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Ormen Lange highlights broader issues

Financial Times: Ormen Lange highlights broader issues

“in the wake of the scandal at Royal Dutch/Shell”

By James Boxell

Jun 30, 2004

BP’s share of the Ormen Lange gas field is estimated to be worth the equivalent of 180m barrels of oil – a drop in the ocean for a company that yesterday confirmed it had 18.4bn barrels of proved total reserves.

But given the current obsession with reserves in the wake of the scandal at Royal Dutch/Shell, which overbooked its reserves by more than 20 per cent, the Norwegian field has acquired a significance far beyond its size.

It captures in microcosm the confusion over how companies report their reserves to the SEC.

And while one analyst sums up the SEC rules as meaning “bugger all” in terms of the real valuation of oil companies, Ormen Lange also raises questions about BP’s optimism when booking reserves in comparison with its peers.

Oil and gas reserves can be booked with the SEC only if they are ready to develop and have been proved as present by test wells.

But yesterday’s filing of Norsk Hydro and BP’s annual accounts with the SEC shows how widely interpretations can differ.

BP is confident it can extract 80 per cent of its share, and until yesterday its Norwegian partner seemed to agree, with its own expectation of 70 per cent.

This was in marked contrast to others in the field. Shell is only relying on 20 per cent of its share, ExxonMobil has booked 35 per cent and Statoil 25 per cent. Yesterday, despite ongoing debate with the SEC and claims that it would stick to its guns, Norsk Hydro broke ranks with BP and now expects to retrieve only 49 per cent.

The two companies are understood to have used the same techniques for evaluating the reserves, but they interpreted them differently.

BP does not discuss individual fields, but it is understood it is happier to rely on technology and 3D-seismic data, even though the SEC is strict on the need to drill to prove reserves.

It is understood that Shell has used a far stricter interpretation of the SEC drilling requirements.

For some analysts, the SEC debate is an irrelevance to oil companies, which has little to do with their investment decisions and shareholder returns.

Matthew Lanstone, oil analyst at Goldman Sachs in London, says: “The operational teams working on these assets are not thinking ‘What is an SEC barrel?’, but ‘What is the future cash flow going to be and what are the economic returns of the project?'”

Goldman Sachs estimates that BP would need to cut its Ormen Lange reserves from 180m barrels to 50m to bring it into line with Shell’s conservative approach, but Mr Lanstone says this is a tiny proportion of BP’s overall reserves.

The bigger question is whether BP’s optimism on this field could be extended elsewhere, although that is impossible to tell.

© Copyright The Financial Times Ltd

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