San Francisco Chronicle: SEC questions oil giants' reserves - ChevronTexaco, ExxonMobil queried in wake of Royal Dutch/Shell admission

Verne Kopytoff, Chronicle Staff Writer

Saturday, April 10, 2004

Federal regulators have asked ChevronTexaco and its chief U.S. rival, ExxonMobil, about how they book oil reserves,broadening an inquiry into the energy industry after Royal Dutch/Shell admitted overstating its reserves earlier this year.

The questions, submitted by the Securities and Exchange Commission, come after Royal Dutch/Shell's disclosure on Jan. 9 that it overstated its proved oil reserves by 20 percent. Investors and analysts immediately began worrying about whether other companies made similar mistakes.

ChevronTexaco, based in San Ramon, acknowledges being contacted by the Securities and Exchange Commission about its reserve estimates sometime after Royal Dutch/Shell's problems became public. But ChevronTexaco declined to offer any more details about when it was contacted, whether there have been any follow-up questions or what information the SEC was seeking.

"Yes, ChevronTexaco has been contacted by the SEC, and we understand others in the industry have been contacted as well," Stan Luckoski, a ChevronTexaco spokesman, said in an e-mail. "We are cooperating with the SEC."

Lauren Kerr, a spokeswoman for ExxonMobil, based in Irving, Texas, said the SEC sent her company a comment letter earlier this year that included questions about oil reserves related to the company's 2002 annual report.

Proved oil reserves are an important yardstick used to measure a company's future financial health. They're an estimate of how much oil and natural gas a firm believes it can recover from known reservoirs using existing technology under current economic conditions.

If the total declines over several years, analysts invariably begin raising questions about a company's exploration strategy. Lower reserves could ultimately lead to big drops in production.

As of the end of 2003, ChevronTexaco and its affiliates reported 8.6 billion barrels of proved oil reserves. Proved natural-gas reserves were listed at 20.2 billion cubic feet.

Ever since the reserve problems at Royal Dutch/Shell emerged, ChevronTexaco executives have maintained that their reserve estimates are correct. They've insisted that their company has a "rigorous review process" and will not change the way its worldwide reserves are categorized.

One of the projects for which Royal Dutch/Shell cut reserves was a joint venture with ChevronTexaco in Australia. Royal Dutch/Shell had counted the natural-gas project, known as Gorgon, as a major source of proved reserves even though it hasn't received final approval for development from the Australian government.

ChevronTexaco said it never included the project in its proved reserve estimates.

Another of Royal Dutch/Shell's major overstatements was in Nigeria, the oil-rich West African nation. ChevronTexaco also has significant operations there.

Fadel Gheit, an analyst for Oppenheimer & Co., said he believes that virtually all oil companies operating in Nigeria are under pressure from its government to exaggerate reserves, which the Organization of Petroleum Exporting Countries uses to help set production quotas. The more proved reserves a nation says it has, the higher its quota.

"It is in an OPEC country's best interest to put pressure on the operators to motivate them to book more reserves," Gheit said.

Gheit, who owns some ChevronTexaco shares, said he wouldn't be surprised if other companies besides Royal Dutch/Shell restate their proved worldwide reserve estimates. He cited El Paso Corp., the natural-gas company in Houston, which cut its reserves by 35 percent in February.

"I don't think Shell is the only company," Gheit said. "You saw what El Paso did, and there may be some others."

Royal Dutch/Shell's initial cut in reserves in February, followed by another, smaller reduction in March, was a big shock to Wall Street. Sir Philip Watts, the company's chairman, and Walter van de Vijver, chief executive of exploration and production, both resigned.

ChevronTexaco and other oil companies were initially contacted by the SEC about reserves in 2002. At that time, the questions were highly technical and focused exclusively on deepwater fields in the Gulf of Mexico, according to ChevronTexaco.

"The SEC originally thought they would smoke out some of the small companies," analyst Gheit said. "But they caught a whale. Then they said, 'Let's go and put more pressure on and see who else is going to squeal.' "

Gheit said that soon after the inquiry began, companies become more careful about how they estimate reserves. Most are taking the approach of "if in doubt, leave it out," he said.

To help end the uncertainty about proved reserves, analysts have asked the SEC to issue new rules to give oil companies more guidance about how to make their estimates. An SEC spokesman declined to comment about any new rules.

E-mail Verne Kopytoff at vkopytoff@sfchronicle.com.

©2004 San Francisco Chronicle

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