San Jose Mercury News: Estimates of oil reserves based largely on guesswork

RECENT CUTS OFFER PEEK INTO ENERGY INDUSTRY'S CONFUSING ACCOUNTING

By Rachel Beck

Associated Press

Posted on Sun, Mar. 21, 2004

NEW YORK - Energy companies announcing big reductions in their oil and gas reserves have left many investors wondering what happened. Did the oil suddenly disappear or was it never there in the first place?

Don't expect an easy answer to that.

The recent cuts by big names like Royal Dutch/Shell Group and others have provided a glimpse into the energy industry's murky accounting practices, which are the result of imprecise government regulation that gives great discretion to oil company executives and allows results to be based largely on guesswork.

So-called proved oil and gas reserves are the estimated quantities that a company expects to commercially extract; unproved reserves are less certain to be extracted. Although some experts say that tallying reserves is more of an art than a science, they are considered an important asset for energy companies and are closely watched by investors as a key measure of future profit potential.

Shell announced in January it was reclassifying 20 percent, or 3.9 billion barrels, of its proved reserves to the unproved categories. And on Thursday, it reduced estimated proved reserves by an additional 250 million barrels.

Other companies have done the same in recent months, including El Paso Corp. of Houston, which knocked down its proved reserves by 41 percent.

Companies often acknowledge the difficulties involved in determining reserves. Oil and gas can be buried deep below the earth's surface, so there isn't any easy way to gauge precisely what is down there and how much will actually be retrieved.

Also, changes in prices can require revisions in reserves. It might not be profitable to drill for hard-to-get oil when prices are at $15 a barrel, but that thinking changes when prices reach $30.

``There is some big science and some strong math behind what we do,'' said Gary Swindell, a Dallas-based petroleum engineering consultant. ``But at the end of the day, there is rarely enough information to feed our equations fully, and there is almost always some piece of conflicting information.''

That uncertainty can be exaggerated because of loose regulations, which give companies lots of leeway in determining their reserve levels and allow for divergent practices in the energy industry.

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