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The Times: BP heads for SEC clash over reserves

The Times: BP heads for SEC clash over reserves

By Carl Mortished, International Business Editor

June 30, 2004

Posted 1 July 04

BP is risking a confrontation with a powerful American stock market regulator over its reporting of reserves at Ormen Lange, a huge Norwegian gasfield.

The oil company is on a collision course with the US Securities and Exchange Commission (SEC) over interpretation of rules governing the reporting of oil and gas reserves after its partner, Norsk Hydro, cut its estimate of gas in the Ormen Lange field by 30 per cent.

The British company found itself isolated yesterday after a climbdown by Norsk Hydro. After extensive negotiations with the SEC, Norsk Hydro, which operates the 2.5 billion barrel offshore project, revealed that it had removed 102 million barrels of its 18 per cent share in Ormen Lange reserves from its filing to the US regulator.

In contrast, BP’s filing to the SEC, also published yesterday, reveals that it has booked 23 millon barrels more than it published in its latest annual report. It made no cut in reserves booked for its 10 per cent stake in Ormen Lange.

The argument between major oil companies over what reserves are proven at Ormen Lange risks confusing investors further and exposes a deep division between the US and Europe over the right way to regulate the reporting of reserves.

BP yesterday refused to back down, insisting that its Ormen Lange reserves were in line with US regulations. However, BP has booked far more gas — some 80 per cent of what is recoverable in the field — than its partners. Norsk Hydro has cut its booking from more than 70 per cent of recoverable reserves to less than 50 per cent. Statoil has booked 27 per cent and Shell has booked just a fifth.

The row over reserves in Ormen Lange first erupted in March when Shell made its second cut in its proven reserves. The issue in Ormen Lange concerns whether an oil company can use modern technology, such as three- dimensional seismic surveys, to “prove” existence of hydrocarbons without actually testing the rate at which oil or gas flows from a well. Guidelines issued by the SEC suggest that 3D seismic computer imaging of the oil reservoir is not permitted and that a well test is the only reliable evidence.

However, multiple well tests are expensive and dangerous in deep-water exploration and BP has already revealed its impatience with the SEC’s refusal to countenance the use of technology that has become standard in the oil industry. In April, the SEC added to the confusion in a letter to oil companies that stated that it would permit the use of new technology, but only in the Gulf of Mexico.

An exasperated Lord Browne of Madingley, BP chief executive, then criticised the SEC. He said: “It is not logical to apply this to one geographic area of the world. If it is good for the deep water of the Gulf of Mexico, is it not good elsewhere?” There is concern in the oil sector that SEC definitions distort the picture by underestimating oil and gas reserves.

Ormen Lange is a case in point, with 2.5 billion barrels in reserves but only one billion barrels according to the downgrade in Norsk Hydro’s SEC filing. Named after a Viking ship, it will supply Britain with a fifth of its gas at a total cost of some $10 billion.

THE PROBLEM OF PROOF

A FAILURE to apply the SEC’s view of reserves correctly has cost a Shell chairman his job and is still rocking the oil sector.

Regulation S-X defines proven reserves as “the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years”.

The debate focuses on what is “reasonable certainty”. The SEC view stems from 1950s Texas, where wells were cheap and many were drilled. Today, much exploration is done offshore in water depths exceeding a kilometre and each well can cost $20 million.

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