THE WALL STREET JOURNAL: Exxon's Reserves Fell in '04: “A disclosure by Royal Dutch/Shell Group last year that it had hugely overstated its energy reserves prompted investors and regulators to focus anew on the details of reserve accounting. In the wake of the Shell debacle, other companies have begun reporting their reserves according to the Dec. 31 guideline” (ShellNews.net) Posted 23 Feb 05

Accounting Anomaly Is Blamed for the Apparent Decline

By JEFFREY BALL

Staff Reporter of THE WALL STREET JOURNAL

Amid increased investor concern about whether energy companies are finding enough new oil and natural gas, Exxon Mobil Corp. became the latest energy giant to report that it ended 2004 with lower fossil-fuel reserves than it had at the start of the year.

But Exxon, the world's largest publicly traded oil company in terms of revenue and market value, dismissed the apparent hit as an accounting anomaly. By its own standards, the Irving, Texas, energy giant said it more than replaced the reserves of oil and gas it pumped out in 2004.

The difference illustrates a fact that until recently was widely ignored by investors: Though reserves long have been a fundamental measure of the growth prospects of an energy company, the measure has been fuzzy at best, because reserves can be measured in many different ways. The Securities and Exchange Commission has its own measure, but its use has contributed to big drops in oil and gas reserves for several major producers, and it is under mounting criticism from the energy industry. 

The issue is likely to gain increased attention tomorrow, when Cambridge Energy Research Associates, an energy-industry consultant, is scheduled to release a report recommending changes to the way the industry accounts for its reserves. The study, which included input from Exxon and other big oil companies, as well as from White House officials, investment bankers and industry analysts, will recommend that all energy companies adhere to a common standard, but will suggest updating the SEC's standard, for instance, to reflect the reality that oil prices can fluctuate widely from day to day, according to a person familiar with the study.

The SEC's guideline "provides comparability across companies," says John Heine, an SEC spokesman. He declined to address industry criticism.

Exxon's so-called reserve replacement ratio was 112% under an accounting method traditionally used by the company, but just 83% under the method advocated by the SEC. The difference: Each one used a different measure of oil prices. Reserves are calculated based on whether the oil or gas supplies can be economically tapped, based on market conditions. The higher the price, the more a company can profitably pump out of the ground.

The SEC wants companies to use the price as of Dec. 31, which last year happened to be lower than overall average prices for 2004. Exxon, on the other hand, traditionally has calculated its reserves based on what it calls its long-term planning price -- the price the company uses internally to determine whether an oil or gas project will be economical over the long term. Exxon argues that that price, which doesn't vary much from year to year, is the most realistic for investors.

Investors appeared unfazed by the accounting dispute. On Friday, Exxon's shares rose 2.2%, to $59.41, a gain of $1.28, in New York Stock Exchange composite trading. The company overtook General Electric Co. as the U.S. company with the highest market capitalization. Exxon's market value stands at $383 billion, compared with $379 billion for GE.

Also notable in Exxon's reserves report was where the company found them. Exxon said 94% of the reserves it added to its books last year came from natural gas in Qatar. Several Wall Street oil analysts said they were surprised by that result, saying Exxon historically has touted its diversification as one of its main strengths.

Exxon officials said the Qatar situation was nothing to worry about. Exxon has plenty of other projects under way around the world that are expected to add to the company's bookable reserves in the future, said Tom Cirigliano, a company spokesman. "This is just one of the cycles in the business and that's the way it fell this year," Mr. Cirigliano said.

For years, oil companies widely disregarded the year-end pricing guideline preferred by the SEC. A disclosure by Royal Dutch/Shell Group last year that it had hugely overstated its energy reserves prompted investors and regulators to focus anew on the details of reserve accounting.

In the wake of the Shell debacle, other companies have begun reporting their reserves according to the Dec. 31 guideline. ConocoPhillips said it replaced only 60% to 65% of its reserves in 2004. ChevronTexaco Corp., which has yet to report detailed numbers, said its replacement rate will be "low." BP PLC said its reserve-replacement ratio was 89%, based on SEC standards, but more than 100% according to its traditional reserve-accounting method.

Exxon was among the most vocal holdouts against the Dec. 31 method. The big hit for Exxon came from a project in Canada in which the company is producing bitumen, a tar-like substance that is the heaviest and least-valuable grade of crude oil. On Dec. 31, bitumen prices had plunged to an unusually low level. Imperial Oil Ltd., which is 69% owned by Exxon, said its reserves dropped 33% under the SEC's guideline. But bitumen prices since have rebounded, and with them, Exxon's reserves.

Frederick Leuffer, a Bear Stearns analyst, said the more important number was the larger level of reserves that Exxon said it added last year to what is called its total resource base. Those unofficial additions amounted to 2.9 billion barrels, or 181% of the amount of oil and gas the company pumped out of the ground last year. Mr. Leuffer said, "2004 appears to have been an exceptionally strong exploration year for Exxon Mobil."

---- Chip Cummins and Tamsin Carlisle contributed to this article.

Write to Jeffrey Ball at jeffrey.ball@wsj.com