FINANCIAL TIMES: US rules on oil reserves produce shortfall for BP: “Under industry rules devised by the US Securities and Exchange Commission, BP replaced 89 per cent of the oil and gas it used last year. This was reduced to 78 per cent when stripping out partners such as TNK in Russia. Royal Dutch/Shell replaced 30-40 per cent of its proved reserves last year under SEC rules, before divestments.” (ShellNews.net) 9 Feb 05

By James Boxell

Published: February 9 2005

The confusion over calculating oil and gas reserves was highlighted yesterday when BP said it had failed to replace the reserves it extracted last year.

The shortfall was caused by a rule change introduced by US regulators. Under UK rules BP more than replaced what it pulled from the ground.

The world's second biggest energy group lifted its fourth-quarter dividend by 26 per cent.

Lord Browne, chief executive, described the dividend rise as a "significant one-time step change" and said it would be maintained even if oil prices fell back to $20 a barrel.

Under industry rules devised by the US Securities and Exchange Commission, BP replaced 89 per cent of the oil and gas it used last year. This was reduced to 78 per cent when stripping out partners such as TNK in Russia. Royal Dutch/ Shell replaced 30-40 per cent of its proved reserves last year under SEC rules, before divestments.

However, the SEC has been criticised because it insists companies use the year-end oil price when calculating reserves.

A growing proportion of reserves is held in "production-sharing deals" with governments, where companies are paid their share in barrels of oil.

A higher oil price means a lower number of barrels owned by the oil company, so the year-end crude price of $40 has led to most companies cutting reserves.

Companies such as ExxonMobil and BP believe it makes more sense to use their long-term price assumptions of $20 when calculating reserves, the figure they use when investing. Under UK rules, which allow for the use of the $20 price, BP replaced 110 per cent of the oil and gas extracted.

Lord Browne said reserves were a matter of interpretation. "It's a bit like saying how would I like to read Shakespeare, in English or in French? Naturally, because I am English, I would prefer the [UK rules]."

Lord Browne said BP and its peers had commissioned Cambridge Energy Research Associates, the consultants, to make recommendations on how to end the confusion. The report is due on February 23.

BP made yearly profits of $16.2bn (£8.7bn) last year, 26 per cent higher than 2003. But 60 per cent of its recent profit rise was attributed to record crude prices. Its shares rose 3p to 547p.

If oil prices remain at $30 in the next two years, as Lord Browne expects, a further $23bn could be returned to BP investors through dividends and buybacks.

BP indicated yearly production growth above 5 per cent on average between 2004 and 2008.