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Shell slight of hand with reserve estimates

Screen Shot 2013-02-05 at 18.26.22By a former employee of Shell Oil Co (Name and contact details supplied to John Donovan)

Back in the 1980’s Shell (and other major oil companies) were having problems with one of the major vendors that provided borehole wireline logging services. There were three of these companies at the time, but we need not mention names. It is from the data gathered through these wireline services that reserve estimates are calculated on new discoveries, and often times on infill wells in existing oil/gas fields.

The services (data) supplied by one of these companies was notoriously suspect and Shell’s engineers routinely complained bitterly about the quality of the data this company provided. Shell engineering staff constantly bickered with technically ignorant middle level managers about using this vendor. Shell’s R&D lab eventually got involved in the matter and discovered very serious design problems with some of the devices built and used by this company. There were also serious operational QC problems in the field. As a result of these issues the laboratory refused to recommend or give its stamp of approval for the services offered by this particular vendor. Shell labs cannot tell the operating units how to run their business, but by refusing to recommend/approve the services of a contractor the operating units assume liabilities if ‘problems arise’.

This action on the part of Shell’s lab caused a howl of protest from middle level management. However, Shell’s engineers were delighted with the ‘news’. The complaint from middle level management was that the lab’s recommendation effectively eliminated one of the three companies from competing for Shell’s business, and would drive up well evaluation costs.

As it happened to be, this particular vendor had a habit of underbidding the competition by about 10% in order to obtain long term service contracts. How did the vendor find out about the competing bid submissions? Well, a few well placed season tickets for various sporting events to ‘cooperative’ Shell engineers took care of that matter quite readily. Nothing like a little traditional oil field G&C (graft & corruption) to grease the skids a bit.

The other problem that Shell’s engineers complained of was that the data supplied by this vendor (which was not reliable) resulted in an increase in reserve estimates by about 15% compared to the data supplied by the other two vendors. Middle level management loved this of course, because it meant they could book additional reserves through a simple switch in vendors (slight of hand), and save in evaluation costs as well. This earned these middle level managers serious brownie points with upper level management.

Well, to make a long story short, senior Shell head office management got involved after this vendor complained, and after some rather heated confrontation discussions between Shell management, lab technical staff, and vendor technical staff and management, the vendor finally admitted that its services were not ‘quantitatively reliable’. That little bombshell went over like a lead balloon at Shell and this vendor’s contracts were not renewed when they expired.

One would think that the lab staff who uncovered this particular problem would have gotten some sort of pat on the back for a job well done. Not so. In time honored Shell tradition, the bearer of bad news was vilified by line management. Why ? Because it meant the additional reserve booking were not reliable, and probably fictional, It also made operating management look venal and incompetent for not heeding the warnings and protests of their technical staff.

Fast forward a few years and the rest of the story is the resulting reserves scandal of 2004. However, that scandal was brewing for a long time, for well over a decade. The problem with Shell’s reserve bookings were known about by middle and senior level management for a long time as well. It was a deliberate deception. Interestingly, middle level management was to no small degree, engaged in deceiving upper level management. The motivation here was career advancement, of course. After all, all is fair in love and war.

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