Royal Dutch Shell Group .com

Financial Times: The rise of the independent consultancy


By Sheila McNulty

Mar 29, 2004


After the embarrassment of having to cut its proved reserves twice by a total of more than 20 per cent, Royal Dutch/Shell has hired Ryder Scott, one of the biggest reservoir-evaluation consulting companies in the oil industry, to provide its investors with a credible estimate.


El Paso, the US energy company, was also forced to call in the Houston-based consultancy after new management suspected its numbers were awry. Ryder Scott's assessment forced El Paso to revise down its proved oil and gas reserves by 41 per cent.


Ryder Scott is not listed and, therefore, relatively unknown outside the industry. But it carries out more than 1,000 consulting studies a year for oil and gas producers, investors, banks, governmental agencies and accounting and law firms. It is the most widely used consultancy for year-end estimates to meet US Securities and Exchange Commission guidelines.


Mike Rodgers, senior director of the exploration and production portfolio for PFC Energy, an industry consultancy, says he would not be surprised if the major energy companies, which have long calculated their own proved reserves, now turn to consultancies like Ryder Scott to back up their estimates.


"It is possible shareholders will start to get nervous enough," he says. However, he suspects the world's biggest oil and gas companies will not want to have independent assessments of all their assets. Most insist they are at least as conservative as the independent assessors. But Mr Rodgers says they might start to get outside opinions for assets which could significantly affect their share prices.


Ron Harrell, Ryder Scott chief executive, says estimating reserves is an inexact science. "The process of estimating reserves is no more than that," he says. "No two evaluators would get the exact same number."


Only if there is a "reasonable certainty" about what a field holds can a company report it as proved reserves, he says, adding, however, that "reasonable certainty is in the eye of the beholder". He likens the estimates to those provided by a weather forecaster, who cannot guarantee the weather will turn out as expected.


Nonetheless, Ryder Scott has assembled leading geologists and engineers to evaluate the data companies bring to them. They are not always right, Mr Harrell admits, yet they have developed a reputation for being consistently close to target.


On a discovery well, say, in the deep water of the Gulf of Mexico, a company will drill into the reservoir and monitor the data from rock and fluid samples that come to the surface. The company estimates the porosity and saturation of the reservoir to help determine how much oil, gas and water exist in the rock. Electrical, acoustic and radioactive measurements are also made.


Any estimates made will be based on information from one or more sampling points from an eight-inch diameter well bore for a field that could cover hundreds, even thousands, of acres. To book proved reserves, a company might drill additional delineation wells, depending on the size of the field.


Even then, it cannot claim them as proved reserves without overcoming the engineering challenge of determining how much the company can economically recover from the well. That usually ranges from 15 to 60 per cent, Mr Harrell says.


Finally, a company must establish a viable economic plan to get the reserves to market before it can report them as proved. Mr Rodgers says he understood that was a large part, perhaps 85 per cent, of Shell's problem. In the end, he says, Shell expects it will rebook the reserves that it prematurely reported, as the company firms up contracts or markets over the next decade.


In El Paso's case, the company is blaming most of its problems on assets acquired in its 2001 merger with Coastal, which it was led to believe were of better quality. "Yet even if the discrepancy turns out to be the result of inflated bookings by Coastal, El Paso is still left holding the bag," Mr Rodgers says. "Those reserves are not in the ground." Such problems are what make Ryder Scott and its ilk extra conservative with their estimates. "Their whole existence depends on their credibility and integrity," Mr Rodgers says.


"The oil companies have a vested interest in encouraging these reserve-evaluation companies to come up with the highest possible number," Mr Rodgers says. "But if they over-certify the reserves that a company books, and that company gets into trouble, like Shell or El Paso, that reserve-evaluation company is in trouble."


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