The New York Times -- relying on "confidential" documents that the paper has mysteriously "obtained" -- is reporting aggressively on a scandal developing around Royal Dutch/Shell's withholding of information about proven oil reserves. Various government agencies of the U.S., the U.K., and the Netherlands are beginning investigations. Though the mainstream press cannot bring itself to say so, this matters because there is great uncertainty about the reliability of reserve estimates, which are in turn crucial to the question "peak oil," so called from the "Hubbert Peak" upon which we may be standing even as we speak....
PEAK OIL LURKS BEHIND STORIES ABOUT ROYAL DUTCH/SHELL RESERVE REDUCTIONS
By Henry Adams
March 20, 2004
The N.Y. Times -- relying on "internal," "confidential" documents that the paper has "obtained," without saying how -- is reporting aggressively on the scandal developing around Royal Dutch/Shell's withholding of information about proven oil reserves. Various government agencies of the U.S., the U.K., and the Netherlands are beginning investigations.
Estimates of proven reserves have been in the neighborhood of 700 to 1,000 billion barrels. (Estimates of "ultimate" reserves -- i.e., the total amount of oil still in the earth, have mostly been between 1,800 and 2,400 billion barrels.)
The additional reduction announced Thursday in Royal Dutch/Shell's proven reserves -- 470 million barrels --increased to 4.37 billion the total number of barrels by which the company has reduced its proven reserves since the beginning of the year. This is thus an amount on the order of half a percent of total world proven reserves.
This may seem a relatively small reduction in the global scheme of things. But it is in fact a huge reduction that is roiling world markets.
Why? Because there is great uncertainty around the reliability of reserve estimates, which are in turn crucial -- though the mainstream press cannot bring itself to say so -- to the question of "peak oil," so called from the "Hubbert Peak."
The expressions "Hubbert Peak" and "peak oil" derive from scientist M. King Hubbert's work in the 1950s, and refer to the moment when oil production will peak (or perhaps has already peaked) and begins (or began) its downward slide.
Where is the Hubble Peak? Perhaps beneath your feet at the present moment.
Wherever it may be, at that point, many analysts say, energy prices will begin to rise irrevocably. As a result, the fundamental givens of world international socioeconomic conditions will begin to shift sharply in ways that will certainly drastically affect almost all of the ways we live now.
Such is the enormous unstated question that hovers at the edge of the three New York Times stories reproduced below.
Other news media reported Friday on denials British Petroleum that the UK company might soon take similar steps, aggravating the crisis.
SHELL WITHHELD RESERVES DATA TO AID NIGERIA
By Jeff Gerth and Stephen Labaton
New York Times
March 19, 2004
WASHINGTON, March 18 -- The Royal Dutch/Shell Group has kept secret important details of its sharp reduction in oil and gas reserves, particularly in Nigeria, for fear of damaging its business relationship with the government there and the Nigerians' desire to produce more oil, internal company documents show.
While Shell has acknowledged that the biggest adjustments in reserves include those in Nigeria, it continues to conceal the extent of its problems. But confidential documents from late last year show Shell concluded that more than 1.5 billion barrels, or 60 percent of its Nigerian reserves, did not meet accounting standards for "proven reserves."
The scale of the revision is important because Nigeria is a significant source of oil for Shell and the country is seeking to increase markedly its production quota within the Organization of the Petroleum Exporting Countries. The size of proven reserves is a basic consideration when OPEC sets quotas for its members. At stake for Nigeria are billions of dollars in revenue annually.
Shell disclosed two months ago that it had overstated its oil and gas reserves by 20 percent, which is equivalent to 3.9 billion barrels of crude oil. On Thursday, it pared its reserves by the equivalent of 250 million barrels more, most of that involving a natural gas field off Norway. Shell also postponed the publication of its 2003 annual report for two months to complete a review of its oil and gas assets.
The oil company's executives are acutely aware of the potentially explosive political effect of their cutting the estimates of Nigerian reserves. A report dated Dec. 8, 2003, and prepared for senior executives by Walter van de Vijver, then the top official for exploration and production, recommended that the revised Nigerian reserves remain "confidential in view of host country sensitivities."
