The Times: Shell knew of oil shortfalls two years ago
By Steven Downes
April 08, 2004
Shell executives knew two years ago that its estimates of its own oil reserves were overstated, according to reports in the United States.
Today's New York Times says that it has obtained documents to show that senior Shell executives were told the calculations of reserves were too high in 2002, at least two years before the company downgraded its estimate of its reserves by 25 per cent this January.
The report suggests that Shell's oil fields in Oman have been in steep decline for seven years.
Sir Philip Watts, Shell's former chairman, said in an upbeat public report in 2000 that "major advances in drilling" were enabling the company "to extract more from such mature fields." The internal Shell documents suggest that the figure for proven oil reserves in Oman was mistakenly increased in 2000, resulting in a 40 per cent overstatement.
"In the case of [Oman's] Yibal field, for example," the newspaper reports, "Shell and Omani oil engineers and auditors have expressed concerns that a technique Sir Philip said would recover more oil not only did not do so, but also increased the amount of water in the extracted oil to as much as 90 per cent of the total volume, increasing production costs."
The report suggests that fundamental flaws in the assumptions made by Shell, and other western oil companies, may have seriously over-estimated the amount of reserves available throughout oil fields in the Arabian Gulf.
One innovative technique developed over the past decade by Shell, called "horizontal drilling", is widely used and can extract more oil from some fields, and can pump it out sooner and more efficiently than traditional vertical drilling.
But a Shell document from last autumn obtained by the New York Times says that the technique would not increase the amount of oil that will ultimately be recovered from the field, and that its use has resulted in additional water being mixed in with the oil, thus increasing production costs.
Sir Philip made his optimistic assessment of the Oman field in May 2000, when he was the company's head of exploration and development. He was named chairman a year later. The board dismissed him and Walter van de Vijver, chief executive of the exploration and production business, last month, two months after Shell reduced its reserves estimate.
Regulators in Europe and America, as well prosecutors at the United States Justice Department, are investigating whether Shell's disclosures about its reserves complied with securities laws. The company expects to announce the results of an internal review in the next few weeks.
"Shell has been open about the production shortfall in Oman, most recently in the presentation to analysts on February 5," Shell said today.
Shell maintains that a production target of 703,000 barrels per day was met in 2003.
For more information, visit the investor page at www.shell.com, or for more on Omani production, see: http://www.pdo.co.om/pdo/NewsandLibrary/PublicationsandReport/Annual_Reports.htm
http://business.timesonline.co.uk/article/0,,8903-1067645,00.html