ABCNews.go.com: Shell Reclassifies More of Its Reserves
Shell Reclassifies More Reserves of Oil and Natural Gas; Postpones Release of Annual Report
The Associated Press
LONDON March 18 — The Royal Dutch/Shell Group of Cos. suffered another blow to its reputation Thursday when it announced additional cuts to its estimated reserves of oil and natural gas and suggested that more reductions might follow.
Shell downgraded 250 million barrels in reserves to other, less certain categories. At the same time, it decided not to book a separate batch of 220 million barrels that it had earlier considered worthy of classifying as reserves.
The company postponed the release of its annual report by about two months to give independent auditors enough time to complete a review of all the company's reserves.
The reclassifications follow Shell's stunning announcement in January that it was downgrading 3.9 billion barrels in reserves, or about 20 percent of its total holdings. That disclosure caused a shareholder uproar that led to the resignations of Shell's former chairman, Sir Philip Watts, and its head of exploration and production.
"We have to make very sure we don't drop this ball again," said Shell's new chairman, Jeroen van der Veer. "I do realize our reputation has been dented."
Shares in Shell Transport & Trading Co. PLC, the group's British component, closed 2.9 percent lower at 361 pence ($6.61) in London. The company's U.S.-traded shares were off about 1.5 percent on the New York Stock Exchange.
The latest changes would increase the company's after-tax costs by about $20 million. Shell said it also would write off $10 million worth of wells associated with its reclassified assets.
"Because of (Shell's) operational under-performance of the last six months and the farcical nature of the whole reserves issue, today really was a negative surprise," said Jason Kenney of ING Financial Markets in Edinburgh, Scotland.
Shell executives explained their decisions in a hastily arranged news conference. Managing Director Malcolm Brinded acknowledged that the announcement was "a surprise and disappointment," striking an almost confessional tone with analysts and reporters.
Shell decided to reclassify 250 million barrels in oil and gas, mostly in northwestern Europe and Australasia, as a result of an independent review that has so far analyzed 40 percent of its total proved reserves. Together with the much larger downgrade in January, Shell has now reclassified 4.15 billion in reserves that it had carried on its books.
Reserves constitute an oil company's most valuable asset, and any reclassification of reserves into less certain categories is a major concern for investors. The U.S. Securities and Exchange Commission is now conducting a formal investigation into Shell's accounting for its reserves.
Shell also backed off from booking 220 million barrels as reserves because they "did not strictly follow" SEC guidelines, the company said. Most of these would-be barrels lie in Shell's share of the Ormen Lange field in Norway.
Brinded said the reclassifications were technical in nature. Shell had strayed from SEC guidelines by failing to provide adequate supporting evidence for favorable three-dimensional seismic data it had collected on these holdings.
"This isn't an exact science, but it's up to us to make sure we get it right," he said.
Brinded added that the current review of Shell's reserves could uncover still more problems. However, he said that any additional overestimates would probably be smaller than those Shell has already identified.
Van der Veer said Shell's senior management was partly to blame for the confusion over reserves. In the past, top executives had assumed that the company's exploration and production staff were booking reserves correctly. From now on, top executives themselves would have to sign off an each year's reserves estimates.
"Shell recognizes that restoring confidence and credibility in reserves reporting practices is vital. Shell is determined to resolve all these issues in the most timely and transparent manner possible and to eliminate chances of a recurrence," the company said in a news release.
Shell would strengthen its internal controls in several ways, executives said. It would significantly increase the number of staff dedicated to managing reserves. Reserves auditors would conduct audits more frequently and start reporting directly to Shell's central audit department instead of to the group's operational businesses. The booking of reserves also would no longer affect executives' performance bonuses, Shell said.
Due to the late developments, Shell delayed the release of its annual report for 2003 until late May. It had planned to release the report on Friday.
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