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Financial Times (Lex): Royal Dutch/Shell

Published: January 9 2004 14:41 

It seems the oil major with the reputation for conservatism was not so prudent after all. In its second public relations disaster within a month Shell  has owned up to overbooking a staggering 20 per cent of proved oil and gas reserves. 

Shell already had a problem relative to some of its peers. For the last three years it has failed to replenish organically all of its reserves. In 2002, excluding the acquisition of Enterprise Oil, the replacement ratio was only about 57 per cent. 

Moreover, in recent years upward revisions have played a significant role in adding to proved reserves at Shell. For 1996-2002 some estimates put this contribution at 5.7bn barrels of oil equivalent, or 60 per cent of organic additions. In yesterday's "grand old Duke of York" move, that figure has been revised down by 3.9bn barrels. 

Investors can take comfort from Shell's greater realism and a more consistent approach to booking reserves. This holds out some hope that the share price fall-out could be confined to yesterday's sharp drop. 

But the re-categorisation throws the problem of reserve replacement into even starker relief, calling growth prospects into question. Management credibility, already questioned by some, has been further dented. The revision, mainly for reserves booked in 1996-2002, would be tough for the head of any company to explain. Sir Philip Watts, chairman, also has to contend with the embarrassing fact that he was in charge of exploration and production from 1997-2001. 

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