The Securities and Exchange Commission (SEC) last week launched a formal non-public inquiry into the oil and gas reserves overbooking by Royal Dutch/Shell Group, which may lead to a broader investigation of other producers’ proved and probable numbers.

In January, Shell announced it would reclassify 20% of its worldwide proved reserves, or about 3.9 billion boe (NGI, 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 indicated that the reserve overbookings were unintentional and that individuals acted in good faith, and it attributed the revisions to a changing business climate in Australia and slow infrastructure development in Nigeria. Shell’s hydrocarbon output fell slightly last year and is expected to be flat this year, but 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, Sir Philip Watts, chairman of Shell’s managing directors, said he was determined to “fix” the reserves situation (see NGI, Feb. 9). 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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