Shell won't provide reserves replacement guidance in results
Benoit Faucon, Dow Jones Marketwatch, 29 Jan 2008View original article
Royal Dutch Shell PLC (RDSB.LN) won't provide oil and gas reserves replacement guidance - as it normally does - along with its annual results Thursday, despite its reserves having been an issue in recent years.
Correspondence released by the U.S. Securities and Exchange Commission, or SEC, suggests the U.S. market regulator has continued to pay particularly close attention to Shell's reserves accounting. In contrast to its closest European oil major rivals, Shell has on more than one occasion been asked by the SEC for additional details.
The company's fourth-quarter and annual "results will just be financial results only," a Shell spokesman said Tuesday. "We think the right place to update on reserves is in the annual report (to the SEC), so we will be updating then on the reserves replacement ratio."
Reserves - a key indication of future production - are a sensitive issue after Shell downgraded its reserves several times in 2004 and 2005, leading to a management shakeup, a share price slump and fines by U.S. and U.K. regulators.
Broker Dresdner Kleinwort said in a research note Monday, "We understand Shell won't comment on reserves in its (fourth-quarter results) essentially because the reserve replacement has been weak and made more complex by the impact" of Shell's losing control of the Sakhalin II project last year.
"We regard this as regrettable," the broker said.
The Shell spokesman said, "This is simply a change in reporting timings and is in line with other competitors."
Following the series of reserves downgrades in 2004 and 2005, the SEC continued to send letters in 2006 requesting more disclosures on Shell's bookings, letters posted on the regulator's Web site show.
Although routine, Shell's correspondence contrasts with its two largest European rivals, BP PLC (BP) and Total SA (TOT), which didn't receive questions on their reserves disclosures during this period.
In a letter on Sept. 29, 2006, the SEC asks Shell to "disclose your net proved reserves for (all significant oil and gas) properties." In a Nov. 2, 2006, reply, Shell said the properties it didn't detail weren't individually material enough to be displayed separately.
In this Sept. 29 letter, the SEC also sought explanations for the large revisions to Africa and Asia-Pacific reserves, and to extensions and discoveries in the Middle East, which Shell had recently announced. Shell did then provide these explanations to the SEC - but they haven't been publicly disclosed.
Then in a Dec. 7, 2006 letter to Shell, the SEC requested more detailed disclosure for changes in natural gas bookings in Africa and Asia Pacific - to which Shell agreed in a Feb. 23, 2007 reply.
GUEST COMMENTARY
Shell's 108,000 employees earned "an obscene" £14 billion in profits last year.
If, as I imagine, Shell keeps a similar number of contractors off the books to keep the head-count down, the profit per head is about £70k. If you earned £70k as profit in a business, you probably wouldn't expect to be sand-bagged with a windfall tax by a starving Chancellor. There is also some truth to Shell's defences, "We can't invest profits if we can't keep them", and "We don't profit from petrol, it's tax which is hammering consumers." And nobody gave Shell a handout when the oil price fell below $10.
What is more interesting about Shell's results is this: they didn't publish their reserves. Memorably, they've been known to publish the wrong numbers, but none at all? The most Shell have revealed is that in 2007 they discovered 1 billion barrels of new "resources", including 11 "material discoveries". A field of well under 100 million barrels of "resource" is now material? How have the mighty fallen!
A billion barrels of "resources" means very little. It is not a reserve, it could indicate something or nothing. It's a quantity of petroleum which might or might not be recoverable. Usually less than half of any oil field is actually produceable.
How does this stack up? In 2006 Shell added 2 billion barrels of oil equivalent (i.e. oil + gas) to their "resources". During 2007 they produced almost 1.2 billion barrels of oil and gas. However you look at it, Shell did far worse than in 2006, they have not replaced last year's production, and they are not revealing the actual reserve data.
This is ugly if one of the best explorers just can't find any more conventional oil. And Jeroen Van der Veer, Shell's boss, commented only last week that the world looked set to reach peak oil by 2015. This is not so much joined-up thinking as joined-up consequences.
And don't expect anything better from the other majors - they're all in the same boat. There is nowhere left to look. There are few spots left in the world where a billion barrel field could be hiding. Those few spots are increasingly closed to foreigners as a predictable wave of resource nationalisation sweeps through the industry. Shell not only failed to find much in 2007, Putin even forced them to sell back what they'd already found in Sakhalin-2.
But Shell can't postpone the evil reporting day forever. Eventually it will have to make its annual statement to the American authorities, which must include reserves data. That could make woeful reading.