Bloomberg: Shell Says SEC Rules on Gas-to-Liquids Reserves Are `Untested'

Posted 17 June 04

July 16 (Bloomberg) -- Royal Dutch/Shell Group, Europe's second-largest oil company, said a $5 billion natural gas project in Qatar marks an ``untested area'' that may require talks with U.S. regulators to recognize the reserves in its books.

The venture to convert gas into diesel and other fuels is almost 10 times the size of the largest such plant in existence. Shell is counting on Qatar to help recover proven reserves, which the company on Jan. 9 said had been overstated for years. The Securities and Exchange Commission has the strictest definition of what can be included in an oil company's accounts.

``It's an untested area,'' said Andrew Brown, Shell's head of the Qatar project, when asked if the reserves count under SEC rules. ``It's an area where the SEC will have to make decisions how they are to be treated.''

The outcome at Shell, based in London and The Hague, may reverberate throughout the industry. Exxon Mobil Corp., ConocoPhillips, ChevronTexaco Corp. and Sasol Ltd. are planning to spend $23 billion on similar so-called gas-to-liquids projects in Qatar. Exxon Mobil's $7 billion project was announced Wednesday.

When Shell introduced the Qatar venture in October, then- chairman Philip Watts, 59, said the company may begin recognizing the Qatari gas in its books in 2005. The project would have a ``serious impact on gas reserves,'' he said then.

Watts was ousted March 3 in connection with the reserve overstatements and replaced by Jeroen van der Veer, 56. Shell calls Qatar a ``legacy'' project, a cornerstone of the century-old company's future.

Internal Review

``Booking of GTL reserves is an untested area which is subject to a current internal review,'' said Lisa Givert, a Shell spokeswoman in London. ``Prior to making any booking decisions, we expect to consult with external parties, which may include direct communication with the SEC.''

After reducing its proven reserves at the end of 2002 by 23 percent this year, Shell's holdings in 2003 equaled 10.2 years of production, less than 13.5 years at Exxon and 13.8 years at BP Plc, according to Bear, Stearns & Co. Inc. in a May 25 note.

The shares of Shell Transport & Trading Co. in London, representing 40 percent of the parent company, have declined 3.8 percent so far this year, lagging an 8.6 percent rise at BP and an 11 percent advance at Exxon. Shell traded at 399.75 pence, unchanged, at 8:55 a.m.

The SEC defines proven oil and gas reserves as those that can be produced ``with reasonable certainty.'' For example, the SEC requires signed sales contracts, approved authorizations for spending, environmental permits and other documents.

SEC spokesman John Heine in Washington declined to comment on whether reserves from gas-to-liquids projects counted as proven reserves. He also wouldn't comment on any talks with Shell.

Unusual Oil Source

SEC rules prohibit booking reserves as proven from those defined as unconventional projects. For instance, Shell mines oil from tar sands at the $4.4 billion Athabasca project in Alberta and has to record those reserves separately.

Malcolm Brinded, head of Shell's oil and gas unit, in a March interview in London said Shell wouldn't add the reserves to its books this year. The company may make a final investment decision -- one of the criteria used to designate reserves as proven -- on the project next year, he said.

Shell's reserve reductions have led to probes by the SEC and Justice Department, the ouster of Watts and two other top executives, and investor lawsuits. The Anglo-Dutch company's U.S. listing requires filings to regulators there.

Oil consultants who have studied the issue said the gas at a gas-to-liquids project can be booked with the SEC.

``The produced gas that can be used for feedstock for the GTL process is viable for a reserve booking,'' said Gary McGilvray, chief executive of DeGolyer and MacNaughton, a Houston-based consultant that has given independent estimates of reserves since the 1930s.

`Profitable' Project

Shell and Qatar last week signed a development and production- sharing agreement to build the plant, which it said may cost as much as $6 billion. The profitability of the project won't change whether or not Shell books reserves, analysts said.

``The economic benefit is not going to be any different whether they book reserves or not,'' said Tony Alves, an analyst at KBC Peel Hunt Ltd. in London. ``With oil prices where they are, I would have thought it's quite profitable.''

Shell's Pearl GTL project will tap the world's largest gas field, the North field, and convert the gas into naphtha and other fuels. In addition to producing 1.6 billion cubic feet of natural gas output a day, Shell also will pump more than 60,000 barrels of gas condensate and natural gas liquids.

Shell will pay the entire cost of the project and be repaid from its subsequent output under an agreement that runs for more than 20 years from the start of production.

To contact the reporter on this story:

Alex Lawler in London alawler@bloomberg.net.

To contact the editor on this story:

Tim Coulter at tcoulter@bloomberg.net

Last Updated: July 16, 2004 04:31 EDT 

http://quote.bloomberg.com/apps/news?pid=10000102&sid=aaOperSVltwg&refer=uk