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The Guardian: Sir Philip ducks out as Shell cuts its reserves

David Gow

Saturday January 10, 2004


Sir Philip Watts, the Shell chairman, came under heavy investor fire yesterday after failing to explain in person why the British-Dutch oil and gas group cut its proven reserves by 20%, triggering a sharp fall in its share price.


Sir Philip, the chairman since 2001, also faced renewed criticism after Shell admitted that it failed for the third year in a row to boost its reserves by as much as it produced, raising doubts about possible future earnings growth.


Shell shares fell as much as 7%, despite a climb in oil prices to nine-month highs, and dragged down the sector, including BP, which said it had no plans to revise its own reserves after issuing a cautiously optimistic trading statement.


Sir Philip was absent from a conference call to discuss the preliminary findings of a strategic review of Shell's proven reserves initiated by the group but prompted by more stringent guidance from America's securities and exchange commission.


The Shell chairman's aides explained his absence by the fact that the group is in the close period before its full-year results on February 5 when he is expected to offer a fuller explanation. However, the reserves affected - 3.9bn barrels of oil equivalent - were booked between 1996 and 2002, largely coinciding with Sir Philip's leadership (1997-2001) of Shell's exploration and production division.


The company said the "recategorisation" of the reserves would have no material impact on the financial results for 2003 and that 90% of them were undeveloped. Two thirds are crude oil and natural gas liquids, the other third natural gas.


The group raised hackles by admitting that the reserve replacement ratio for last year would be in the range of 70% to 90% or an addition of 1bn-1.3bn barrels.


At the end of 2002, proven reserves stood at 13.3 years of production, but analysts are even more concerned that Shell, like other western oil groups, may be unable to replace existing fields despite huge investments in Russia and elsewhere.


These fears were heightened when the group confirmed that output would be flat from 2003 to 2005 and Simon Henry, head of investor relations, refused to reaffirm a 3% forecast for production growth given last year.


The SEC, under rules recently given tighter interpretation, requires oil groups to report with "reasonable certainty" proved reserves that have reached technical or commercial maturity.


Shell insisted that most of the reserves now removed to the unproved category would eventually be rebooked as proved once the fields matured. The change would have no impact on near-term output or on expected recoveries.


Almost half the affected reserves are in Nigeria and Australia, where Shell has a 29% stake in the $8bn Gorgon gas field majority-owned by ChevronTexaco and delayed by weakness in the Asian economy.


The rest is in other parts of the "eastern hemisphere" including Russia, where Shell and its partners are investing $10bn in the huge Sakhalin project. The area also embraces the Middle East, Africa and the Asia-Pacific region.


BP, meanwhile, said its margins in North American gas marketing and refining were expected to be lower in 2003's last quarter because of higher costs, but it was seen as on track to deliver high profits when it reports on February 10.,3604,1119931,00.html


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