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Financial Times: Shell reserves shock analysts

By Carola Hoyos

Published: January 11 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 its reserves have shrunk from 19bn barrels to just 15bn at its annual review early next month. That has worried shareholders and analysts almost as much as the reclassification.


The downgrade knocked Shell well below its closest rivals in reserve life, with BP of the UK, and Exxon- Mobil 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 lagged behind its rivals.


Wood Mackenzie, the energy consultant, calculates that from 1997 to 2002 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 major 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 his cause that ChevronTexaco and ExxonMobil - two of Shell's partners in Australia's Gorgon project, one major area in which Shell was forced to downgrade its reserves - said they had not booked the reserves as proved in the first place. Their more conservative approach undermined Sir Philip's credibility and Shell's reputation as one of the most cautious among its peers.


But analysts and shareholders 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-10 shareholder said.


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


JJ Traynor, an analyst at Deutsche Bank, said figuring out what went wrong in Australia and Nigeria, which accounted for half Shell's reclassification, was difficult because companies did not break down reserves by project or 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."


Though observers point out that Shell did not knowingly mislead investors, they say pressure to find new reserves put a cloud over big oil companies' reporting habits. Until now, third party verification was generally reserved for those companies, such as ones in Russia, whose information the market did not trust.


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