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Shell scandal prompts industry call for new test of reserve auditors

THE BUSINESS: Shell scandal prompts industry call for new test of reserve auditors

“Reports into the Shell scandal by the SEC and the UK’s Financial Services Authority (FSA) “… also drew attention to the way the job of verification rested with a single, semi-retired Shell geologist, who was not given enough resources for the task. As a result, the committee is also setting up an ethics committee to devise professional standards similar to those used in the legal and accounting professions.”

BLOOMBERG

By Richard Orange

3rd/4th October 2004

THE oil industry is planning a professional qualification for auditing companies’ oil and gas reserves, in a move designed to steer the US Securities and Exchange Commission (SEC) away from plans to force companies to have their claims verified by independent consultants. At present there is no professional standard or methodology for reserves auditors.

Confidence in the oil industry’s claims of what it has in store beneath the ground was severely dented after Royal Dutch/Shell slashed its claimed oil and gas reserve estimates by 23%, primarily because the numbers failed to meet SEC guidelines. Shell’s revision was followed by similar cuts from US independents Forest Oil and El Paso, but did not trigger the industry-wide epidemic feared at the time.

Representatives from the American Association of Petroleum Geologists and the Society of Petroleum Reserves Evaluators are drawing up the qualification under the Certification Programme for Petroleum Reserves Evaluators.

Daniel Tearpock of the American Association of Petroleum Geologists told The Business: “We are hoping it’s a way to let the investment community and government know that we are regulating ourselves. It might help to avoid the need for compulsory independent reserve auditors.”

The qualification would require auditors to be trained and to take professional exams on the geological and engineering expertise required and on the complex array of definitions of oil and gas reserves, with special attention paid to the SEC’s guidelines.

Tearpock said: “It means companies can’t just employ someone who’s got a geology degree and leave them to learn the definitions as they go along. People just don’t understand the variety of definitions out there. Also, quite often, people don’t know the geological techniques.”

Reports into the Shell scandal by the SEC and the UK’s Financial Services Authority (FSA) stressed that many within Shell showed imperfect knowledge of the, admittedly vague, SEC definitions of proved reserves and how they differed from the company’s internal standards.

They also drew attention to the way the job of verification rested with a single, semi-retired Shell geologist, who was not given enough resources for the task. As a result, the committee is also setting up an ethics committee to devise professional standards similar to those used in the legal and accounting professions.

Professional petroleum reserves evaluators would be taught to recognise when the information provided to them was inadequate, and to see it as their duty to require companies to provide better data. If they failed to do so, they would risk losing their qualification.

The SEC said in July it was considering requiring companies to have an independent reserves audit, but has issued no statement on its progress since then. Norwegian oil firm Statoil is a rarity in having its reserves annually evaluated by geologists DeGolyer and Mac-Naughton, which also appraise Yukos. Since its scandal, Shell has committed to employing consultant geologists as part of its audit.

But oil companies such as Exxon Mobil and Total are resisting the proposals, arguing that the expense would be unnecessary given that their company experts will always have a deeper knowledge of the fields concerned than any consultant.

Ron Harrell, chief executive of geologist Ryder Scott and a member of the team drawing up the qualification, has argued that there aren’t enough independent geologists to carry out such a task.

Ratings agency Standard & Poor’s last week added to the pressure on companies to introduce greater standardisation in a report calling for better disclosure of reserves auditing methodology, emphasising the need for companies to appoint qualified personnel.

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