TIMESONLINE: Shell books reserves again after downgrade
By Xan Rice
February 26, 2004
SHELL completed a rapid about-face yesterday by announcing that it would again book reserves at the giant Kashagan oilfield as proven, just a month after they were controversially downgraded.
The company said yesterday that it had taken a final decision to invest in the project in Kazakhstan, in which it holds a 16.67 per cent share.
ENI, the Italian oil company that operates the field, had earlier announced that year-long negotiations with Kazmunaygaz, the Kazakh petroleum authority, had been successfully concluded, kickstarting construction.
In January, Sir Philip Watts, the chairman of Shell, came under severe pressure from shareholders after the group said that 3.9 billion barrels of oil and gas, a fifth of its total reserves, were incorrectly booked as “proven”. The announcement shocked the City and caused the share price to slide more than 10 per cent. Shell’s reserve life, measured in terms of future production, immediately fell from thirteen to ten years.
About 380 million of the 3.9 billion barrels that were recategorised as unproven related to Kashagan, one of the world’s biggest oil discoveries of the past three decades. The field is thought to contain 13 billion barrels of oil, and will be mined by a consortium of companies that also includes Total, ExxonMobil, ConocoPhillips, Agip and Inpex.
Some of these groups were angered by Shell’s decision to recategorise its reserves at Kashagan. Thierry Desmarest, chief executive of Total, which owns a 17 per cent interest in the project, last week said the move was impossible to understand. ExxonMobil, which also holds a 17 per cent interest, announced it had booked oil for its share of the project just two weeks after Shell’s shock announcement.
A spokesman for Shell said that some of the 380 million barrels would now be booked as proven during 2004, following a detailed review process. He defended the move, saying that the January recategorisation related to the position of the Kashagan project at December 31, 2002, when negotiations with the Kazakh government were less advanced.
Bruce Evers, oil analyst at Investec, said it was hard to criticise Shell over the treatment of the Kashagan reserves as all the consortium partners were using different policies to book the oil. “Now that the final investment decision has been made they are entitled to bring those barrels on board,” he said.
The first oil from Kashagan, which is located in the shallow waters of the Caspian Sea, is expected to flow in 2008. Total capital investment in the project is estimated at $29 billion (£15.4 billion).
The positive news is unlikely to ease the pressure on Sir Philip, however. A group of US shareholders had filed a class action suit against Shell, alleging that the group violated accounting rules with its reserve booking policy. The Securities and Exchange Commission has also launched a formal investigation.