Business Week: Outlook for oil not so gloomy, study of reserves shows: “Exxon Mobil replaced 83% of its proved reserves, BP 89%, Royal Dutch/Shell an embarrassing 35%...” (ShellNews.net) 27/28 Feb 05

By Richard Orange

LAST week’s oil industry report calling for changes to US Securities and Exchange Commission (SEC) regulations on reporting oil and gas reserves appeared before the last big oil firm publishes its results. It was no coincidence.

Under SEC guidelines, almost every one of the big oil companies failed to book enough new oil reserves in their accounts to make up for what they pumped out.

Exxen Mobil replaced 83% of its proved reserves, BP 89%, Royal Dutch/Shell an embarrassing 35%, Total 73%, and Spain’s Repsol, after a three-year independent audit of its reserves downgraded them 4%, managed 32.5%. Eni reports on Monday. After a year when a tight oil market and high prices revived fears the world might run out of cheap oil supplies, those numbers make gloomy reading. 

But one of the points the report’s authors, Cambridge Energy Research Associates (CERA), make clear is that the oil companies are not doing as badly at sourcing supplies as the 30-year-old SEC guidelines suggest.

The 1978 system was designed for onshore oil production in the US’s historic oil heartland in Texas, Louisiana and Oklahoma.

Oil companies increasingly operate in deep water or the Artic, regions where it makes no economic sense to drill the number of wells the SEC requires for reserves to be booked and where companies themselves would rely on seismic surveys.

They also rely on “non-conventional” heavy oil, gas-to-liquids, oil sands and oil tars, little of which the SEC counts as oil reserves. And operating in many Middle Eastern countries means accepting contract terms where the oil reserves companies are entitled to fluctuate with the oil prices.

The SEC guidelines have singularly failed to keep up with these changes. Remove the distortions and most companies are again replacing 100% of their production. Exxon would have replaced 112% without downgrades due to the low price of bitumen on 31 December, the date o which the SEC demands companies base their measurements.

Total, which has many contracts where oil reserves fall with the oil price, would have achieved 102% if it had used its long-term planning price. BP would have achieved 110%, Shell 50%. Investors understand this.

Shell, to the relief of its management, did not lose a third of its stock market value when it downgraded a third of its proven oil and reserves.

But, as CERA president Daniel Yergin reported one institutional investor complaining, the number-crunching investors need to do to turn the SEC numbers into a meaningful company outlook makes them more victims than beneficiaries.

Richard Orange