Petroleum Review - Editorial - February 2004

Time for independent audit of reserves

The near hysterical reaction of the London financial analysts to the non-appearance of the Shell's Chairman and Finance Director at a meeting to explain the recent downward revision in the company's proved reserves illustrates two truths - that reserves have now become a critical factor in valuing a company and that the analysts continue to have an enormously high opinion of their own importance. While Shell's actions appear unfortunate, it was Shell and not the analysts who identified and corrected the error. Wood Mackenzie's excellent analysis of the implications is on p14.

One option to protect shareholders and to give a reliable guide to an oil company's future prospects is to have independent reserves audits. Independent financial audits are normal and uncontroversial. Improved seismic means that accurate reserves assessments are easier to produce and more reliable than ever before. At a time when there is real concern over future production growth from large and small companies alike it seems desirable that reserves, like financial results, are independently audited.

If Shell - a company usually known for its probity and one that has not one but two independent financial auditors for its accounts - wishes to start remedying the damage done to its reputation by the recent reserves reporting debacle, the simplest and most effective move would be to appoint independent reserves auditors with a brief to report as soon as possible.

When Russia started to open up after the collapse of Communism in 1991 a number of investors were burned by wilful confusion between Russian and western reserve definitions. In reaction large discounts were applied to Russian reserve figures until a number of Russian companies decided to have independent reserves audits done so that they could be listed on western stock exchanges. Many, if not all, were able to show that they had larger reserves than most had thought. Was it the independent auditing of Russian reserves that led to the change in western perceptions about Russian oil production prospects?

Given that modern technology makes reserves assessment more accurate and less subjective than ever before, can we now look forward to company reports with independently audited reserves broken down by region and giving both SEC style proved reserves and 2P proved and probable reserves?

The consultant IHS Energy has just reported its first take on discovery in 2003 (see p46). It is little short of horrifying. At the moment it looks as though 2003 will be the first year to have recorded no large oil discoveries at all. We would probably have to go back to the early 1920s to find a year when fewer large oil discoveries were made. The situation for gas discovery appears little better. It is worth recording that exploration is driven by the prospect of finding large fields, which justify the expenditure on the infrastructure. Small fields are found as a by-product of searching for the large ones and depend on the large field infrastructure for their development, particularly offshore.

The main feature in this issue looks at Russia and Eastern Europe (see pp18-30). For the last few years expansion of Russian supplies have been the largest single component in the expansion of non-Opec supply (see table below). If non-Opec, non-FSU production is separated out it can be seen to have peaked in 1998, although it will expand in 2004-2006 as projects come onstream in Angola, the Gulf of Mexico, Brazil and the Caspian. Russian production expansion remains a vital component in meeting oil and gas demand growth.

Russian, FSU and non-Opec oil production (in ,000 b/d), 1993-2002
Source: BP Statistical Review, June 2003

The opinions expressed here are entirely those of the Editor and do not necessarily reflect the view of the EI.

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