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Shell's Reclassification Not Expected by Peers; Watts' Future Questioned

Shell's Reclassification Not Expected by Peers; Watts' Future Questioned

Royal Dutch/Shell Group's decision to reclassify its proven reserves by 20% continued to rattle energy investors and analysts on Monday, with many wondering whether other producers also will restate their reserves numbers in the near future. And in London, insiders say it's only a question of weeks before Group Chairman Phil Watts is looking for another job.

On Friday, Shell announced it had overbooked its proven oil and gas reserves by 3.9 billion boe, or 20% (see Daily GPI, Jan. 12). Shell said it was recategorizing the proved reserves to "scope for recovery," a category that means that although the same volume of hydrocarbons is believed to be present, the development of the projects is not mature enough for them to qualify as proved reserves.

The decision to rebook its numbers follows a period of more transparency throughout the energy industry, and Shell executives pointed out last week that the changes do not mean the oil and gas reserves aren't there -- it's mostly a question of how much is there and when it may be exploited.

But there is more than just rebooking reserves by those that follow Shell. CEO Watts, who took over in 2001, could be fired within four weeks if he doesn't turn the company around, according to London's Sunday Times. The newspaper quoted sources close to the company as saying that the next month is "make-or-break time" for the CEO.

"He has until Feb. 5 when the group publishes its year-end figures to pull a rabbit out of the hat and show he is in charge, otherwise investors will be clamoring for change," the Times' source reported.

Watts arrived at Shell following a time of upheaval at Shell (see Daily GPI, Aug. 3, 2001). The company had cut its chemical assets and reduced costs to boost its profits. But it had failed in two takeover bids in 2001 to boost its gas assets. Shell lost out to Williams in an attempt to buy Denver-based producer Barrett Resources Corp., and it also was blocked in an attempt to buy Australia's Woodside Petroleum Ltd. (see Daily GPI, May 8, 2001).

However, before Watts assumed the lead role, he was the overseer of Shell's exploration and production -- and had resided during the time that the reserves now being rebooked were first discovered, between 1997 and 2001.

What may have prompted Shell to revise its booking system could have been changes within Securities and Exchange Commission regulations, which is tightening the screws across the board, including in the oil and gas industry. Last year, as part of its move to encourage more disclosure in financial accounting and reporting for oil and gas producers, the SEC informed producers that it had revised regulations under the Energy Policy and Conservation Act of 1975.

SEC's Regulation S-X, 17 Code of Federal Regulations Article 210.4-10 concerns financial accounting and reporting for oil and gas producing activities under federal securities laws. It was published last November, but the SEC also sent out other policy changes to detail how it now defined "proved" and "unproved" reserves.

When asked whether the SEC's changes had prompted the reclassification of reserves, Shell's management denied it during the conference call last Friday. When asked what had prompted the move, a Shell spokesman said there would be no more comment before fourth quarter results are released on Feb. 5.

"We are in our closed season," said Andy Corrigan. "The fourth quarter clearly points as the next time the company will be making major communication." He said Shell had not finished its reserves review.

In a statement, ChevronTexaco Corp. insisted that Shell's announcement would not affect how it categorizes its own worldwide reserves. ChevronTexaco operates in some of the areas where Shell recategorized its reserves, including the Gorgon project, a joint endeavor in Australia.

"ChevronTexaco has a rigorous review process for determining how and when its proved reserves for crude oil and natural gas reserves are recognized," the statement said. The "announcement by Shell will not affect how ChevronTexaco's worldwide reserves are currently categorized, including Nigeria and Australia."

John Gass, president of ChevronTexaco Global Gas confirmed that the company has yet not recognized any proved reserves for its interest in the Gorgon Joint Venture natural gas development project in Australia. "Our Gorgon project continues its steady progress toward commercialization," he said.

ChevronTexaco plans to issue its fourth quarter earnings announcement on Jan. 30, and said it would announced its proved crude oil and natural gas reserve activity for 2003 then.

ExxonMobil Corp. also issued a statement that said in part, "We are very confident in our proved reserves numbers and stand behind them."

The difference for Shell and the other majors operating in Australia, where most of the reserves will be recategorized is that "neither Chevron nor Exxon has booked any reserves associated with Gorgon," said Bruce Lanni, an analyst at A.G. Edwards & Sons.

ChevronTexaco, which operates the Gorgon field, estimates nearly 13 Tcf of reserves in Gorgon. It holds a 57.1% interest, while Shell has a 28.6% stake and Exxon Mobil has a 14.3% stake. ChevronTexaco also is the only other major that overlaps with Shell in parts of Nigeria, where Shell also is reclassifying proven reserves.

Lanni said ChevronTexaco had told him that it didn't understand the rationale behind the reserve changes and that it doesn't expect to change its own reserve estimates in Nigeria. And analyst Tyler Dann at Banc of America Securities said it was unlikely that ChevronTexaco would "pull something like this" because it most likely reassessed its assets during the merger of Chevron and Texaco three years ago.

However, Dann pointed out that it isn't uncommon for producers to book reserves even when its partners don't. Partners usually have independent assessments of the reserve potential for any project, and Shell may have booked the Gorgon reserves in 1997.

Lanni pointed out that "most companies are conservative in booking reserves," and they wait until "they have a definitive development plan in hand. When and if you get to the stage of monetizing that asset," he said, "whether you have a market developed to sell gas to, whether LNG (liquefied natural gas) or whatever, and you have commitments to buy that gas -- then they will sanction the project and book the reserves."

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