Dow Jones Business News: Royal Dutch/Shell Trims Proved Oil, Gas Reserves
By Mark Long
Fri Jan 9, 8:26 AM ET
LONDON -- Royal Dutch/Shell (NYSE:RD - News) Group (RD, SC) stunned markets Friday by saying it has significantly overestimated its proved global oil and natural gas reserves.
Reserves are the lifeblood of an oil company and fuel future growth of its production. Any downgrade is looked upon negatively, and shares in United Kingdom component Shell Transport & Trading Co. PLC sank 7.5% in early trading, all but wiping out strong gains made during December.
In a statement, the world's third biggest oil company in terms of production said it would trim its proved oil and gas reserves to 15.6 billion barrels of oil equivalent from 19.5 billion estimated at December 2002.
Based on current production, Shell's move cuts its reserve life to 10.6 years from 13.4 years, according to J.P Morgan. Shell's production in the third quarter averaged 3.9 million barrels of oil equivalent a day.
The bulk of the downward reserves adjustment stems from overestimates on fields in Nigeria and Australia. The pair form part of Shell's so-called heartland regions, in addition to Brunei, Malaysia, Oman and the Gulf of Mexico.
The downgrade comes after a comprehensive internal review of the company's reserve base, the company said. A spokesman for Shell said these reviews are conducted on a rolling basis roughly every four years.
Shell stressed the review wasn't prompted by any external factors or third parties, such as the U.S. Securities and Exchange Commission (news - web sites), which sets the booking guidelines to which oil companies adhere.
The Anglo-Dutch oil company attempted to soften the blow by saying the adjustment would have no impact in the short-term on production and no effect on profit for 2003 or previous years. It also said that that it "anticipated that most of these reserves will be rebooked in the proved category over time as field developments mature."
For the time being, Shell has shifted 20% of its proved reserves into a more nebulous unproved category.
But, Shell's more conservative treatment of its reserves failed to impress the market.
Analysts said the adjustment implies Shell was far too aggressive in booking proved reserves.
"They realized they could not get the same level of reserves that they originally anticipated," said analyst Angus McPhail of ING Financial Markets, who has a "sell" rating on Shell's shares.
Analysts said the bombshell has renewed concerns about management credibility, including that of Chief Executive Philip Watts, and raised the possibility that the company would buy its way out of its reserves problem by launching a fresh round of acquisitions.
In its statement, Shell also warned that it will replace only 70% to 90% of its 2003 oil and gas with new finds, below market expectations of 100%.
The disclosure will mean the company has failed to replace all of its production for the third year running, raising concerns about its ability to grow in the future, analysts said.
"This is a classic case of an oil company not finding oil," Mr. McPhail said. "A company that cannot find oil will not be respected by the market."
At 1256 Greenwich Mean Time, Shell's shares were trading down 7.2% at 372.25 pence. The deep fall rippled into other oil shares and helped drag the FTSE-100 lower.
Merrill Lynch downgraded Royal Dutch's and Shell's shares to "neutral" from " buy" following the disclosure.
It said the reserves reclassification will leave the impression that the oil company is not growing next to its peers.
Analysts said they were particularly concerned that Shell appears to have not been following its own standard in booking reserves, namely by not booking reserves before a final investment decision on a project is made.
In a conference call with analysts and reporters, Shell's head of investor relations, Simon Henry, confirmed this was the case in a number of projects, including the ChevronTexaco Corp. (NYSE:CVX - News)-led Gorgon project off Australia.
"They have a reputation as being conservative and prudent, but this raises not only the question of whether or not they are prudent, but whether or not they've been following the advice they've been touting to the market," said Canaccord Capital analyst Charlie Sharp, who rates Shell a "hold."
Around 50% of the adjusted reserves are in Nigeria and Australia, with no more than 10% of reserves from any other one country being downgraded, Shell's Mr. Henry said.
He insisted the people that had originally judged the downgraded reserves as proved made their decision with "reasonable certainty," based on the technical and commercial conditions of the time.
Of the downgraded reserves, more than 90% were undeveloped, proved reserves, meaning an estimate of the oil and gas in the ground at the various projects was made, but work had yet to begin. The remaining reserves reduction came from the proved developed category.
Of the reclassified reserves, two-thirds are of oil and natural gas liquids, and one third are natural gas, Shell said.
The company reports its fourth-quarter production and earnings results Feb. 5.
By Mark Long; Dow Jones Newswires; +44 (0)20 7842 9356; mark.long@dowjones.com
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