ShellNews.net Archive: Shell’s reputation destroyed after FIVE consecutive cuts to its Hydrocarbon Reserves covering 55 % of total reserves.: Sunday 12 February 2006
Produced below from various sources is a compilation of the five successive downgrades in hydrocarbon reserves which destroyed the reputation of the Royal Dutch Shell Group.
(This compilation will be followed shortly by a list of the various announcements of related Class Action litigation in the United States.)
9th January 2004: Shell Cuts Reserves for the First Time
On January 9, 2004, Royal Dutch/Shell announced that it was writing down its “proved” oil and gas reserves by 20% (or 3.9 billion barrels), from 19.5 billion barrels to 15.6 billion barrels. The write-down: (a) cut the Company’s reserve life from 13.4 years to 10.6 years; (b) increased the Company’s worldwide 5-year average reserve replacement cost per barrel from $5.49 to $12.57 -- 128% greater than the industry average of $5.51; (c) increased Royal Dutch/Shell’s exploration and development costs to $7.90 per barrel -- well above the costs of its competitors; and (d) reduced Royal Dutch/Shell’s Appraised Net Worth by as much as 7.1%, or $9.6 billion. The restatement of proven reserves is related to Royal Dutch/Shell’s oil production in Australia and Nigeria. Based on the importance of reserves estimates, a downward reclassification of reserves represents a dramatic decline in the overall health of the Company.
Impact: Following the January 9, 2004 announcement, Royal Dutch ADSs fell 7.87% from $52.76 to $48.61 per ADS on the New York Stock Exchange (“NYSE”) and Royal Dutch ordinary shares fell 7.10% from the U.S. equivalent of $52.91 to $49.15 per share on the Amsterdam Euronext exchange. Similarly, Shell Transport ADSs fell 6.96% from $44.81 to $41.69 per ADS on the NYSE and Shell Transport ordinary shares declined on the London exchange from the U.S. equivalent of $7.36 to $6.86 per share. Based upon the foregoing disclosures, Moody’s Investor Service (“Moody’s”) placed its AAA rating of both Royal Dutch and Shell Transport under review for possible downgrade because the joint venture’s write-down materially and adversely affected the individual companies’ reserves-to-debt ratios.
The Reserves downgrade problems started “As early as 1997”
18th March 2004: Shell Cuts Reserves for the Second Time
The March 18, 2004 press release also stated that managing directors would not receive a performance-based bonus for 2003 and that the Company’s internal audit department would report directly to Royal Dutch/Shell’s CFO, with the head of internal audit having full access to the Company’s Audit Committee. These changes were in direct response to investor concerns arising since the reserves issue came to light. .. The Company also announced that it was further cutting its proved oil and natural gas reserves for 2002 by an additional 250 million barrels. This change raises the total amount of reserves improperly booked and filed with the SEC to 4.15 billion barrels. Royal Dutch/Shell also reduced its 2003 planned reserves by 220 million barrels, indicating that the Company would only replace 82% of depleted reserves for 2003, not the 98% announced in February 2004.
19th April 2004: Shell Cuts Reserves for the Third Time
In another blow to the Company, Royal Dutch/Shell announced on April 19, 2004, that it would cut for a third time its total energy reserves. This third reserves reduction brought Royal Dutch/Shell’s total reserves to 4.35 billion barrels -- reducing the amount of reserves that the Company planned to book in 2003 by about a billion barrels. These most recent revisions brought the Company’s reserves replacement ratio for 2003 to around 60%, as of the end of 2003, and its reserves life to 10.2 years. The Company also announced that it would restate its financial results for 2002 and revise it 2003 numbers. Overall, the impact of this reserves downgrade was approximately $100 million per year for the period from 2000 through 2003.
24th May 2004: Shell Cuts Reserves for the Fourth Time
May 24, 2004. On May 25, 2004, The Financial Times reported that Royal Dutch/Shell again restated its proved oil and gas reserves for the end of 2002 and disclosed that it will reduce earnings by a total of $402 million for the years 2001 to 2003. The Company stated that it was downgrading another 103 million barrels of its proven reserves to other non-proven categories. This is the fourth time this year that the Company has restated these reserves. The Company stated that these additional corrections were necessary after it changed its accounting treatment for the amortization of goodwill and the way the Company currently reports its inventories of oil and natural gas.
Instead of accounting for proved reserves in Canada on a gross basis, Royal Dutch/Shell will align its practices in Canada with those in the United States and report on a net basis. The Company also said its accounts would now comply strictly with the Financial Accounting Standard (“FAS”) 19 for exploration costs, which states that “companies should follow the successful efforts method of accounting for the costs of acquiring, exploring, and developing mineral resources.” The Statement also specifies “the means by which capitalized cost should be amortized and addresses the accounting for mineral property conveyances, the disclosure to be included in the financial statements, and the accounting for income taxes.” In an effort to clarify its financial accounting the Company stated that it will report its 2003 results exclusively according to US Generally Accepted Accounting Principles (“GAAP”) as opposed to a mix of US GAAP and Dutch GAAP as they had previously and will move to International Financial Reporting Standards (IFRS) in 2005.
1st November 2004: Shell Cuts Reserves for the Fifth Time
Most recently, as announced on November 1, 2004, the Company took another “potentially significant” reserve write-down. In reference to the write-down, a senior analyst with A.G. Edwards & Sons stated:
This most recent disclosure only represents 55% of the company’s reserves examined, 8 billion BOE, leaving an additional 45%, 6 billion BOE, remaining to be reviewed. With the review process in its early stages, [we do] not know what, if any, restatements will have to be made to the company’s prior filings. While the market appears to have taken the reserve write-down news in stride, Royal Dutch/Shell still remains vulnerable to further reserve revisions and financial restatements.
Published on 5 Feb 2005 by Bloomberg
Shell Cuts Oil and Gas Reserves for the Fifth Time by M.Carr & T.Coulter
Royal Dutch/Shell Group cut its reserves for a fifth time, showing its oil and gas holdings were at least a third lower than reported in 2002 after the company misled investors and failed to find new fields.
Shell today reduced its estimate of 2003 reserves by 1.4 billion barrels, or 9.8 percent, to 12.95 billion and said its investigation of the figures is complete. Reserves probably fell further in 2004 and will decline this year before recovering, Shell said. The shares of Europe's second-largest oil company lost 1.7 percent, the biggest drop since Sept. 23.
The company has ``a huge mountain to climb'' to find new reserves, said Neil McMahon, an oil analyst at Sanford C. Bernstein in London with a ``market perform'' rating on Shell. ``Nothing in this company seems to be working at all.''
Two-thirds of Shell's most prospective wells in 2004 were dry holes, and oil output won't rise until 2007, Chief Executive Officer Jeroen van der Veer said during a conference call from The Hague. Because of the reserve write-offs, first disclosed in January 2004, Shell paid $151.5 million in U.S. and U.K. fines, dismissed three executives and lost its top-tier credit rating. The U.S. Justice Department is conducting a criminal probe.
Shell's Tragic Touch :”Shell’s stocks [of oil] are nearly one-third smaller than they had appeared at the start of last year.” London Times, 3 February 2005
We believe stakeholders would like to know cumulative numbers after auditing “well-by-well and field-by-field” for the remaining 45 % of total reserves around the world.
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