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BP surprises with upward adjustment

Financial Times: BP surprises with upward adjustment

By James Boxell in London

Jun 30, 2004

BP yesterday surprised the markets with a slight upward adjustment of its estimates of reserves. Europe’s biggest oil group had to recalculate its UK-approved figures to bring them into line with US Securities and Exchange Commission guidelines.

The issue of oil reserves has become a hot topic since Royal Dutch/Shell was forced to cut its own estimates by more than 20 per cent this year.

Shell is expected to file its revised reserve figures with the SEC today, although no more nasty surprises are expected.

In the wake of the Shell debacle and the raising of questions by the SEC over its own reporting of reserves for 2002, BP has provided more detail of its estimates in this year’s filing.

Analysts point out that Shell’s huge readjustment of its reserves was the result of seriously flawed procedures and that many were incorrectly declared as “proved”.

There is no suggestion of similar problems at BP, but the fall-out from Shell does shine the spotlight on all oil companies.

In its form “20F”, which reconciles UK accounts with US accounting principles, BP raised its proved reserves by 23m barrels of oil to 18.36bn barrels.

Some analysts had been expecting a slight downward revision.

However BP indicated yesterday that apparently stricter SEC rules on the use of technology had not made a material difference when reconciling its figures.

There were substantial differences when the figures were broken down regionally, but BP said this was because the SEC used a different oil price to establish reserve levels.

Under UK rules, BP uses its own “planning” price of $20 per barrel to determine its reserve levels. This is the same figure that it uses to decide whether a project is a sound economic investment. However, the SEC uses the “year-end” oil price, which on December 31 was $30.10.

Happily for BP, the higher oil price used by the SEC means that many of its fields in the US and the UK would yield more reserves, because the high price would justify spending more on extracting oil from harder-to-reach areas.

This almost exactly offsets a big reduction in Africa, where the company has several “production-sharing agreements”.

Under these deals, BP’s proved reserves are based purely on their overall financial value where a higher oil price translates as fewer barrels.

BP, still locked in talks with the SEC over its 2002 reserve estimates, said its planning price assumptions were the best way to calculate reserves.

“An investment is made for 20-25 years, therefore we wouldn’t make an investment decision based on one day’s price.”

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