are victims of a quirky U.S. Securities and Exchange Commission regulation that requires them to evaluate year-end reserves based on Dec. 31 prices.

On that date, crude with an API gravity of 12-14 degrees was trading at C$12.27 a barrel, a figure that was wildly out of line with the average for all of 2004 that ranged from C$25.91 for Shell to C$28.75 for Husky.

(Heavy crude sells at a discount to light crudes because of the upgrading required before it can be processed by conventional refineries).

However, the SEC standard forced Suncor to reduce to “possible” from “proven” 420 million barrels.

Suncor took that step regardless of the fact that it is currently selling those same barrels at a profit of C$15-$20 per barrel.

In fact prices were up about 76 percent in the first 10 days of 2005, underscoring market gyrations that can often distort heavy crude prices for only brief periods.

Much the same applies to Shell Canada, which is still in a business-as-usual mode, producing 11,000 bpd from its Peace River heavy oil operation in northwestern Alberta. If the company had been able to apply the average heavy oil price for 2004 to its reserves, they would have met the SEC’s threshold for profit at the wellhead and no changes would have been needed.

In Husky’s case, had the deadline been Jan. 10, when Lloydminster heavy oil was at C$21.56 a barrel, rather than Dec. 31, the write-down would have affected only 2 percent of its heavy oil reserves, not 50 percent.

Unlike the SEC, Canadian securities rules allow companies to use the average price of bitumen for the preceding 12 months.

The flip side for the producers is that SEC filings have greater credibility in the eyes of U.S. investors and despite the drastic change in reserves numbers with a consequent impact on asset values, company earnings are not affected.

—Gary Park