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International Herald Tribune: Shell Concealed Extent of Its Problems to Protect Nigeria Partnership.

Friday, March 19, 2004

The Royal Dutch/Shell Group has kept secret key details of its sharp reduction of oil and gas reserves for fear of damaging its close ties to Nigeria, whose oil production quota set by OPEC might be jeopardized if the facts were disclosed, internal company documents show.

Nigeria is seeking a significant increase in its quota with the Organization of the Petroleum Exporting Countries, which sets production levels for its members in an effort to control prices. A lower quota would mean less income for Shell and Nigeria and less Nigerian oil for the United States, the largest customer for its exports.

Since Shell disclosed two months ago that it had overstated its oil and gas reserves by 20 percent, or 3.9 billion barrels, the company’s senior executives have pledged greater openness to investors, who were stunned by the revelations.

The company announced Thursday that it was again cutting its estimates of its reserves by the equivalent of 250 million barrels, mostly involving a natural gas field near Norway. Shell also postponed the publication of its 2003 annual report for two months to complete a review of its oil and gas assets.

But the company continues to conceal the extent of its problems in Nigeria, the country with the largest reserve restatement, to avoid endangering its partnership. Shell operates the largest joint venture with the Nigerian government. Confidential company documents late last year show that more than 1.5 billion barrels, or 60 percent of Shell’s earlier estimate of proven Nigerian reserves, were not fully compliant with accounting rules and company guidelines.

A report on Dec. 8, 2003, prepared for senior executives by Walter van de Vijver, then the top official for exploration and production, recommended that the revised Nigerian reserves stay confidential in view of host country sensitivities. Identifying the extent of Shell’s lowered reserves in Nigeria, the report warned, could affect that country’s quota discussions with OPEC.

Nigeria has been seeking a large increase in its quota, currently at about two million barrels a day, as part of a plan to double its daily production over the next several years.

Reserves are a key input in quota discussions, the report says, and since Shell’s portion of Nigeria’s reserves constitutes about 50 percent of total country reserves, an external disclosure indicating that estimates have been overstated could negatively impact the government’s position. An OPEC spokesman said Thursday that a team from OPEC’s secretariat visited Nigeria last month and that the organization would discuss a new formula for determining quotas this year. Proven reserves, the spokesman said, were part of the quota calculation. Oil yields 90 percent of Nigeria’s export revenue, and a doubling of its production could mean tens of billion dollars in extra annual income.

Andy Corrigan, a spokesman for Shell, the world’s third-largest publicly traded oil company, declined Thursday to provide details about restated reserves in Nigeria, saying only that they constitute a significant proportion of the overall restatement.

E.E. Imohe, the economics minister at the Nigerian Embassy in Washington, said he had passed on questions from a reporter to his government this week about Shell but had not yet received a reply.

Behind Shell’s confidential stance are the company’s own financial motivations, too. The report said negotiations with Nigeria over $385 million in bonus payments could be jeopardized by publication of too much information.

While reserves are a key indicator by which outsiders assess an oil company’s future prospects, Shell’s dealings with Nigeria resonate beyond the stock market.

Nigeria is the world’s seventh biggest oil exporter. Shell’s documents about Nigeria portray a sometimes fragile marriage of the two sides and offer a window into the kind of relationship that is vital to global energy security. Most of the world’s oil resides in less-developed countries like Nigeria, yet much of the financial and technological resources needed to develop that oil belongs to Western oil companies.

The documents give a far bleaker assessment of Nigerian operations than the company’s public disclosures.

For example, Nigeria has called for an end to the daily practice of releasing billions of cubic feet of natural gas into the atmosphere by 2008. The flared gas, a byproduct of oil production, has become an environmental and political issue. Shell’s Web site says this opportunity to gather gas is going well. Corrigan said the company is committed to meeting the target.

But a high-level company review last December found that many oil field projects were now seen as immature because of the lack of gas- gathering plans, many of which were still a long way from a possible request for funds. This, in turn, prompted concerns that oil production would have to be shut in without a way to utilize the gas. Natural gas is more expensive to transport than oil, so flaring the gas has been the most economical approach.

