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Houston Chronicle: World oil reserves used up faster than they’re being found

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(A welder works on the utility module of Chevron’s Tahiti floating production platform at the Gulf Marine Fabricators facility near Corpus Christi in March. Chevron showed improvement in replacing its reserves in 2006, despite a general failure of major oil companies to replace reserves for the third straight year.

June 23, 2007, 11:40PM

As development costs rise, decline could affect prices, analysis finds
Associated Press

The world’s major oil companies replaced reserves at levels below 100 percent for the third straight year in 2006, even as costs to find and produce the key asset continued to rise, a new analysis shows.  

Reserve replacements last year, excluding acquisitions and divestitures, were 91 percent, below the 92 percent replaced in 2005, according to a report released last week by the investment bank Bear Stearns & Co.

At the same time, the companies’ finding and development costs rose to $13.63 per barrel of oil equivalent, the report said, a 28 percent rise from 2005.

Analysts typically say an oil company’s reserves replacement should average more than 100 percent over a three- to five-year period to indicate growth.

“The major oils continue to record reserves in large blocks, but with less frequency,” the report said. “The timings of these bookings causes swings in reserve-replacement performance.”

Jeff Tillery, an analyst with Pickering Energy Partners in Houston, said falling reserves could have some effect on rising gasoline prices, particularly as world demand grows.

But, he noted, companies such as Irving-based Exxon Mobil Corp., Royal Dutch Shell and other majors produce a small portion of the world’s oil and natural gas compared with government-controlled national oil companies.

The Bear Stearns report also noted that oil and natural gas production by the majors rose 4 percent last year from a year earlier. That number was lifted in part by acquisitions such as ConocoPhillips’ $35.6 billion purchase of Burlington Resources, and Occidental Petroleum Corp.’s $3.8 billion takeover of Vintage Petroleum.

The report said finding and development costs continue to be influenced by the need to extract oil from more technically challenging areas, such as deeper waters and rugged terrain.

“Inflationary pressures stemming from a tight market for deep-water rigs, labor and materials also took a toll,” Bear Stearns said.

Looking ahead, the investment bank said it expects reserve bookings to “remain lumpy” in 2007, and for replacements among the major oil companies to remain mixed. Over a period of five to 10 years, Bear Stearns said replacement-booking levels are likely to be in the 100 to 110 percent range.

“In other words, we have confidence that the exploration efforts being undertaken now will pay off in the near future,” the report said.

Of some of the world’s major integrated oil companies, Bear Stearns noted:

• BP was a top performer in 2006, and its project pipeline appears solid, as new developments in Angola and the Gulf of Mexico progress.

• Chevron Corp. has not fully replaced reserves since 2003, but showed improvement last year based on reserve additions in the U.S., Bangladesh, Kazak-hstan and elsewhere.

• Exxon Mobil should replace full production in 2007 with bookings from major projects in Angola, Nigeria, Qatar, Norway and Australia.

• Royal Dutch Shell has a portfolio of projects that could add meaningful reserves in coming years.

• Excluding acquisitions, Houston-based ConocoPhillips has a 10-year average reserves replacement of 95 percent, and reserve additions could lift replacements to 100 percent for 2007.

Voices of Houston

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johnadonovan wrote:

Royal Dutch Shell is still fighting in the U.S. Courts over its missing reserves. A four week mini-trial was due to commence in the U.S. Courts on Monday 18 June 2007 in the consolidated class action against Royal Dutch Shell on behalf of worldwide (qualified) Shell investors. Instead, the parties involved have agreed to the appointment of a Special Master to consider issues and make recommendations to the Court.

The original U.S. class action against Shell, its officers and also against Shell’s auditors, KPMG NV and PwC UK, commenced on 13 February 2004. The litigation arose from a fraudulent overstatement of proven hydrocarbon reserves by Shell in Form F20 returns filed with the U.S. Securities & Exchange Commission. The SEC declared that Shell had violated United States law by issuing “false and misleading statements regarding its reserves”. Shell paid a $120 million fine to settle the SEC claims.

On 9 August 2005, Chief Judge John Bissell (now retired) of the United States District Court District of New Jersey, denied motions to dismiss by Shell, KPMG and PwC UK, having concluded that the Lead Plaintiff, the Pennsylvania State Employees Retirement System and the Pennsylvania Public School Employees Retirement System, had provided factual support for its allegations that Shell “engaged in material and substantial fraudulent conduct in the United States”.

On 30 June 2004, all of the U.S. claims were consolidated into a single class action with the NY law firm of Bernstein Liebhard & Lifshitz LLP acting as Lead Counsel for the Lead Plaintiffs.

From the outset of the litigation, Lead Counsel used what has been described by the Financial Times as an anti-Shell website operated by a father and son team, Alfred and John Donovan, to generate witnesses and evidence.

In January 2006, an appeal was made on the Donovan website to find a qualified non-U.S. holder of Shell stock to act as a representative of all qualified non-U.S. Shell investors in an expanded worldwide class action.

The appeal followed a conference between the senior partners of the Lead Counsel and John Donovan. A qualified non-U.S. Shell stocker holder, a British national, Mr Peter M. Wood, a Petroleum Engineer, was found within the U.S. court imposed time limit. The court granted him permission to intervene as a named plaintiff representing all non-U.S. qualified holders of stock. The pivotal role of Mr Wood is a focal point of the mini-trial.