Nigeria is the world's seventh-largest oil exporter, producing about two million barrels a day, and shipping 40 percent of that to the United States. Shell documents about Nigeria portray a sometimes fragile marriage and offer a window into the kind of relationship that is considered vital to global energy security.
Most of the world's oil is in less-developed countries like Nigeria, yet much of the financial and technological resources needed to develop that oil belong to Western oil companies.
Authorities in the United States, Britain and the Netherlands have each opened investigations into Shell's actions, to see if the company violated any laws or securities regulations.
By reducing its estimates of reserves, Shell has not necessarily lost any oil or gas. Instead, it reclassified some oil and gas fields as less likely to be developed soon, if at all. Timing is important to investors because it suggests how much money the company can make over certain periods and how busy it can keep its refineries.
Reserves are also important to Shell because they can influence the company's relationship with the country where the oil and gas are found. This is particularly true in Nigeria.
Identifying the extent of Shell's lowered reserves in Nigeria, Africa's most populous nation, could affect Nigeria's "quota discussions" with OPEC, the December report warned. Nigeria has been seeking a quota increase as part of a plan to double its daily production in the next several years.
Reserves are "a key input in quota discussions," the report says, and since Shell's reserves constituted about half the country's total, "an external disclosure indicating that estimates have been overstated could negatively impact the government's position."
OPEC officials visited Nigeria last month and the organization will discuss a new formula for determining quotas later this year, an OPEC spokesman said. Proven reserves, the spokesman said, were part of the quota calculation. Oil yields 90 percent of Nigeria's export revenue, which was estimated at $17.3 billion a year in 2002. A doubling of its production, as it intends, could mean billions extra in annual income.
Andy Corrigan, a spokesman for Royal Dutch/Shell, the world's third-largest publicly traded oil company, declined to provide details on Thursday about the restated Nigeria reserves, saying only that they constitute a "significant proportion" of the overall calculations.
E. E. Imohe, the head of the economic section at the Nigerian Embassy in Washington, said Thursday that he passed on questions from a reporter to his government this week about Shell, but had not yet received a reply.
Protecting Nigeria's negotiations with OPEC may not be the only reason Shell has not been more forthcoming about its reserves there. The report said the publication of too much information could jeopardize the company's negotiations with Nigeria over $385 million in bonus payments.
In any case, the documents about Nigeria offer a far bleaker assessment of Nigerian operations than the company's public disclosures.
Nigeria, for example, has called for an end to the practice of flaring, or burning off, natural gas that is a byproduct of oil production; two billion cubic feet of natural gas are burned this way in Nigeria every day, and this has become an environmental and political issue. Mr. Corrigan said the company was committed to meeting the target. Shell's Web site says "this opportunity" to gather gas "is going well."
But the Shell documents present a different view. A high-level review in December found that many oil field projects did not include plans to gather natural gas, and that "oil production would have to be shut in," or stopped, unless the company found a way to use the gas. Shell could sell it in Europe or the United States, but natural gas is expensive to transport across the ocean.
So far, Shell has not released a country breakdown of its reserve restatements, but it told 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 "noncompliant" with guidelines established by the Securities and Exchange Commission, and that a further 814 million barrels were "potentially noncompliant."
S.E.C. guidelines on reporting reserves apply because Shell sells bonds and stock in the United States. Calculating reserves can be as much an art as a science, and there can be debate about how to do it. The S.E.C. and energy companies have been in discussions in the last few years over how to apply the guidelines.
At the end of 2002, Shell recorded 2.524 billion barrels of proven reserves in Nigeria, but after reviews and a tightening of company guidelines, the December report said that only 990 million barrels "fully complies" with the guidelines.
The document recommended that "any debooking of proved reserves" 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 operations in several African countries, including Libya and Egypt, but Nigeria is the only one listed in a "potential reserves exposure catalog" that was distributed to senior executives late last year.
