Royal Dutch/Shell cuts reserves again

Feb. 4, 2005
Royal Dutch/Shell Group has reduced its proved reserves by 1.4 billion boe as of Dec. 31, 2003, in the fifth such reduction in a little over a year.

By Paula Dittrick
Senior Staff Writer

HOUSTON, Feb. 4 -- Royal Dutch/Shell Group has reduced its proved reserves by 1.4 billion boe as of Dec. 31, 2003, in the fifth such reduction in a little over a year. The company's new reserves total is 12.95 billion boe.

Previous write-downs totaled 4.47 billion boe. The new total reduction of 5.87 billion boe is equivalent to 30% of the company's total reserves originally reported for Dec. 31, 2002, said consultant Wood MacKenzie Ltd.

Shell's latest recategorization was "largely based on technical adjustments," WoodMac analyst Derek Butter said in a Feb. 4 research note.

Shell executives noted that their reserves audit for 2003 has been completed. The US Securities and Exchange Commission has yet to accept it. Shell's series of reserves revisions attracted the attention of international regulators and shareholders alike last year (OGJ Online, Nov. 1, 2004).

Shell announced its most recent reserves cut while releasing its 2004 earnings statement in London on Feb. 3. The major reported record net income of $18.5 billion for 2004, compared with $12.5 billion for 2003.

Shell executives plan to seek approval from shareholders to merge Royal Dutch Petroleum Co. and Shell Transport & Trading Co. to form a single parent company, Royal Dutch Shell PLC (OGJ Online, Oct. 28, 2004).

Standard & Poor's Ratings Services responded to the reserves reduction by lowering Royal Dutch/Shell's credit rating to AA from AA+ on Feb. 4 and took the major's long-term corporate credit ratings off CreditWatch.

"Accordingly, we estimate that proven reserves amounted to only some 12 billion boe, or about 8.5 years of production, at Dec. 31, 2004, a level significantly below that of most oil companies globally," said S&P credit analyst Emmanuel Dubois-Pelerin.

WoodMac's Butter estimates Shell's 5-year organic reserve replacement rate has fallen to 44-57%.

"This is significantly below the level of its industry peers, where the top performers have recorded 5-year organic reserve replacement rates of up to 150%," Butter said.

Shell said it replaced 15-25% of the depletion in its reserves last year, and its goal is to average 100% reserves replacement during 2004-08.

Butter believes that Shell has sufficient unbooked commercial reserves to achieve this target. But he noted that Shell's 2004 organic reserves replacement "was again disappointing. While this is partly to do with its interpretation of booking guidelines, it is also the case that Shell has had proportionately fewer large-scale projects coming to fruition over the past few years than its peer group, particularly BP and ExxonMobil."

WoodMac forecasts flat near-term production for Shell, adding that its analysis of Shell's proved and probable reserves "would lead us to concur with Shell's assessment of having access to multibillion-barrel opportunities which it can 'unlock' in the medium term."

Banc of America Securities analyst Daniel Barcelo said it appears that Shell is now beyond the reserves issues.

"The clouds are finally parting, and things look much better than they once did. This could truly be the dawn of a new beginning, although, while recovery may be starting, it is likely to be a slow process," for lack of effective productive growth prospects, Barcelo said.

"Yes, after a heavy decline in 2005 in percentage terms, production will grow again, but by 2009, absolute production is still expected to be less than it was for 2002," he noted.

He suggested that if the oil price drops the company might seeks acquisitions to help boost its near-term production rates and its assets' life.

Contact Paula Dittrick at [email protected]