So far Shell has not released a country breakdown of its reserve restatements, but it told oil industry analysts last month that Nigeria and Australia were the two largest. Company documents show that Shell’s senior managers were told in December that 720 million barrels in Nigeria were non-compliant with SEC guidelines and an additional 814 million barrels were potentially noncompliant. At the end of 2002 Shell booked 2.524 billion barrels of proven reserves for Nigeria, but after internal reviews and a tightening of company guidelines, the December report said only 990 million barrels fully complies with current Shell guidelines.

The document recommended that any debooking of proved reserves for Shell’s venture in Nigeria not be identified publicly with Nigeria but classified under a wider geographic area. Last month, when Shell reported more details about the reserve downgrading, it said African operations accounted for 1.5 billion barrels of the revision. Shell has other operations in Africa, including Libya and Egypt, but Nigeria is the only African country listed in a potential reserves exposure catalogue distributed to senior executives late last year.

The Shell documents make clear that geology is just one part of determining whether oil or gas is a proved reserve. A company must also have firm plans to extract the resource and the investments to implement those plans. The absence of such commitments, the documents show, is why the Nigerian reserves were seen as noncompliant.

From 1991 to 1999, Nigeria offered Shell and other oil companies an incentive to increase reserves, the Reserves Addition Bonus. Shell contended that it was owed $385 million under the bonus program, but it only sought 30 percent to 50 percent of the claim, according to Shell’s December report. The bonus program applied to a different, less-probable category of reserves than the publicly reported proved reserves, which have been downgraded.

In principle, the December document said, Shell’s bonus claim should therefore not be impacted by reduction in Shell’s proved reserves in Nigeria, but disclosing their exact amount is likely to undermine the current resolution process and put $115 million to $170 million at risk. There are more than financial issues behind the decline in reserves.

Community disturbances and political instability were also to blame, according to the Shell report late last year. Most of Nigeria’s oil reserves are in the Delta region, where unrest caused a reduction in production last year. The Royal Dutch/Shell Group has kept secret key details of its sharp reduction of oil and gas reserves for fear of damaging its close ties to Nigeria, whose oil production quota set by OPEC might be jeopardized if the facts were disclosed, internal company documents show.

Nigeria is seeking a significant increase in its quota with the Organization of the Petroleum Exporting Countries, which sets production levels for its members in an effort to control prices. A lower quota would mean less income for Shell and Nigeria and less Nigerian oil for the United States, the largest customer for its exports.

Since Shell disclosed two months ago that it had overstated its oil and gas reserves by 20 percent, or 3.9 billion barrels, the company’s senior executives have pledged greater openness to investors, who were stunned by the revelations.

The company announced Thursday that it was again cutting its estimates of its reserves by the equivalent of 250 million barrels, mostly involving a natural gas field near Norway. Shell also postponed the publication of its 2003 annual report for two months to complete a review of its oil and gas assets.

But the company continues to conceal the extent of its problems in Nigeria, the country with the largest reserve restatement, to avoid endangering its partnership. Shell operates the largest joint venture with the Nigerian government. Confidential company documents late last year show that more than 1.5 billion barrels, or 60 percent of Shell’s earlier estimate of proven Nigerian reserves, were not fully compliant with accounting rules and company guidelines.

A report on Dec. 8, 2003, prepared for senior executives by Walter van de Vijver, then the top official for exploration and production, recommended that the revised Nigerian reserves stay confidential in view of host country sensitivities. Identifying the extent of Shell’s lowered reserves in Nigeria, the report warned, could affect that country’s quota discussions with OPEC.

Nigeria has been seeking a large increase in its quota, currently at about two million barrels a day, as part of a plan to double its daily production over the next several years. Reserves are a key input in quota discussions, the report says, and since Shell’s portion of Nigeria’s reserves constitutes about 50 percent of total country reserves, an external disclosure indicating that estimates have been overstated could negatively impact the government’s position. An OPEC spokesman said Thursday that a team from OPEC’s secretariat visited Nigeria last month and that the organization would discuss a new formula for determining quotas this year. Proven reserves, the spokesman said, were part of the quota calculation. Oil yields 90 percent of Nigeria’s export revenue, and a doubling of its production could mean tens of billion dollars in extra annual income.