The Shell documents, including the December report, make clear that geology is just one part of determining whether oil or gas is a proven reserve. A producer must also have firm plans to extract the resource and be ready and able to make the investment to carry out those plans; the absence of such commitments, the documents showed, was the main reason most of the Nigerian reserves did not meet the definition of "proved."
There are different explanations for Shell's lack of progress in developing its Nigerian oil fields. A report in November by the International Energy Agency said that joint ventures -- like Shell's in Nigeria, where it is in partnership with the government -- "suffered from underinvestment, because of a lack of state funding." In Nigeria, according to the international agency and to local news media reports, government budget and other developments have shifted more of the financial burden of developing oil fields to foreign investors.
Mr. Corrigan, the Shell spokesman, said that "government funding has been a constraint, not Shell's willingness to fund."
From Nigeria's perspective, the foreign oil companies are partly to blame for the slow pace of meeting reserve targets because they "are sitting on large tracts of undeveloped acreage," according to Shell's understanding of a growth plan prepared by Funsho Kupolukun, who functioned as an adviser to Nigeria's president and who now manages the national oil company.
From 1991 to 1999, Nigeria offered Shell and other foreign oil companies an incentive to increase reserves, called a Reserves Addition Bonus. Shell asserts it was owed $385 million under the bonus program, but has only sought 30 to 50 percent of the claim, according to the December report. The program applied to a different, less probable category of reserves than the publicly reported "proved reserves," which have been downgraded.
In a news conference in London on Thursday, Malcolm Brinded, the new executive in charge of exploration and production, said the restatement of reserves was unrelated to the bonus.
"There has been speculation on bonuses paid to company about Nigeria," Mr. Brinded said. "That's a completely different issue to this proven reserves issue. It is quite another matter and totally unrelated to reserves recategorization."
But the December review of the problems in Nigeria and elsewhere presents a different view.
"While in principle a debooking of S.E.C. proved reserves should not impact on RAB," the review says, referring to the Reserves Addition Bonus, "this is likely to undermine the current resolution process, or would jeopardize relations if a settlement were agreed just ahead of a de-booking," and adding that this would 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. Most of Nigeria's oil reserves are in the delta region in the south, where unrest forced the company to reduce production last year.
Shell faced international criticism from human rights groups after the execution in 1995 of Ken Saro-Wiwa, a Nigerian environmentalist who organized demonstrations to demand that Shell and other energy companies reduce oil spills and pollution, and hire more local people. Shell decided to pay more attention to its civic responsibilities, but challenges remain.
"It's a very challenging environment for Shell in Nigeria," said Alex Vines, head of the Africa program at the Royal Institute of International Affairs in London.
Nigeria has also tried to be more publicly accountable on its handling of the oil industry. President Olusegun Obasanjo won praise last year when he promised that his country would publicly report its oil revenue. He also called for each oil company to publish its payments to governments, but some American companies and the Bush administration oppose such detailed reporting.
Transparency International, a research and advocacy group based in Berlin, which helped organize the news conference for President Obasanjo, said that Chris Finlayson, chairman of the Shell companies in Nigeria, attended the event and welcomed the president's announcement.
A month later, Shell's senior management recommended that details of its reserve problems and bonus negotiations with Nigeria be kept confidential.
SHELL REDUCES ESTIMATE OF RESERVES AGAIN
By Heather Timmons
New York Times
March 19, 2004
LONDON, March 18 -- Royal Dutch/Shell Group made a second reduction to its proven reserves of oil and natural gas on Thursday and said that it would postpone its annual report and shareholder meeting by eight weeks or more, surprising investors.
The equivalent of 250 million barrels of oil are being reclassified, the company said, because they do not comply with regulations of the Securities and Exchange Commission in the United States.
An additional 220 million barrels that in February were expected to be booked as reserves in a final tally for 2003 will not be included, the company said. The disclosure comes on top of a Jan. 9 announcement that reserves had been overstated by 20 percent, or the equivalent of 3.9 billion barrels
While the amount of Thursday's restatement was small in comparison, it rattled investors, given the growing questions about the company's credibility. Shares of Shell's two component companies fell sharply in European trading before recovering a bit.
