The New York Times: Shell Withheld Reserves Data to Aid Nigeria
By JEFF GERTH and STEPHEN LABATON
March 19, 2004
WASHINGTON, March 18 — The Royal Dutch/Shell Group has kept secret important details of its sharp reduction in oil and gas reserves, particularly in Nigeria, for fear of damaging its business relationship with the government there and the Nigerians' desire to produce more oil, internal company documents show.
While Shell has acknowledged that the biggest adjustments in reserves include those in Nigeria, it continues to conceal the extent of its problems. But confidential documents from late last year show Shell concluded that more than 1.5 billion barrels, or 60 percent of its Nigerian reserves, did not meet accounting standards for "proven reserves."
The scale of the revision is important because Nigeria is a significant source of oil for Shell and the country is seeking to increase markedly its production quota within the Organization of the Petroleum Exporting Countries. The size of proven reserves is a basic consideration when OPEC sets quotas for its members. At stake for Nigeria are billions of dollars in revenue annually.
Shell disclosed two months ago that it had overstated its oil and gas reserves by 20 percent, which is equivalent to 3.9 billion barrels of crude oil. On Thursday, it pared its reserves by the equivalent of 250 million barrels more, most of that involving a natural gas field off Norway. Shell also postponed the publication of its 2003 annual report for two months to complete a review of its oil and gas assets.
The oil company's executives are acutely aware of the potentially explosive political effect of their cutting the estimates of Nigerian reserves. A report dated Dec. 8, 2003, and prepared for senior executives by Walter van de Vijver, then the top official for exploration and production, recommended that the revised Nigerian reserves remain "confidential in view of host country sensitivities."
Nigeria is the world's seventh-largest oil exporter, producing about two million barrels a day, and shipping 40 percent of that to the United States. Shell documents about Nigeria portray a sometimes fragile marriage and offer a window into the kind of relationship that is considered vital to global energy security.
Most of the world's oil is in less-developed countries like Nigeria, yet much of the financial and technological resources needed to develop that oil belong to Western oil companies.
Authorities in the United States, Britain and the Netherlands have each opened investigations into Shell's actions, to see if the company violated any laws or securities regulations.
By reducing its estimates of reserves, Shell has not necessarily lost any oil or gas. Instead, it reclassified some oil and gas fields as less likely to be developed soon, if at all. Timing is important to investors because it suggests how much money the company can make over certain periods and how busy it can keep its refineries.
Reserves are also important to Shell because they can influence the company's relationship with the country where the oil and gas are found. This is particularly true in Nigeria.
Identifying the extent of Shell's lowered reserves in Nigeria, Africa's most populous nation, could affect Nigeria's "quota discussions" with OPEC, the December report warned. Nigeria has been seeking a quota increase as part of a plan to double its daily production in the next several years.
Reserves are "a key input in quota discussions," the report says, and since Shell's reserves constituted about half the country's total, "an external disclosure indicating that estimates have been overstated could negatively impact the government's position."
OPEC officials visited Nigeria last month and the organization will discuss a new formula for determining quotas later this year, an OPEC spokesman said. Proven reserves, the spokesman said, were part of the quota calculation. Oil yields 90 percent of Nigeria's export revenue, which was estimated at $17.3 billion a year in 2002. A doubling of its production, as it intends, could mean billions extra in annual income.
Andy Corrigan, a spokesman for Royal Dutch/Shell, the world's third-largest publicly traded oil company, declined to provide details on Thursday about the restated Nigeria reserves, saying only that they constitute a "significant proportion" of the overall calculations.
E. E. Imohe, the head of the economic section at the Nigerian Embassy in Washington, said Thursday that he passed on questions from a reporter to his government this week about Shell, but had not yet received a reply.
Protecting Nigeria's negotiations with OPEC may not be the only reason Shell has not been more forthcoming about its reserves there. The report said the publication of too much information could jeopardize the company's negotiations with Nigeria over $385 million in bonus payments.
In any case, the documents about Nigeria offer a far bleaker assessment of Nigerian operations than the company's public disclosures.
Nigeria, for example, has called for an end to the practice of flaring, or burning off, natural gas that is a byproduct of oil production; two billion cubic feet of natural gas are burned this way in Nigeria every day, and this has become an environmental and political issue. Mr. Corrigan said the company was committed to meeting the target. Shell's Web site says "this opportunity" to gather gas "is going well."
But the Shell documents present a different view. A high-level review in December found that many oil field projects did not include plans to gather natural gas, and that "oil production would have to be shut in," or stopped, unless the company found a way to use the gas. Shell could sell it in Europe or the United States, but natural gas is expensive to transport across the ocean.
