The New York Times: Shell Found Variety of Practices for Rivals' Reserves

By STEPHEN LABATON and JEFF GERTH

Published: March 10, 2004

One month before the Royal Dutch/Shell Group downgraded its estimate of its oil and natural gas reserves by 20 percent, the company concluded that some of its chief rivals, like Exxon Mobil, had more conservative accounting of their reserves, according to a December memorandum prepared for senior Shell executives.

The Dec. 8 memo, which also concluded that other rivals might have looser accounting standards than Shell, said that Exxon Mobil "appears to rigidly enforce" some reserve accounting rules and that its accounting was accompanied by an "extensive, well-staffed annual global audit effort."

The review of industry practices by Shell was conducted as the company grappled with how much it might need to reduce its reserve figures. The company acknowledged internally as early as 2002 that the figures might have been lower than it had told investors, according to company memos at the time.

When the group's board members learned of the reserves shortfall remains unclear. According to a memo prepared for an October 2003 meeting of the group's audit committee - consisting of outside directors from Shell's Dutch and British parent companies - a wide range of reserve accounting issues were discussed. While raising concerns that the company's accounting for reserves may not have complied with Securities and Exchange Commission rules in some areas, the memo did not describe the magnitude of the reserves problems that later became apparent.

In the wake of the disclosures about the reduction of reserves, two executives of Shell were ousted and the S.E.C. has started an investigation.

Oil and natural gas reserves are a crucial asset of any energy company, and their measurement and replacement, while imprecise, is an important financial element that is closely watched by analysts and investors.

Shell's Dec. 8 memo described Exxon Mobil's accounting treatment of reserves as "probably the most rigorous of all majors across their global portfolio."

Shell's view of Exxon Mobil's conservative accounting squares with that company's own assessment.

"I'd be surprised if there is another company more conservative than us," Lee R. Raymond, the company's chairman and chief executive, said yesterday in an interview. He declined to discuss in any detail the restatement at Shell, saying there would be "no value for us to pile on."

Shell sometimes waited a few years to audit some reserves, according to its documents. In contrast, Exxon Mobil, the world's largest publicly held oil company, monitors its reserves every year on a rolling basis. The company has five engineers in Texas, where it is based, reviewing its holdings.

The Dec. 8 Shell memo, which was marked "confidential" and prepared for the group's committee of managing directors, noted that "detailed insights into competitor practices is generally difficult to come by" and that the information in the document represented "current impressions of competitor practice." The other companies examined included BP, Enterprise and ChevronTexaco.

Some at Shell even wondered if Exxon was too conservative in its reporting. But Mr. Raymond denied speculation in the Shell documents that Exxon Mobil intentionally understated its reserves in strong years to preserve a stable reserves replacement ratio, or the amount of oil found to offset exhausted reserves. Like its rivals, Exxon Mobil is under pressure to find new reserves, an indicator of an oil company's future health. Exxon Mobil increased its oil and gas reserves by 1.7 billion barrels last year, while producing 1.6 billion barrels. It was the 10th consecutive year that reserves growth outpaced production.

Over all, Exxon Mobil has 22 billion barrels of oil and gas in reserve, enough to continue current levels of production for 14 years. Mr. Raymond expressed confidence that his company could maintain that pace. Thanks to improved technology, the company discovered about three-quarters of its reserves on its own. Technology, he said, was a big reason Exxon had some of the industry's lowest discovery costs.

Others, though, warn that the industry is growing too reliant on advanced technology to find new oil reserves, and that technology has created a false sense of confidence about how much oil is available.

Jim Murphy, a petroleum engineer at the S.E.C., told the Society of Petroleum Evaluation Engineers Forum in October that the lowering of reserve estimates typically occurred when companies had not fully explored new fields and had relied too heavily on computer projections.

With demand for oil growing and the supply of oil barely keeping pace, crude oil prices have risen to their highest level since the start of the war in Iraq a year ago.

Mr. Raymond said high prices were a result of several factors, including strong demand from China and a decision last month by the Organization of the Petroleum Exporting Countries to cut production."It's OPEC. It's Russia. It's China. You name it," Mr. Raymond said.

Ken Belson contributed reporting for this article.

http://www.nytimes.com/2004/03/10/business/10oil.html