The Guardian: Shell debacle leads to call for outside audits

Terry Macalister

Monday January 12, 2004

Oil companies are facing calls for a crackdown in the way they handle their oil and gas reserve figures in the wake of Friday's shock announcement from Shell.

Given their importance as indicators of overall performance, outside auditors should check oil company figures, say respected energy consultants Wood Mackenzie.

Shell last week shocked investors by revealing a 20% cut in its proved reserve base after admitting it had overstated the potential of the Gorgon LNG scheme in Australia and its Nigerian operations.

The Shell share price slumped 7.5% to 371.25p, wiping £3bn off its market value, and other shares in the sector were also hit. The Shell changes mean nearly 4bn barrels of oil and gas have to be reclassified to comply with securities and exchange commission rules in the United States.

This means the oil company's organic reserve replacement performance in 1997-2002 falls from 105% to 57%, says Wood Mackenzie. Comparative figures from BP and ExxonMobil are 152% and 116%.

The changes also affect Shell's finding and development costs per barrel, pushing them up over the five years from $4.27 a barrel to $7.90, which compares with $3.73 at BP and $3.93 at Exxon.

Shell declined to comment on these figures last night, saying it had promised to deliver its own analysis on the historical impact of the changes in due course. "We are still doing work on this," said a spokesman.

The downgrades do not affect operational performance or future growth prospects but are vital because they are used as performance benchmarks. They also hurt Shell's reputation for prudence.

While Shell booked the reserves for Gorgon in 1997, before a final decision to proceed with the project was made, its partner and scheme operator, ChevronTexaco, did not.

A final investment decision has not yet been made, and although it is expected soon, no reserves should have been booked until the green light was given, says Wood Mackenzie.

"We believe that the current situation points to a need for greater transparency in the reporting of reserves ... There is likely to be a call for third-party certification of reserves."

The furore has put the spotlight on Shell chairman Sir Philip Watts, who was head of the exploration and production unit at the time the Gorgon results were booked.

The fact that neither he nor financial director Judy Boynton were present at the crucial meeting last week has increased anger among investors and led to calls for Sir Philip to bring forward his retirement from June 30 2005.

Shell says it would have been inappropriate for them to present the figures because the group is in a close period ahead of a February 5 announcement on fourth-quarter results - at which Sir Philip and Ms Boynton will be present.

http://www.guardian.co.uk/oil/story/0,11319,1120901,00.html

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