The decision by the Securities and Exchange Commission (SEC) to launch a formal inquiry into oil and gas reserves overbooking by Royal Dutch/Shell Group may lead to a broader investigation of other producers’ proved and probable numbers. Since Shell first disclosed the overbooking in January, several other oil and gas producers have revised their proved and probable numbers also, including El Paso Corp.

London-based Shell confirmed Thursday that the SEC has launched a formal non-public inquiry into the company’s reclassification of oil and gas reserves, and the oil major said it would “continue to cooperate fully” with the SEC. Following El Paso’s announcement earlier this week that it had overbooked 41% of its reserves, analysts suggested that an SEC investigation, and resulting lawsuits, also were sure to follow (see Daily GPI, Feb. 19). El Paso said it would cooperate if regulators requested more information.

In January, Shell announced it would reclassify 20% of its worldwide proved reserves, or about 3.9 billion boe (see Daily GPI, Jan.12). More than 90% were reduced in “proved undeveloped,” and the remainder were reduced in “proved developed,” which trimmed proved reserves to 15.6 billion boe from 19.5 billion boe estimated in December 2002.

Shell has indicated that the reserve overbookings were unintentional and that individuals acted in good faith. A changing business climate in Australia and slow infrastructure development in Nigeria apparently led to most of the downgrades to energy reserves. Shell’s hydrocarbon output fell slightly last year and is expected to be flat this year. By late 2005, the company expects to see growing production from new prospects in Russia and other overseas locations.

Scrutiny on Shell’s overbooking most likely will be directed toward the Gorgon gas field in Australia. Shell included the Gorgon field as a “revision,” rather than a discovery, when it filed it with the SEC in 1997. When a field is booked for the first time, the reserves are usually noted in the SEC category “extensions and discoveries.” Adjustments made following a review of the field are then moved to the “revisions” category.

In a recent conference call, Walter van de Vijver, who directs Shell’s exploration and production unit, said that Shell had misclassified Gorgon with the SEC. “Let’s be real about it,” said van de Vijver. “It’s a bit of an embarrassment, what happened.” He said Shell Australia had booked the Gorgon field as probable internally in 1994 and later changed it internally to proved, which meant there was more than a 50% chance it would be developed

“That revision, which we did in Shell Australia, unfortunately rolled up in a revision in the group filing [to the SEC], rather than as the proper new extensions and discoveries,” van de Vijver said.

The Shell recategorization was especially troubling because neither ExxonMobil Corp. nor ChevronTexaco Corp., which partner with Shell on the Gorgon project, have booked the field as proved with the SEC.

Earlier this month on a conference call, Sir Philip Watts, chairman of Shell’s managing directors, said he was determined to “fix” the reserves situation (see Daily GPI, Feb. 6). Watts oversaw Shell’s exploration and production unit for most of the period when the overbooking occurred, but he has rebuffed calls for his resignation.

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