Andy Corrigan, a spokesman for Shell, the world’s third-largest publicly traded oil company, declined Thursday to provide details about restated reserves in Nigeria, saying only that they constitute a significant proportion of the overall restatement.

E.E. Imohe, the economics minister at the Nigerian Embassy in Washington, said he had passed on questions from a reporter to his government this week about Shell but had not yet received a reply.

Behind Shell’s confidential stance are the company’s own financial motivations, too. The report said negotiations with Nigeria over $385 million in bonus payments could be jeopardized by publication of too much information.

While reserves are a key indicator by which outsiders assess an oil company’s future prospects, Shell’s dealings with Nigeria resonate beyond the stock market.

Nigeria is the world’s seventh biggest oil exporter. Shell’s documents about Nigeria portray a sometimes fragile marriage of the two sides and offer a window into the kind of relationship that is vital to global energy security. Most of the world’s oil resides in less-developed countries like Nigeria, yet much of the financial and technological resources needed to develop that oil belongs to Western oil companies.

The documents give a far bleaker assessment of Nigerian operations than the company’s public disclosures.

For example, Nigeria has called for an end to the daily practice of releasing billions of cubic feet of natural gas into the atmosphere by 2008. The flared gas, a byproduct of oil production, has become an environmental and political issue. Shell’s Web site says this opportunity to gather gas is going well. Corrigan said the company is committed to meeting the target.

But a high-level company review last December found that many oil field projects were now seen as immature because of the lack of gas- gathering plans, many of which were still a long way from a possible request for funds. This, in turn, prompted concerns that oil production would have to be shut in without a way to utilize the gas. Natural gas is more expensive to transport than oil, so flaring the gas has been the most economical approach.

So far Shell has not released a country breakdown of its reserve restatements, but it told oil industry analysts last month that Nigeria and Australia were the two largest. Company documents show that Shell’s senior managers were told in December that 720 million barrels in Nigeria were non-compliant with SEC guidelines and an additional 814 million barrels were potentially noncompliant. At the end of 2002 Shell booked 2.524 billion barrels of proven reserves for Nigeria, but after internal reviews and a tightening of company guidelines, the December report said only 990 million barrels fully complies with current Shell guidelines.

The document recommended that any debooking of proved reserves for Shell’s venture in Nigeria not be identified publicly with Nigeria but classified under a wider geographic area.

Last month, when Shell reported more details about the reserve downgrading, it said African operations accounted for 1.5 billion barrels of the revision. Shell has other operations in Africa, including Libya and Egypt, but Nigeria is the only African country listed in a potential reserves exposure catalogue distributed to senior executives late last year.

The Shell documents make clear that geology is just one part of determining whether oil or gas is a proved reserve. A company must also have firm plans to extract the resource and the investments to implement those plans. The absence of such commitments, the documents show, is why the Nigerian reserves were seen as noncompliant.

From 1991 to 1999, Nigeria offered Shell and other oil companies an incentive to increase reserves, the Reserves Addition Bonus. Shell contended that it was owed $385 million under the bonus program, but it only sought 30 percent to 50 percent of the claim, according to Shell’s December report. The bonus program applied to a different, less-probable category of reserves than the publicly reported proved reserves, which have been downgraded.

In principle, the December document said, Shell’s bonus claim should therefore not be impacted by reduction in Shell’s proved reserves in Nigeria, but disclosing their exact amount is likely to undermine the current resolution process and put $115 million to $170 million at risk. There are more than financial issues behind the decline in reserves.

Community disturbances and political instability were also to blame, according to the Shell report late last year. Most of Nigeria’s oil reserves are in the Delta region, where unrest caused a reduction in production last year. The Royal Dutch/Shell Group has kept secret key details of its sharp reduction of oil and gas reserves for fear of damaging its close ties to Nigeria, whose oil production quota set by OPEC might be jeopardized if the facts were disclosed, internal company documents show.

Nigeria is seeking a significant increase in its quota with the Organization of the Petroleum Exporting Countries, which sets production levels for its members in an effort to control prices. A lower quota would mean less income for Shell.

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