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The Financial Times: Reduction in proved reserves adds to pressure on ratings


By Charles Batchelor in London

Published: March 18 2004 19:41 | Last Updated: March 18 2004 19:41  


The latest reduction in Shell's proved reserves is expected to bring further pressure for a downgrade in the company's credit rating by the three leading credit rating agencies.


Standard & Poor's, the largest of the big three, said the latest revision to Shell's reserves justified its earlier decision to put the company on negative CreditWatch - indicating the next ratings move would be downwards - at the time of the first revision on January 9.


Fitch revised its long-term outlook for the oil group last Friday from "stable" to "negative". Moody's Investors Service put the company on review for a downgrade on January 9.


Shell is currently on the top triple A or its equivalent rating from all three agencies. A downgrade would be expected to increase the cost of borrowing to the company.


"Although the recategorisation announced today is relatively minor compared with that of January 9 in terms of its potential impact on Shell's credit quality, in S&P's view it justifies the decision not to resolve the CreditWatch before obtaining definitive results from Shell's review of its proved reserves and full accounts for 2003," said Olivier Beroud, an S&P credit analyst.


S&P will carry out an examination of Shell's procedures for proved-reserve booking and how these compare with its main competitors. It will also look at key areas of the company's operations and the specific projects that led to the recategorisation of its reserves.


It will review the impact of the recategorisation on the company's capital spending needs. S&P said it would also focus on corporate governance issues.


Fitch justified its decision to move to a negative outlook, saying this reflected the expectation that the company would incur additional costs of up to $6bn to replace the "missing" reserves by additional production or by acquisitions.


It also reflected "the possibility of further managerial instability, financial penalties, findings supporting shareholder litigation and further adjustments to reserves".

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