The Guardian (UK): Shell suffers fifth cut in reserves: Earnings record masks losing battle to replace resources: “Fadel Gheit, oil analyst with Oppenheimer & Co in New York, said he was "very disappointed" with the downgrade and poor reserve replacement. "I cannot remember in my 25 years of covering this sector any oil company failing to replace its reserves three years in a row like Shell has done. "It is also disturbing that Shell seems able to (continually) revise downwards its reserves figures as though it is nothing unusual.": “"The real fact is that the underlying fundamentals [at Shell] are deteriorating," said Mr Gheit.” (ShellNews.net) 4 Feb 05

Terry Macalister

Friday February 4, 2005

Shell wound up the most turbulent trading year in its history yesterday by announcing a fifth cut in oil and gas reserves at the same time as record £9.4bn annual profits.

The oil and gas group described 2004 as a "year of extremes" as it admitted it had also replaced as little as 15% of its reserves if the impact of divestments and other factors were taken into account.

Exploration boss Malcolm Brinded admitted that in 2005 it would not hit the 100% reserves replacement ratio it was aiming for, and might not do so in 2006.

Shares in Shell have risen 9% over the past three months but yesterday fell 2% to 480p, partly with profit-taking.

Analysts were disappointed by a range of factors that were heavily masked by crude prices remaining at historically high levels.

The soaring oil price helped Shell to 134% growth in fourth-quarter net income to £2.4bn while £3.5bn of cash was accumulated from operations.

The company said it had accumulated record cash of £17.5bn from operations and divestments during 2004 but planned to hand back at least £5.3bn in dividends on top of the £3.8bn handed out in 2004.

Shell also planned to relaunch a £1.6bn-£2.7bn share buyback programme during the next 12 months.

But the company was also trying to put a lid yesterday on a reserves problem that has scarred its reputation and last year led to the exit of its former chairman, exploration boss and finance director.

Shell said it had been forced to cut a further 1.4bn barrels of oil equivalents from its proven reserves figures for the 2003 trading year. It now plans to book 12.95bn barrels instead of more than 19.4bn barrels it had previously recorded.

Mr Brinded admitted the process was not complete, although he doubted the 12.95bn would be touched unless the securities & exchange commission, the American financial regulator, demanded it.

"Since last summer our asset teams in every country have completed a thorough review of 100% of our proved reserves base," he said.

"We have also now conducted internal audits of 90% of the reserves, assisted by external experts. Of the remaining 10%, around half is in the US, where our experience to date indicates that we have very little risk of non-compliant volumes."

He pointed out that the financial impact was the equivalent of 1% of income over five years.

The exploration and production boss expected the reserves replacement ratio - a key measure in the oil industry - to be in the region of 45% to 55%. That was before divestments and an assessment known as "year end pricing": after both those considerations the figure could be as low as 15% to 25% while even the 45% to 55% estimate was well below the 60% to 80% assessment given in July 2004.

The future looks tough with Shell aiming to average 100% over the next five years despite divesting up to £8.5bn of assets between 2004 and 2006.

"I'm reasonably confident we can reach that target ... but it is likely to be back-end loaded [stronger results coming later in the decade]," admitted Mr Brinded, who will be able to take advantage of bringing back some of the debooked reserves.

Fadel Gheit, oil analyst with Oppenheimer & Co in New York, said he was "very disappointed" with the downgrade and poor reserve replacement.

"I cannot remember in my 25 years of covering this sector any oil company failing to replace its reserves three years in a row like Shell has done.

"It is also disturbing that Shell seems able to (continually) revise downwards its reserves figures as though it is nothing unusual."

Oil prices close to $50 a barrel had rewarded the Anglo Dutch firm despite its "ineptitude" and papered over the cracks in its operations. "The real fact is that the underlying fundamentals [at Shell] are deteriorating," said Mr Gheit.

http://www.guardian.co.uk/business/story/0,,1405638,00.html