Financial Times: Oil-gas distinctions blurred in combined estimates booked by the oil companies (ShellNews.net)
By G Ramaswamy
Published: October 4 2004
From Dr G. Ramaswamy.
Sir, Regarding James Boxell's report "Slick Shell shows lack of substance" (September 23) and Eric Knight's letter on the same date, I wish to say that combining oil and gas in booking reserves is defective. The reserves should be booked separately for oil and gas.
This is because calculating gas as barrels of oil is a historical aberration. It is done by comparing their thermal potential.
On this basis, gas as a barrel of oil-equivalent has much less value than a barrel of oil.
To equate market value, today's gas should be priced $7 to $8 per thousand cubic feet gas. But European and Asian gas prices are less than half of this amount.
It is bound to be like this in the near future. Moreover, "proved" gas may take a longer lead time to market due to infrastructure and finding a long-term buyer. But "proved" oil can be readily traded once production facilities are in place. These economically significant distinctions are blurred in the combined estimates booked by oil companies.
For better transparency, let oil and gas companies follow the practice of splitting oil and gas reserves as "proved" oil and "proved" gas.
If this is done, Shell's crude oil picture may look better in the sense that the proved oil's life will be more than 10 years, and somewhat nearer the level of Shell's peers.
The shareholder can make his or her own estimate of the value of the booked reserves of oil and gas under current market conditions and also the performance of Shell in replacing the individual oil and gas reserves produced.
G. Ramaswamy, (Former adviser, Petroleum Ministry, Government of India), Mumbai 400054, India