So far, Shell has not released a country breakdown of its reserve restatements, but it told analysts last month that Nigeria and Australia were the two largest. Company documents show that Shell's senior managers were told in December that 720 million barrels in Nigeria were "noncompliant" with guidelines established by the Securities and Exchange Commission, and that a further 814 million barrels were "potentially noncompliant."
S.E.C. guidelines on reporting reserves apply because Shell sells bonds and stock in the United States. Calculating reserves can be as much an art as a science, and there can be debate about how to do it. The S.E.C. and energy companies have been in discussions in the last few years over how to apply the guidelines.
At the end of 2002, Shell recorded 2.524 billion barrels of proven reserves in Nigeria, but after reviews and a tightening of company guidelines, the December report said that only 990 million barrels "fully complies" with the guidelines.
The document recommended that "any debooking of proved reserves" in Nigeria "not be identified publicly with Nigeria" but classified under a wider geographic area.
Last month, when Shell reported more details about the reserve downgrading, it said African operations accounted for 1.5 billion barrels of the revision. Shell has operations in several African countries, including Libya and Egypt, but Nigeria is the only one listed in a "potential reserves exposure catalog" that was distributed to senior executives late last year.
The Shell documents, including the December report, make clear that geology is just one part of determining whether oil or gas is a proven reserve. A producer must also have firm plans to extract the resource and be ready and able to make the investment to carry out those plans; the absence of such commitments, the documents showed, was the main reason most of the Nigerian reserves did not meet the definition of "proved."
There are different explanations for Shell's lack of progress in developing its Nigerian oil fields. A report in November by the International Energy Agency said that joint ventures — like Shell's in Nigeria, where it is in partnership with the government — "suffered from underinvestment, because of a lack of state funding." In Nigeria, according to the international agency and to local news media reports, government budget and other developments have shifted more of the financial burden of developing oil fields to foreign investors.
Mr. Corrigan, the Shell spokesman, said that "government funding has been a constraint, not Shell's willingness to fund."
From Nigeria's perspective, the foreign oil companies are partly to blame for the slow pace of meeting reserve targets because they "are sitting on large tracts of undeveloped acreage," according to Shell's understanding of a growth plan prepared by Funsho Kupolukun, who functioned as an adviser to Nigeria's president and who now manages the national oil company.
From 1991 to 1999, Nigeria offered Shell and other foreign oil companies an incentive to increase reserves, called a Reserves Addition Bonus. Shell asserts it was owed $385 million under the bonus program, but has only sought 30 to 50 percent of the claim, according to the December report. The program applied to a different, less probable category of reserves than the publicly reported "proved reserves," which have been downgraded.
In a news conference in London on Thursday, Malcolm Brinded, the new executive in charge of exploration and production, said the restatement of reserves was unrelated to the bonus.
"There has been speculation on bonuses paid to company about Nigeria," Mr. Brinded said. "That's a completely different issue to this proven reserves issue. It is quite another matter and totally unrelated to reserves recategorization."
But the December review of the problems in Nigeria and elsewhere presents a different view.
"While in principle a debooking of S.E.C. proved reserves should not impact on RAB," the review says, referring to the Reserves Addition Bonus, "this is likely to undermine the current resolution process, or would jeopardize relations if a settlement were agreed just ahead of a de-booking," and adding that this would put $115 million to $170 million "at risk."
There are more than financial issues behind the decline in reserves. "Community disturbances and political instability" were also to blame, according to the Shell report. Most of Nigeria's oil reserves are in the delta region in the south, where unrest forced the company to reduce production last year.
Shell faced international criticism from human rights groups after the execution in 1995 of Ken Saro-Wiwa, a Nigerian environmentalist who organized demonstrations to demand that Shell and other energy companies reduce oil spills and pollution, and hire more local people. Shell decided to pay more attention to its civic responsibilities, but challenges remain.
"It's a very challenging environment for Shell in Nigeria," said Alex Vines, head of the Africa program at the Royal Institute of International Affairs in London.
Nigeria has also tried to be more publicly accountable on its handling of the oil industry. President Olusegun Obasanjo won praise last year when he promised that his country would publicly report its oil revenue. He also called for each oil company to publish its payments to governments, but some American companies and the Bush administration oppose such detailed reporting.
Transparency International, a research and advocacy group based in Berlin, which helped organize the news conference for President Obasanjo, said that Chris Finlayson, chairman of the Shell companies in Nigeria, attended the event and welcomed the president's announcement.
A month later, Shell's senior management recommended that details of its reserve problems and bonus negotiations with Nigeria be kept confidential.