Royal Dutch/Shell reduces its proved oil, gas reserve estimates

By OGJ editors
HOUSTON, Jan. 9 -- The Royal Dutch/Shell Group Friday said it overestimated its proved oil and natural gas reserves by 3.9 billion boe, or 20%, as of the figures stated on Dec. 31, 2002.

"Over 90% of the total change is a reduction in the proved undeveloped category; the balance is a reduction in the proved developed category," a Shell news release said. Numerous countries were affected by the change, with half of the total adjustment involving overestimates in Nigeria and the Gorgon gas development off Australia. Gorgon is linked to a proposed LNG export project.

Shell anticipates "no material effect on financial statements for any year up to and including 2003," and expects that the production profile for 2003-05 will be "broadly flat."

"The recategorization of proved reserves does not materially change the estimated total volume of hydrocarbons in place, nor the volumes that are expected ultimately to be recovered. It is anticipated that most of these reserves will be rebooked in the proved category over time as field developments mature," a Shell news release said.

Of the total, 2.7 billion bbl involved crude oil and natural gas liquids, and 1.2 billion boe, or 7.2 tscf, involved natural gas.

"Reserves affected were mainly booked in the period 1996 to 2002. A significant proportion of the recategorization relates to the current status of project maturity. The recategorization brings the global reserve base up to a common standard of definition, consistent with the globalization of processes within the new exploration and production business model," the release said.

Analysts' reactions
Standard & Poor's Ratings Services had put its 'AAA' long-term ratings on Royal Dutch/Shell and its fully owned subsidiaries on CreditWatch with negative implications. At the same time, the 'A-1+' short-term ratings on these entities were affirmed.

Credit analyst Emmanuel Dubois-Pelerin of Paris said, "Standard & Poor's had already expressed concern over Shell's level of reserve replacement in 2001-02, but took comfort from the company's very strong bookings of proved reserves in previous years and expected stronger bookings in 2003. The announced reclassification, however, regards bookings made during 1996-2002, and also reveals that 2003 bookings will be well below 100%, markedly heightening our concern."

Shell anticipates a reserve replacement ration for 2003 to be 70-90%, representing a net addition of 1-1.3 billion boe.

Dubois-Pelerin said that during the past 8 years, Shell's replacement of proved reserves of about 80% implied high finding and development costs (estimated by S&P to be around $6.50/boe) and resulted in a significantly shortened proved reserve life of just above 10 years compared with 13.3 years reported at year-end 2002.

"Additionally, the concentration of the reclassification on crude oil and NGLs implies that this indicator, for liquids only, will be even lower: just above 8 years," Dubois-Pelerin said.

The New York-based Moody's Investors Service on Jan. 9 placed the Aaa ratings of the Royal Dutch/Shell Group under review for possible downgrade. This involved Shell Finance (UK) PLC and Shell Finance (Netherlands) BV.

On Jan. 12, Moody's also placed several entities linked to Shell under review for possible downgrade credit ratings. The review involved $1.6 billion of debt securities.

The group included Shell Oil Co., Pennzoil-Quaker State, and Shell Frontier Oil & Gas Inc.

Others under review were Coral Energy Holding LP, a trading subsidiary owned 91% by Shell Oil. Motiva Enterprises LLC and Deer Park Refining LP, both joint ventures owned 50% by Shell Oil, also are under review.

Banc of America Securities analysts said they see no material adverse effect for independent operators.

"We believe this writedown is largely a Royal Dutch/Shell-specific event, which they attribute to timing and technical issues," Banc of America analyst Bob Morris, Tyler Dann, and others said in a note on the announcement.

"Importantly, it has always been our perception that many of the majors are more aggressive than the independents in booking proven reserves. In fact, on average over the past 10 years, 37% of worldwide reserve replacement by the majors has been the result of positive revisions to prior estimates vs. 1% for the independents," they said.

Unlike independents, the majors traditionally conduct their own internal reserve calculations without third-party verification, the analysts noted.

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