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Beurs.nl: FOCUS: Oil Cos Face Challenges Obtaining New Reserves

By Benoit Faucon
Of DOW JONES NEWSWIRES

LONDON -(Dow Jones)- A string of disclosures in recent weeks has revealed the greater challenge some oil companies face in trying to find more oil than they produce.
For some, buying rival companies helps mask the growing difficulty of obtaining new oil and gas at economic rates. But the industry at large is under pressure as national champions become globally competitive, rigs are hard to come by and companies increasingly feel the impact of U.S. regulations.
The rate at which new hydrocarbon reserves are added to make up for every barrel produced is a key indicator of an oil company's future growth.
'It's going to be challenging for international companies to renew their reserves,' said Philipp Lotter, an analyst at credit rating agency Moody's. 'Political risk is increasingly a factor.'
Spanish-Argentine oil and gas producer Repsol YPF SA (REP) showed how bad things can get, saying on Jan. 26 that its base reserves of crude oil and natural gas only increased by about one barrel for every five it pumped last year. It expects to do only slightly better in 2006. Repsol also announced a 25% reduction in its proven reserves at the end of 2005 compared with a year earlier.
The day after Repsol's disclosure, Chevron Corp. (CVX) said it had replaced 175% of its 2005 production. But the positive ratio was due to non-organic factors, chiefly the acquisition of Unocal. Without these, it would have replaced only 40% to 50% of its reserves in 2005 through the development of its existing assets.
And despite reporting a record fourth-quarter net profit on Feb. 2, Anglo-Dutch major Royal Dutch Shell PLC (RDSA) said it had replaced just 60% to 70% of its 2005 production, excluding mineable reserves from Canada's Athabasca Oil Sands.
Some companies are faring better than others, however. In February, Exxon Mobil Corp. (XOM) said it had replaced 143% of the oil it produced in 2005 with new proven reserves based on year-end prices. The world's largest oil company by market capitalization benefited from strong Qatari additions to its reserves and less exposure to production-sharing contracts, or PSCs, with governments than most of its peers.
Political Risk, National Champions
On the whole, global oil and gas companies face the two-pronged threat of growing competition from state-owned energy companies – from Russia, India or China – and some governments throwing up new barriers to their resources, Lotter said.
Last month, Repsol said the 25% reduction in its base natural-gas and crude-oil reserves was largely due to a new hydrocarbons law passed in May in Bolivia resulting in less favorable investment terms.
Oil companies face the prospect of a widespread shift to technical service contracts such as those being considered in Kuwait, instead of traditional equity interests, said Peter Newman, a managing partner for global oil and gas at Deloitte Touche Tohmatsu.
Such regimes increasingly would preclude companies participating in the projects from booking related reserves at all, Newman said in mid-February on the sidelines of London's IP Week conference.
And in Russia, a pending subsoil law could make certain fields off-limits to foreign companies.
Drilling Into The Numbers
Credit Suisse analysts highlighted two challenges facing oil and gas companies: scarce equipment needed for finding and producing hydrocarbons and U.S. financial rules on how to account for reserves.
In a report in January, the bank said 'the main constraint' to booking new reserves in 2006 through exploration 'will likely be rig availability.'
In 2005, it said, a key negative factor was the 'increased focus on compliance with strict SEC (U.S. Securities and Exchange Commission) definitions.'
For instance, an SEC rule, demanding that year-end crude prices be used to book reserves, has a negative impact on the numbers accounted for under production-sharing contracts.
'Under PSCs, if (oil and gas) prices go up, reserves go down for the contractor,' Deloitte's Newman said.
That's because an oil company's entitlement to hydrocarbons falls when prices rise, favoring the host government.
Without the impact of year-end pricing, the replacement ratio for Italy's Eni SpA (E) would have been 115% in 2005, not 40%. Eni said its bookings of reserves were negatively affected by PSCs.
On the other hand, the impact of year-end pricing helped boost Exxon Mobil's replacement of reserves to 143% in 2005. Without it, the oil giant's ratio would have been 112%, the company said.
As of 2004, 59% of Exxon Mobil's proven reserves were in the U.S., Europe and Canada, regions in which production-sharing contracts aren't the norm. By comparison, only 34% of Shell's developed proven reserves were in those regions that year.
In some cases, the replacement of reserves also has been hurt by a greater focus on developing unconventional oil and gas reservoirs. These resources are more difficult to extract and aren't generally booked as reserves under SEC rules.
For instance, reserves in Shell's Athabasca Oil Sands project cannot be booked under SEC regulations. If included, they would have added net proven mineable reserves of 166 million barrels of oil equivalent in 2005.
But Wood Mackenzie analyst Tom Ellacott says he doesn't believe oil majors are facing that great a challenge in replacing their reserves. Shell has a lot of hydrocarbons 'in the tank, from unbooked commercial reserves,' and Chevron has a 'great (long-term) portfolio,' he said.
These companies would seem to agree. Chevron has vowed to improve its organic replacement of reserves as new, large projects are booked, especially in deepwater Gulf of Mexico.
Shell is targeting an average of 100% replacement of production between 2004 and 2008, betting mainly on projects and exploration already in the pipeline.
Company Web sites: http://www.shell.com http://www.repsol.com http://www.chevron.com
-By Benoit Faucon, Dow Jones Newswires; +44-20-7842-9266; [email protected]
(END) Dow Jones Newswires

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