"Every time you turn around, there is another little surprise," said Bruce Lanni, an analyst with A. G. Edwards. The latest revision is particularly vexing, some analysts said, because in February, Jeroen van der Veer, who has since been named chairman of Shell, said in a conference call that the company was confident in the thoroughness of an internal inquiry after the January restatement.
"We have left no stone unturned to make sure that this doesn't happen again," Mr. van der Veer said in February.
Reserve estimates are an important indicator of an energy company's worth and strength, and the surprise Jan. 9 announcement rattled investors.
After an internal investigation, Shell's chairman and the head of exploration and production were asked to resign on March 3.
Company documents from two years ago obtained by The New York Times show that the two ousted executives, as well as some current top Shell executives -- including Mr. van der Veer and the chief financial officer, Judith Boynton -- were aware of a significant shortfall in reserves and came up with an "external storyline'' and "investor relations script'' that minimized its significance.
The Securities and Exchange Commission, European regulators and the Department of Justice are now investigating the company's disclosure.
On Thursday, Shell said that regulators in the Netherlands were investigating possible insider trading. Shell also said in a statement that a review of its reserve restatement was continuing and that further departures from management were possible.
The latest revision to the oil and gas reserves come in part from the company's Ormen Lange field in Norway, where Shell used seismic technology to determine reserves, but did not back up the results with other methods, as the S.E.C. demands. An outside audit of the company's fields is only 40 percent complete, the company said, and more changes to reserve levels could not be ruled out. As a result, Shell's annual report, which was due to be released on Friday, will be delayed until late May, while its shareholder meetings will be held on June 28.
Shell said the second reserve change was prompted by its external auditor, Ryder Scott, which was hired in March and has checked just 40 percent of the company's fields.
"Here we are weeks later, and it transpires that we're less than halfway through the review, and there are a quarter-million barrels that didn't comply with S.E.C. requirements," said Issac Xenitides, an analyst with Fitch Ratings.
Mr. van der Veer and Shell's new head of exploration and production, Malcolm Brinded, held a news conference in London on Thursday afternoon to explain the change. Shell's other group managing directors, Judy Boynton and Rob Router, attended the conference but sat in the audience.
Many of the questions related to what top executives knew about Shell's reserve problem before the January restatement.
Mr. van der Veer acknowledged that there were internal documents about "exposures" regarding S.E.C. guidelines, but contended that they did not represent incorrect bookings.
"The word 'exposure,' '' he said, did not mean the same thing as incorrect booking of reserves. "Exposures are things that have to be managed.''
He said that a March 9 article in The Times about the 2002 documents had emphasized "two lines from the back" of a large document.
But the second page of a Feb. 11, 2002, memo prepared for the committee of managing directors -- Mr. van der Veer is a member of the panel -- said that one billion barrels of reserves "are no longer fully aligned with the S.E.C. rules'' on accounting for reserves. On the same page, the memo said that the expiration of licenses in three countries would result in an "exposure'' of 1.3 billion barrels.
A July 18, 2002, memo to the committee noted on the first page of its executive summary that the company was having difficulty replacing the reserves it was producing.
"Shell faces a challenge'' in maintaining its proven reserves "over the coming years -- particularly during 2002 and 2003'' and simultaneously achieving production growth and keeping expenses down, the memo begins. It said technical and commercial constraints "equates to a shortfall of 2-3 billion'' barrels of proven reserves.
The July memo then proposes an "external storyline'' and "investor relations script'' that would minimize the significance of the shortfall.
Asked about reports that federal prosecutors in New York had opened a criminal inquiry involving Shell executives, Mr. van de Veer said that he had asked around the company and found that no one had been notified of such an investigation.
Shell did acknowledge that Dutch regulators had begun an inquiry into possible insider trading. These types of investigations are routinely prompted when a company's stock drops 5 percent or more, Aad Jacobs, chairman of Shell's audit committee, said at the conference.
