THE WALL STREET JOURNAL: Exxon Mobil Balks At Changing Way It Books Reserves: “Exxon Mobil Corp. is resisting a push by the Securities and Exchange Commission in the wake of the Royal Dutch/Shell Group scandal to change its methodology for booking oil and natural-gas reserves.” (ShellNews.net) 22 Nov 04
By JOHN M. BIERS
DOW JONES NEWSWIRES
November 22, 2004; Page A6
Exxon Mobil Corp. is resisting a push by the Securities and Exchange Commission in the wake of the Royal Dutch/Shell Group scandal to change its methodology for booking oil and natural-gas reserves.
The dispute puts the oil giant at odds with U.S. securities regulators over a rule that oil companies broadly dislike but are increasingly complying with, even at the cost of reductions in reserve counts.
At issue is an SEC requirement that oil companies use year-end commodity prices to calculate their annual reserves, a number watched by investors as a sign of a company's prospects. The roughly 50% jump in oil prices this year has given the issue more urgency.
Rather than year-end prices, many of the largest oil companies have traditionally estimated reserves on the basis of long-term "planning prices," which reduced the impact of the sometimes-large year-to-year swings in the volatile energy markets.
Typically, high oil prices are seen as a boon to oil companies. But under a sort of contract that is becoming more common in the industry, high prices can force a company to report lower production levels and reserves, even as profits rise.
The SEC says its rule is intended to ensure all oil companies follow the same reporting standard. Most big companies are relenting. Following discussions with the SEC, BP PLC this year dropped its practice of using a long-term planning price and decided to use the year-end price. The change contributed to a 2.5% downward revision to BP's 2003 reserves. At ChevronTexaco Corp., a spokesman said that company plans a similar shift for its 2004 report. Previously, ChevronTexaco based its reserve tally on the same prices it uses for business planning.
But Exxon Mobil, which has been in communication with the SEC over this and other reserves issues, is holding out. The oil company said it continues to view long-term pricing rather than year-end pricing as an "appropriate" way to book reserves, said Lauren Kerr, a spokeswoman. The company declined to comment on its discussions with the SEC. "We would not expect a significant change in our overall reserves due to a higher (or lower) price outlook," she said, responding to written questions.
An SEC spokesman said the agency doesn't discuss continuing communications with companies.
The SEC has begun pressuring companies to change in the aftermath of the Shell scandal. A company forced to change its system in 2004 could potentially take a large hit in reserves, given that most companies set budgets based on oil prices less than half of today's level.
Under contracts in the U.S., the U.K. and other conventional energy basins, higher prices usually result in bigger reserves, as more projects become economic. But under so-called production-sharing agreements, a government owns the resource and guarantees the company enough oil to cover its costs plus a percentage of the oil left after those costs. As the price of oil goes up, the volume a company gets under such an agreement declines.
Write to John M. Biers at john.biers@dowjones.com