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Daily Mail: Reserves row spotlight on oil giants

Daily Mail: Reserves row spotlight on oil giants

Brian O’Connor,

15 June 2004

Posted 16 June 04

COULD the oil reserves scandal that has crippled Shell spread to others? Markets are on a knife edge as oil giants prepare for fresh scrutiny from the powerful US Securities and Exchange Commission.

Shell’s rivals, including BP, insist that they are different. But how can they be sure?

The issue will come to a head quickly. BP is due to make a full filing with the SEC by 30 June. Intriguingly, markets expect it on 28 June – the date of Shell’s annual meeting, when a big row is expected.

That might be a good day to bury any bad news. But BP says ‘the date has not been fixed’ and seems likely to stay away from 28 June to avoid any fears of a cover-up.

Rivals have insisted that Shell’s problems are all its own and stem fundamentally from its weakness at finding oil in the first place.

But investors’ confidence was shattered by the row, in which Shell rewrote its reserves four times, cutting the initial figure of nearly 20bn barrels to 14.5bn. That triggered the departure of chairman Sir Philip Watts and exploration chief Walter van de Vijver and the stepping down of finance director Judy Boynton.

BP has stated its reserves at 18.3bn barrels and is adamant that the SEC filing should confirm it. But broker Goldman Sachs warns that the SEC figure could be lower than BP’s by as much as 400m barrels.

One of the problems is that accounting for oil and gas reserves has always been complex. They are buried deep underground or at sea – even conservative estimates are partly guesswork. Countries have different accounting rules. And it does not help that the crude oil price is jumping about.

Until the Shell row exploded, reserve categorisation was an arcane issue. When drilling and seismic studies showed a field to be larger or smaller than first thought, this had a share price impact. Smaller companies with a single field were vulnerable. But for Shell or BP, with hundreds of global prospects, minor changes were unimportant.

Right now, though, any mishaps with the SEC will be sensitive. A leading analyst said: ‘Investors are absolutely paranoid about reserves. They don’t want to be wrongfooted.’ After Shell dropped its reserves bombshell on 9 January, its market value fell by £9bn.

That means BP must tread carefully. As a British company, it counts reserves under the UK statement of recommended practice (SORP). This uses the oil price on which it bases its own plans – $20 a barrel.

The SEC requires use of the year-end market price. For 2003, that is $30 a barrel. In its filing, BP must ‘translate’ its own reserve count on to an SEC basis.

At $30 a barrel rather than $20, marginal reserves in some fields will become profitable, suggesting total reserves could, in fact, rise. But it is not so simple. Under production sharing agreements, common in the industry, BP might be guaranteed, say, the first $600m of revenue from a field to recover its costs.

Any excess revenue is shared with the host government. The $600m guaranteed revenue can be counted as reserves. At $20m that counts as 30m barrels. On a $30 price, it comes to only 20m barrels.

So BP’s ‘reserves’ fall by 10m barrels – though it gets its money just as before, and is much better off because of the high crude price.

This is only one of the accounting wrinkles. When the dust from the Shell row settles, these will be seen as technical questions. More important will be how much money a company is making and how much oil it is finding.

But for now, reserve accounting is hot. Anyone tripping up could get burned. For BP and Shell, the end of June is still a long way off.

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