Royal Dutch Shell Group .com

DAILY TELEGRAPH (UK): It will take another 30 years for the needle to sink to half empty, says Christopher Hope: “Last week Shell, which is already in hot water for managing to "lose" a third of its proven oil and gas last year, said it had only managed to find between 30pc and 40pc of the oil it had pumped in 2004.” ( 12 Feb 05


If you weren't worried before, then there's been enough news in the past few days to make you nervous. Some of the world's biggest energy companies are saying that they can't find enough oil to replace the barrels they are pulling out of the ground for us to burn.


Last week Shell, which is already in hot water for managing to "lose" a third of its proven oil and gas last year, said it had only managed to find between 30pc and 40pc of the oil it had pumped in 2004. For BP, the declared rate was just 89pc.


In America, ChevronTexaco has warned that its reserve replacement rate was likely to be poor (some analysts say it could even be zero).


ExxonMobil and Total will tell investors about their 2004 reserve replacement rate next week.


Meanwhile, analysts at Wood Mackenzie say that Shell has 9.4 years of production left, while BP has enough to last 14.1 years.


At these rates, they will already be scraping the barrel by the time of the 2012 Olympics.


So is that moment, long forecast by the hair shirt brigade, finally on the horizon? Are we running out of the black stuff?


Contrary to the appearance of impending doom, the answer's no.


According to the US Geological Survey, which spent 100 "man years" surveying 128 provinces between 1995 and 2000, the world was endowed with 3,021 trillion barrels before production began. And that was just conventional light crude, which is easy to sell.


The USGS reckons there was probably the same amount again of "unconventional" hydrocarbons such as the oil that is bubbled out of sand in Canada.


Added to that there was another 2,500 billion barrel equivalent of natural gas.


We are not even half way through it yet. The USGS says we have used up just over 1,000 billion barrels of the 3,021 billion total.


If global consumption keeps running at 28 billion barrels a year, the USGS says that it will take until 2036 for the world to have used half the total.


By then, new technologies will almost certainly have turned up more viable reserves.


Already, the Russians think the Americans are too pessimistic, putting the total at 11,000 billion barrels.


As Adam Sieminski, an analyst at Deutsche Bank, says: "Only God knows how much oil and gas there is and that has not been revealed yet in any of the scriptures."


So why do the companies seem to be in such dire straits? Sieminski continues: "What people don't realise is that reserves are like milk on the shelf at Tesco. A grocer does not order one month's worth of milk to meet two days of demand. As they sell it they get in more.


"For years that is what the oil industry has done. It only makes sense to carry 10 years' worth because that is the length of time it takes to do a project. Shell's reserves won't go to zero. There is as much oil in the tar sands in Canada as in Saudi Arabia, – it is just harder [and much more expensive] to get out. But if you put the price up then, by golly, you will have it."


But if the oil and gas is in abundance, why are reserve replacement rates so low? The answer lies in the rules governing reserves' disclosure, laid down by the US regulator, the Securities and Exchange Commission nearly 30 years ago.


Under these regulations, which were originally set up so America could be certain of its oil and gas supplies in a shortage, companies can only record "proven" barrels of which they are 90pc certain. Conceived with the best of intentions, this ruling is making a nonsense of Big Oil's reporting. This week BP reported an 89pc reserve replacement ratio under SEC rules. Under UK rules the figure is 106pc. The difference – about 300m barrels – flows from the SEC rules on Production Sharing Contracts.


PSCs are arrangements whereby companies earn a return from selling barrels of oil that is capped at an agreed level. If prices are high, the company can earn that return from fewer barrels, thus cutting its share of the field.


In other words, if the oil price goes up, the booked reserves figure falls, even though the amount of oil that can be economically recovered rises.


Shell has also run foul of the rules. Its Peace River field in Canada in 2004 produces less valuable heavy crude but uses expensive gas to get it out. Because of a pricing quirk at the end of December, the field was judged uneconomic under SEC rules.


Malcolm Brinded, Shell's head of exploration and production, says: "We reduced proven reserves from 164m barrels to zero even though production continues and we see potential for producing over one billion barrels of oil in the long term."


Derek Butter, analyst at Wood Mackenzie, says: "It is counter intuitive that as the oil price goes up, companies' reserves go down. This looks a bit crazy and it does not tell investors what they want to know – how much oil does a company have?"


BP's chief executive, Lord Browne, says: "It is rather like comparing Centigrade and Fahrenheit; they are the same thing, measured differently. You can measure reserves in any way you want, as long as you abide by a consistent set of rules.


"Asking me which I prefer is a bit like asking how I would like to read Shakespeare – in English or in French. I think it would depend on whether I am French or English and naturally, because this is a UK company, we prefer the English rules."


Despite the confusion the SEC's rules are causing, it says there are no plans to change them. A spokesman says: "There is no proposal before the commission in this area."


Others have plenty of ideas for reform. Sieminski suggests taking an average oil price over the past two years rather than using the year-end price when calculating production sharing agreements. JJ Traynor, a respected independent analyst, suggests that the SEC figures should in some way be forward-looking as well, while others suggest that the SEC could allow probable as well as proved reserves to be booked.


BP and other oil and gas companies have funded a study into reserves accounting by the respected Cambridge Energy Research Associates in the US, which will report in the next two weeks. Says Lord Browne: "The industry is thinking about whether or not there is something that can be talked about with the SEC generally."


BP decided last year for the first time to publish its reserves figures under both US and UK rules in its annual report so that investors can make up their own minds.


This week it said that under SEC rules it had 20 billion barrels of proved reserves, or 57 billion barrels on its preferred calculation.


As Wood Mackenzie's Derek Butter says: "The simple question is 'Are the oil and gas companies running out of reserves?' The answer is plainly 'no'.” 

Click here to return to Royal Dutch Shell Group .com