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FT: Shell makes shock cut in oil reserves estimate

By Joanna Chung and Gordon Smith

Published: January 9 2004 9:48


Royal Dutch/Shell, one of the world's largest and most respected oil companies, shocked shareholders and rivals on Friday by slashing estimates of its proved reserves by 20 per cent.


The revelation that almost 4bn barrels of oil and gas would have to be reclassified to comply with US Securities and Exchange Commission rules triggered a drop of more than 7 per cent in Shell's share price - knocking about 3bn ($5.5bn) off its market value and hitting shares across the sector.


Reserves are a key measure of an oil company's health. Although difficulty of finding new reserves has become an industry-wide problem, Shell has been among the least successful of its peers in making new finds. Many of the company's added reserves have come in the form of upward revisions of the capacity of fields already discovered - rather than through exploration successes. On Friday, Shell said its reserves would shrink again this year, with only 70-90 per cent of oil and gas extracted being replaced.


Although Shell said the decision would have no material effect on its financial statements, or the total volume of hydrocarbons in place, the news intensified pressure on Sir Philip Watts, its embattled chairman.


Sir Philip was head of Shell's exploration and production division when the fields in question - the majority of them in Australia and Nigeria - were classified as proved. The revision suggests Shell took an unrealistic view of how quickly it could develop the fields. The company said the move would bring all its reserves up to "a common standard of definition".


Leading UK shareholders said the news was the latest example of poor communication by the oil group. They were particularly angered by the absence of Sir Philip and other board members from a conference call explaining the revision to investors on Friday. One large UK shareholder said: "No one likes to deliver bad news but he should not have left it for others to do."

Shareholders said there was no active campaign to oust Sir Philip, who has a history of strained relations with investors disappointed by poor production and reserves growth and what they see as an overpayment in the recent acquisition of Enterprise Oil.


Executives from all Shell's top oil competitors said they were comfortable with their accounting policies and would not be making similarly large revisions.


ExxonMobil said: "We have never had to do anything like this - what Shell did today - in the past, and we would not expect to have to do anything like this in the future."


Shell recategorised 2.7bn barrels of oil - enough to supply the world for more than a month - and 1.2bn barrels of natural gas. The reserves will now be classed as "unproved" or having "scope for recovery".


Standard & Poor's, the rating agency, placed its AAA long-term ratings for Shell on CreditWatch with negative implications - meaning the rating was more likely to go down than up.


Additional reporting by: Sheila McNulty in Houston, Ian Bickerton in Amsterdam, Joanna Chung in London, Michael Peel in La gos and Virginia Marsh in Sydney.


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