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Financial Times: Life of Shell reserves cut by 3 years

By Carola Hoyos

Jan 12, 2004


The life of Royal Dutch/ Shell's proved reserves has been cut by three years to little over 10 years, analysts have calculated following a shock announcement by the world's third-largest listed oil company on Friday.


Shell stunned the market by saying it would have to slash its estimate of proved reserves of oil and gas by 20 per cent, sparking a 7 per cent fall in its share price.


The reduction, triggered by the need to comply with Securities and Exchange Commission rules, is a severe blow to the Anglo/ Dutch company as it struggles to find new reserves to replace the 1.5bn barrels of oil and natural gas it pumps from its fields every year. Reserves which had been classified as "proved" will be termed "unproven" or "having scope for recovery".


The company is expected to announce that its reserves have shrunk from 19bn barrels to 15bn at its annual review next month. That has worried shareholders and analysts almost as much as the stunning reclassification of its reserves.


The downgrade knocked Shell well below its closest rivals in reserve life, with BP of the UK and ExxonMobil of the US having more than 13.5 years of reserve life. The numbers reflect Shell's struggle to expand as its success in exploration has been well below that of its rivals.


Wood Mackenzie, the energy consultant, calculates that from 1997 to 2000 Shell's organic replacement rate has been 57 per cent, compared with 116 per cent for ExxonMobil and 152 per cent for BP.


The cut in reserves also affected Shell's costs, with each new barrel costing $7.90 compared with ExxonMobil's $3.93 and BP's $3.73.


But proved reserves are not all that matter, and when probable reserves are taken into account, Shell is in line with its peers, according to Wood Mackenzie.


Although all of the leading oil companies have struggled to find new reserves, Shell's problems have put Sir Philip Watts, its chairman, under the most scrutiny, with some shareholders warning that they would push for a change at the top.


It did not help that ChevronTexaco and ExxonMobil - two of Shell's partners in Australia's Gorgon project, one area where Shell downgraded its reserves - said they had never booked the reserves as proved. Their more conservative approach undermined Mr Watt's credibility and Shell's reputation as one of the most cautious among its peers.


But analysts still worry that Shell may not be the only company that has overbooked in the past.


For Shell and, in particular, Sir Philip this could offer some welcome relief.


"If other oil groups follow suit over the next few months, that could lift the pressure on him. However, if they don't, he could come under some real pressure," a top ten shareholder said.


Yesterday shareholders, consultants and analysts called for for greater disclosure from Shell and across the industry.


JJ Traynor, analyst at Deutsche Bank, pointed out that figuring out what went wrong in Australia and Nigeria, which accounted for half Shell's reclassification, is particularly difficult because companies do not break down their reserves by project or even country.


"None [of the key five players] provide full disclosure in Nigeria alone, but we can see West Africa for Total and Eni, Africa for ExxonMobil and ChevronTexaco, and Eastern Hemisphere and other (so including Asia unfortunately) for Shell," Mr Traynor added.


Securities regulators in Canada, where some of the largest reserve additions have been made in the past two years, have already proposed a third party auditing system.


Although observers are quick to point out that Shell did not knowingly mislead investors, they say pressure to find new reserves had put a cloud over big oil companies' reporting habits.


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