In response to the expanded action, Royal Dutch Shell secretly entered into discussions with other non-U.S. purchasers of Shell stock including Dutch pension funds and on 11 April 2007, advised the U.S. court of a proposed settlement agreement with all reserves related litigation and claims between Shell and non-U.S. investors. The settlement offer was $359 million plus legal fees. Since there is no litigation underway against Shell in The Netherlands, the move by Shell was clearly designed to substitute and pre-empt the non-U.S. investors litigation brought as part of the worldwide action, with Peter M. Wood acting as the representative of non-U.S. investors.

As part of the non-litigation proposed Dutch settlement route, “Shell has sought and received a statement from the SEC’s Staff that it intends to recommend that the fines paid to settle the United States’s lawsuit be used to reimburse damages to investors worldwide”.

The Wall Street Journal revealed in an article published on 22 June 2007 that “Royal Dutch Shell recently amended its charter to provide for certain shareholder disputes to be handled outside of the court system”. The purpose was apparently to change the rules (as well as using recent changes in Dutch law) after the fact, to allow for arbitration to replace trial in disputes with shareholders.

Shell contends that the current move by the Lead Plaintiff to block the Dutch settlement is “a desperate attempt to preserve ‘the potentially lucrative lead role’ in a U.S. class action”.

Shell argues that “intervening plaintiff (also represented by Lead Counsel) Peter M. Wood, who purchased a mere 1,519 shares during the alleged class period and was brought in by Lead Counsel several years after the initial complaints were filed to serve as a peremptory class representative for non-U.S. investors, could never adequately represent the interests of the sophisticated non-U.S. investors, who purchased more than one billion shares and who have declared their desire to participate in the Settlement rather to litigate in this Court”.

Shell also pointed out in a submission to the court filed on 9 May 2007 that: “Intervening plaintiff Peter M. Wood, the Andorran citizen who counsel for Lead Plaintiffs also represents, is covered by the Settlement but will have an opportunity under the 2005 Law to opt-out and pursue his potential claims against Shell individually”.

The reference by the law firm representing Shell, Robertson, Freilich, Bruno & Cohen, LLC, to Mr Peter M. Wood, as a stockholder owning “a mere 1,519 shares” would appear to betray a contempt by Shell for non-institutional investors.

In its closing arguments to the Court, Shell said: “Continuing the effort to discredit the Settlement, Lead Plaintiffs insinuate… that Shell is colluding in the Settlement with counsel for the individual plaintiffs… Instead they ask this court to impose the will and judgement of two Pennsylvania Funds – ultimately assisted by a single individual investor from Andorra with 1,500 shares – on some of the most sophisticated investors and shareholder advocates in Europe and elsewhere outside the U.S. The Court should see this for the desperate ploy that it is”.

Lead Counsel contends that the proposed settlement represents a blatant attempt to avoid negotiation with the court-appointed Lead Plaintiff in the sole remaining litigation against Shell in respect of the reserves fraud.

One of the main objectives of the mini trial was to resolve issues appertaining to the position of non-U.S. purchasers of Shell stock, namely Mr Peter M. Wood on the one side, in the role already granted by the Court, and on the other side, Shell and the parties who have agreed a proposed settlement in controversial circumstances.

The proposed settlement is subject in any event to approval by the U.S. Court dealing with the worldwide class action claim.

The Lead Plaintiff objects to the proposed Dutch settlement of non-U.S. claims and insists on proceeding with Peter M. Wood acting as the representative of all non-U.S. claims. The Lead Plaintiff argues that “A prepared remedy, pre-arranged by Shell and a limited group of investors simply is not an adequate alternative to litigation”.

The Lead Plaintiff also makes the point that “Without this action, there would have been no claims filed anywhere against Shell; without any pending litigation, Shell would hardly have offered to pay $359 million to settle nonexistent claims three years after the announcement that led to class member losses”.

In concluding comments, the Lead Plaintiff says: –

Finally, this Court has already determined that Shell “engaged in material and substantial fraudulent conduct in the United States.”

“…this Court already determined that it has jurisdiction over the Foreign Purchasers claims.”

“Shell is openly attempting to evade U.S. policy regarding the conduct of class actions.”
The stakes are high bearing in mind that an American professor of law has recently speculated that Shell could be in danger of insolvency if the worldwide litigation led by the Lead Plaintiff proceeds to a successful conclusion.

Shell and the Lead Plaintiff have, since 2006, participated in mediation sessions with a retired U.S. Judge, Nicolas H. Politan, for example a full day mediation session took place on 9 May 2007. The subject was mainly issues related to non-U.S. purchasers of Shell stock i.e. Peter M. Wood or the Dutch pension funds. The parties were unable to reach a settlement during the mediation.

It was eventually agreed that the mini trial be delayed in favour of the Court appointing Judge Politan as a Special Master so that he can consider and review evidence and report to the Court his findings and recommendations by 20 July 2007, or as soon thereafter as possible. Shell and the Lead Plaintiff have agreed to the arrangement, as has the trial Judge, Joel A. Pisano.

Another issue to be decided relates to an application by Sir Philip Watts who wants to put into evidence an FSA Notice of discontinuance and an SEC Termination Letter.

It appears from Court documents that the Lead Plaintiff is claiming $13.84 billion on behalf of the worldwide class action parties and has received more than two million pages of documents from defendants and non-parties. Shell will have to pay out hundreds of millions as already offered to the Dutch group, or if the mini trial decision goes against that option, the litigation could end up costing Shell billions of dollars.

Many passages in this report have been taken verbatim from legal documents filed with the Court.

Click on this link to read the Court documents

6/24/2007 2:38:18 AM and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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