Royal Dutch Shell Group .com

Calgary Herald: Shell's pain is ASC's gain

By Scott Haggett  

Saturday, January 17, 2004.


Once again, it's been proved that it's better to be lucky than good, at least if you work for the Alberta Securities Commission.


The ASC is about to cause a lot of pain in the oil patch now that it's about to enforce a new rule governing how petroleum companies should count their oil and gas reserves. However, the commission's case for upsetting the apple cart was made for it recently by an unlikely source: Royal Dutch/Shell, one of the world's biggest oil companies.


Last week, the Royal Dutch/Shell Group of Companies said it had "recategorized" 3.9 billion barrels of reserves. In strict untechnical terms, Shell went from saying "We have it." to "Uhhh, well, maybe not."


The massive company, which operates on the honour system of reserve reporting, said about one-fifth of the petroleum it thought it had might not be there after all. In actual terms, its revised reserve figure moved 2.7 billion barrels of oil and 7.2 trillion cubic feet of natural gas from the proved undeveloped category (meaning it was certain the oil was there but wasn't yet ready to pump it out of the ground). That doesn't mean the oil never existed -- it may still be there and be produced in the future -- but it does mean Royal Dutch/Shell was overly optimistic in what it told shareholders it had.


Still, that's a lot of oil and gas. The 3.9 billion barrels of oil equivalent the company took off its books is more oil than Canada produces in four years and about 49 days' worth of the entire globe's oil output. It's also one billion barrels more than the proved reserves EnCana Corp., Canada's biggest independent oil producer, reported at the end of 2002.


The cuts, mainly from its operations in Nigeria and Australia, moved Royal Dutch/Shell's total proved reserves to 15.5 billion barrels and doesn't affect the amount of oil and gas the company produces.


A reserves total is really a promise to investors that an oil company has the ability to stay in business over the long term and has real assets it will be able to sell. In that sense, some investors felt Phillip Watts, Royal Dutch/Shell's chairman, had broken that promise and called for him to resign. Watts, who's never been popular in some investing circles, hasn't said he's ready to take that step.


Shell wasn't trying to mislead anyone. Reserve reporting is a bit arcane at best and there's no shortage of companies that have had to admit that their own reserve figures were also overly optimistic.


Canada's had its share of scandals over oil companies that were thought to be overstating their oil and gas holdings. One of those -- Blue Range Resources -- is still the subject of a lengthy hearing by securities regulators.


But, as with all trauma in the business world, there's an upside for somebody. In this case, the Alberta Securities Commission is one of the winners. The commission had been trying for years to come up with a way to ensure petroleum companies had all the oil and gas they said they did.


Last year, the ASC came up with a workable regulation -- poetically titled rule NI 51-101, that will make Canadian companies have their reserves assessed by independent evaluators.


The rule, which will be enforced this year, means companies won't be able to give their own best estimates of their reserves, which is all the U.S. Securities & Exchange Commission requires. Instead, a knowledgeable third party will have to verify those estimates.


It's likely the new standard will cause a lot of pain as companies are forced to have their reserves appraised for the first time (though many have for years relied on outside firms to come up with estimates).


However, NI 51-101 may help Canadian firms and their backers avoid the disaster that has been visited on Royal Dutch/Shell.


Royal Dutch/Shell chairman Phillip Watts has heard the call from some investors to resign, but hasn't said he's ready to take that step.


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