Certain employees of El Paso Corp. used “unsupportable methods” over a four-year period, which resulted in a 41% overbooking of oil and natural gas reserves, according to an independent review released last week. No current or former employees were named in a statement by the company.

El Paso announced in February it would revise its proved reserves downward by 1.8 Tcfe, and the board of directors launched an investigation (see NGI, Feb. 23). Independent counsel Haynes and Boone LLP conducted the review, which was intended to not only assess the reasons for the revisions but also recommend any improvements to internal controls and determine any “instances of misconduct.”

Following more than 200 interviews and a review of more than 100,000 documents, the law firm concluded that “beginning of 1999 through the end of 2003, certain employees used aggressive and, at times, unsupportable methods to book proved reserves. In addition, certain employees provided proved reserve estimates that they knew or should have known were incorrect at the time they were reported.” A few more interviews and document reviews remain to be done, but El Paso does not expect any of the counsel’s findings to change.

The review confirmed El Paso’s previous assessment that it should restate financials for El Paso Corp., El Paso CGP Co. (EPCGP) and El Paso Production Holding Co. (EPPH) from 1999 through 2003. Its first quarter 2004 Form 10-Q will be delayed pending the refilings. El Paso said it also would discuss the findings with the Securities and Exchange Commission (SEC), which is conducting a separate investigation.

The report concluded that the “current senior executive management team of El Paso Corp. did not participate in the inaccurate booking and the resulting overstatement of reserves.” It also found that the estimate of proved reserves on Dec. 31, 2003 was “sound” and within acceptable guidelines.

“El Paso’s board of directors fully accepts the findings of the independent review,” said Ronald L. Kuehn Jr., chairman. “This process is an important milestone for all stakeholders as we take the necessary steps to ensure the integrity of the company’s reserve reporting process.”

To ensure integrity, the following controls are in place or being implemented:

El Paso noted that “significant changes” already have been implemented, including five new board members and three new executives. Long-time CEO William Wise was fired last year and was replaced by Doug Foshee, Halliburton’s COO (see NGI, July 21, 2003). Rodney D. Erskine, president of El Paso Production, resigned last November and was replaced in January by Lisa Stewart, an Apache Corp. veteran (see NGI, Nov. 17, 2003). Jeff Sherrick also was named as senior vice president of the company’s production business in charge of the reserve estimation process.

El Paso said it continues to cooperate with the SEC and the U.S. Attorney’s office on the results of the reviews.

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