San Jose Mercury News: Shell Reclassifies More of Its Reserves
By BRUCE STANLEY
Posted on Thu, Mar. 18, 2004
LONDON - In a surprise step, the Royal Dutch/Shell Group of Cos. said Thursday that it would reduce its estimated reserves of oil and natural gas by an additional 250 million barrels and postpone the release of its annual report by about two months.
Shell said it also has decided not to book a separate batch of 220 million barrels in oil and gas that it had earlier considered worthy of classifying as reserves. These reserves, mostly at its Ormen Lange field in Norway, "did not strictly follow" the U.S. Securities and Exchange Commission guidelines for reserves, the company said in a news release.
The reclassifications follow Shell's stunning announcement in January that it was downgrading 3.9 billion barrels in reserves, or about 20 percent of its total holdings. That disclosure caused a shareholder uproar that led to the forced resignations of Shell's former chairman, Sir Philip Watts, and its head of exploration and production.
Together with the much larger downgrade in January, Shell has now reclassified 4.15 billion in reserves that it had carried on its books. Reserves constitute an oil company's most valuable asset, and any reclassification of reserves into less certain categories is a major concern for investors. The SEC is now conducting a formal investigation into Shell's accounting for its reserves.
The latest changes will lead to an increase in after-tax costs of about $20 million. Shell said it also would write off $10 million worth of wells associated with these reclassified assets.
Shell decided to reclassify 250 million barrels in oil and gas in northwestern Europe and Australasia as a result of an independent review of 40 percent of its total proved reserves. Due to the reclassifications, the company has postponed the release of its annual report for 2003 until late May. Shell had planned to release the report on Friday.
"Shell recognizes that restoring confidence and credibility in reserves reporting practices is vital. Shell is determined to resolve all these issues in the most timely and transparent manner possible and to eliminate chances of a recurrence," the company said.
Shell said it was improving its internal controls in several ways. It would make a "significant increase" in the number of staff dedicated to managing reserves. Reserves auditors would conduct audits more frequently and start reporting directly to Shell's central audit department instead of to the group's operational businesses. The booking of reserves also would no longer affect executives' performance bonuses, Shell said.
Shares in Shell Transport & Trading Co. PLC, the group's British component, fell 3.9 percent to 357.50 pence ($6.54) in afternoon trading in London.