Regulators started looking into possible insider trading at Shell several weeks before the Jan. 9 restatement, a person close to the investigation said on Thursday.
Investigators "are trying to make sure there wasn't any trading going on by officers of the company that were familiar with these kinds of details," the person said.
At Thursday's news conference, Mr. van der Veer and Mr. Brinded also discussed changes already made at Shell. The chief financial officers of Shell's business units now report to the company's overall chief financial officer, Ms. Boynton, Mr. van der Veer said. The company has also removed the reserves from performance scorecards that determine bonuses, Mr. Brinded said.
--Gregory Crouch, in Nijmegen, the Netherlands, contributed reporting for this article.
GAUGING RESERVES: ROOM FOR INTEPRETATION
By Ken Belson
New York Times
March 12, 2004
The recent cuts in the estimates of oil and natural gas reserves at Royal Dutch/Shell, the El Paso Corporation and other energy companies have raised questions about how companies could suddenly have far less potential oil and gas than they initially reported.
The answer is in a mixture of imprecise regulations, geological guesswork and corporate culture that go into the accounting of such reserves.
The starting point for most discussions is the Securities and Exchange Commission requirements for what constitutes an oil or gas reserve. As with many regulations, it is open to broad interpretation, though it is also a best effort, considering how difficult it is to find oil in the first place, analysts and industry experts say.
The government requires companies to disclose their "proved oil and gas reserves," which it defines as "estimated quantities of crude oil, natural gas and natural gas liquids" that can be shown "with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions."
The phrase "reasonable certainty" is crucial. One company may decide that a 90 percent probability of finding and extracting oil is reasonable, while others may want more proof. Despite the opportunity for wide-ranging readings, the phrase has been on the books since 1978, when the current S.E.C. regulations were written.
Companies break down their proven reserves by whether they are developed or undeveloped. Developed proven reserves can be extracted with equipment already in use, and therefore are better indicators of potential production. Undeveloped proven reserves may require the drilling of new wells or other investments.
The S.E.C. requires companies to account for these reserves using one of two methods. The first, called the successful efforts method, is generally considered more conservative because companies write off their failures more rigorously. The other, known as the full-cost method, allows more leeway in acknowledging failures and is typically used by smaller drillers.
Most investors want to know, and few companies are willing to say, how long it takes to drill a new well and how much it will cost. Many analysts are also eager to know how quickly companies can extract that oil and how much it costs to get it to market.
The S.E.C.'s phrase "recoverable in future years" also invites an assortment of interpretations. An optimistic executive might keep an undeveloped well on the books longer than would a company inclined to cut its losses.
The calculations that companies make about their reserves, some industry experts argue, should be limited because that information may give competitors an unfair advantage. But others say that the disclosure of more detail would better help investors determine the prospect of an oil company's producing a return on its reserves.
"It'll be inexact no matter what you do," said Mark Easterbrook, a managing director at RBC Capital Markets in Dallas, who follows the oil industry. "But at least you can get more specific about the assumptions."
One figure that leaves little doubt is the price of oil or gas. The S.E.C. requires that companies compute the value of their reserves using oil or gas prices on Dec. 31. At best, this presents a snapshot of what reserves are worth on a given day. At worst, it can lead to wide distortions if, for instance, prices are low much of the year but soar in December because of unseasonably cold weather.
Some experts say companies would be better off using the average price from the preceding year; others recommend applying a forecast for the coming year.
Either way, different gas prices will do little to clarify the much harder task of figuring out how much oil is in the rocks below ground and how to move it thousands of feet to the surface. Seismologists, geologists and engineers spend years studying ways to determine the size of oil reservoirs and the ratio of fluids to rock in those reservoirs, among many other factors.
"All of these are interpretations," said Ronald Harrell, the chairman and chief executive of Ryder Scott, a petroleum consultant in Houston. "Our equations are pretty good, but we still have to calibrate them."