Sunday Telegraph: BP reserves the right to go its own way: “in the wake of the scandal at Royal Dutch/Shell”

(Filed: 04/07/2004)

Browne is critical of the SEC's confused diktats on reporting proven reserves, writes Sylvia Pfeifer   

Lord Browne is not a man easily provoked but the chief executive of BP, the oil giant, has made it clear that he won't shy away from confrontation with America's powerful stock market regulator over its reporting of reserves at Ormen Lange, a giant Norwegian gas field.

BP's share of the field is worth the equivalent of some 200m barrels of oil - a fraction of the oil group's 18.4bn barrels of total proven reserves. But coming in the wake of the scandal at Royal Dutch/Shell, which overbooked its reserves by more than 20 per cent, the Norwegian field has gained a significance beyond its size. Ormen Lange is at the heart of an increasingly complex argument over the interpretation of a quarter-century-old law governing the reporting of oil and gas reserves to the Securities and Exchange Commission (SEC) which has confounded not just BP but the entire industry.

Last week BP was left isolated after Norsk Hydro, the Norwegian oil group which operates Ormen Lange, revealed that it had cut its estimate of proven reserves by 30 per cent, from 336m barrels to 234m barrels. The reduction came after extensive negotiations with the SEC.

By contrast, BP revealed that not only had it booked 23m barrels more than it had published in its latest annual report, but it had made no cut in its estimate of proven reserves relating to its 10 per cent stake in Ormen Lange. Although BP does not discuss details of individual fields, it insists it is confident of the reserves it has booked there.

But it is being far more optimistic than its partners in the field. It has booked 80 per cent of estimated recoverable reserves in its share in the field, whereas Norsk Hydro has now cut its booking from 69 per cent to 49 per cent. Meanwhile, Shell is now being ultra-conservative, having booked 20 per cent, ExxonMobil has booked 35 per cent and Statoil 25 per cent.

The argument over reserves in Ormen Lange first erupted in March when Shell made its second cut in its proven reserves. At issue is the interpretation of a set of rules which was written to protect investors in Texas from oil investment scams and is based on technology dating back to the 1950s.

Regulation S-X defines proven reserves as "the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years". The debate focuses on what is "reasonable certainty".

According to the SEC, reserves can only be booked if they are ready to develop and have been proved as present by a series of test wells. By contrast, many oil companies argue they should be allowed to use modern technology developed after the regulator's rules came into effect in 1978 to prove the existence of hydrocarbons without actually testing the rate at which oil or gas flows from a well.

Back in March, JJ Traynor, the managing director of global oil and gas research at Deutsche Bank, voiced many of the industry's concerns in an open letter to the SEC criticising its rules as "outdated with respect to technology trends" and the burden of compliance as "an unnecessary cost".

Traynor went on to conclude that "the discrepancy between these guidelines and industrial reality, and the market climate following the Enron affair, is generating an unwarranted external push on the oil companies to underbook reserves and therefore overamplify cost. This has the knock-on effect of reducing market values, and has negative implications for [an] oil company's ability to raise finance."

In April the SEC bowed to industry pressure - and added to the confusion - when it told oil companies that it would allow the use of new technology but only in the Gulf of Mexico. The move prompted an exasperated Browne to express concern that there was no international standard for accounting for oil and gas reserves.

"It is not logical to apply this to one geographic area of the world," he said. "If it is good for the deep water of the Gulf of Mexico, is it not good elsewhere?"

Other oil industry executives have so far refused to raise their heads above the parapet but privately the majority agree with Browne.

"Most of the oil majors recognise that the SEC probably needs to look at the rules it currently has in place. It is quite clear that companies are interpreting the rules differently and are applying them differently," says one executive at a rival group.

Last week a spokesman for the SEC defended its stance. "What it gets down to is that most SEC regulations are not so prescriptive that they absolutely dictate how companies should behave. Companies are required to make their best faith interpretation of the regulations," he said, adding that the SEC was in the middle of conducting an industry-wide review of the regulations.

For investors in the sector the debate is proving more of a distraction than a reason to question investment fundamentals. "Investors primarily focus on economic returns of projects and are less concerned with the minutiae of different interpretations of accounting policies," says Matthew Lanstone, an oil and gas analyst at Goldman Sachs.

Nevertheless, given the level of noise surrounding the issue, Browne and his fellow executives can only hope that the fuss about Ormen Lange leads to an outbreak of common sense at the SEC.

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