FINANCIAL TIMES: Shell in further reserve cut: “Royal Dutch/Shell has cut its proved oil and gas reserves by another 10 per cent and warned that it was still struggling to replace the oil and gas it extracted from the ground.”: “…several analysts were angry at the scale of the latest cuts. Neil McMahon at Sandford Bernstein said: “These results make for sorry reading and there is absolutely no sign of a recovery story under way for Shell.” (ShellNews.net) 4 Feb 05
By James Boxell in London and Ian Bickerton in the Hague
Published: February 3 2005
Royal Dutch/Shell has cut its proved oil and gas reserves by another 10 per cent and warned that it was still struggling to replace the oil and gas it extracted from the ground.
The Anglo-Dutch energy group has now been forced to cut its proved oil and gas reserves by almost a third in 12 months. The news overshadowed its reporting yesterday of record net income of $18.5bn in 2004, on the back of sustained high crude prices.
Shell's problems come as worries grow about how the world's biggest oil companies will secure reserves into the next decade. Exploration success has been limited, access to oil-producing countries is a challenge and new competition has emerged from countries such as India and China.
Last year, the company said it had put its problems behind it by cutting reserves by 23 per cent and forcing the resignation of its three most senior executives.
However, Shell said yesterday it would need to cut the total by another 1.4bn barrels. The company also said it had only replaced 15-25 per cent of the depletion in its reserves in 2004. However, it would have replaced twice as much if not for some disposals and a technical accounting issue in Canada.
The replacement level is expected to recover next year although it will not reach 100 per cent, the ratio achieved by rivals ExxonMobil and BP. Investors were warned about further cuts to Shell's reserves in October, but the scale of the downward revision and its poor reserves replacement figure sent shares falling 8¼p to 471¾p in London.
However, it offered some relief with news that it would take advantage of the cash bonanza from record crude oil prices by buying back $3bn-$5bn of its shares this year. Shell generated $33bn of cash last year.
It will also pay at least $10bn to shareholders in dividends this year, up from $7.2bn in 2004, subject to exchange rates. Shell suspended its buyback programme last year at a time when rival BP was returning $7bn to its shareholders.
Jeroen van der Veer, chief executive, has said his head and those of other senior executives was “on the block” if the company failed to resolve its problems. He said yesterday: “We have done everything possible to get this right. It has been a huge effort to get this behind us.”
Malcolm Brinded, head of exploration and production, repeated that he was “reasonably confident” that the company would replace 100 per cent of the oil it pulls from the ground on average over the next five years. But he warned that this would be a “bigger challenge” because of the latest downgrade and that most of the recovery would be “back-loaded” towards the end of the five-year period.
However, several analysts were angry at the scale of the latest cuts. Neil McMahon at Sandford Bernstein said: “These results make for sorry reading and there is absolutely no sign of a recovery story under way for Shell.”
The US Securities and Exchange Commission defines proved reserves as those that can be extracted commercially from the ground. Shell's reserve replacement rate in effect means the company is shrinking.