The chairman of the Securities and Exchange Commission (SEC) on Wednesday said that the agency is reviewing oil and gas reserves accounting after Royal Dutch/Shell Group recategorized its reserves last week (see Daily GPI, Jan. 13).

SEC Chairman William Donaldson was questioned during an open meeting of the SEC in Washington, DC. When asked about Shell’s recent announcement, he said, “I can’t really say much. But clearly the issue here is one that we’re interested in and looking at.”

Earlier this week, SEC Commissioner Roel Campos told the Wall Street Journal that he was “sure” the SEC enforcement staff was reviewing Shell’s news. Campos added that it was “hard to see” how the company could have been off on its estimates “so badly.”

Oil and gas companies use engineers and third-party companies to estimate probable and proved reserves following a discovery. The numbers are important to the producers for several reasons, including giving investors an idea of a company’s future earnings. Shell’s stock fell about 9% last Friday on the day it announced it had lowered its estimate on boe reserves by 20%. Most of Shell’s restatement of reserves will be for its Nigerian and Australian operations. It also has indicated it will recategorize some Gulf of Mexico reserves, but no further details were released by Shell, and none are expected before it releases its quarterly report next month.

Analysts agree that determining the amount of reserves, both proved and probable, is a difficult process — and even somewhat of a guess. Most of the majors, including Shell, Exxon Mobil Corp. and ChevronTexaco Corp., determine estimates using internal reservoir engineering groups, while many of the second tier and smaller producers use outside consultants. And, while financial statements always are independently audited, oil and gas reserves are only audited by companies that do not issue their own debt, and lenders then insist on independent third party verification.

Charles Gleeson, president-elect of the Society of Petroleum Evaluation Engineers, told the Journal that even with the “best data, 10 engineers will have 10 different opinions on the same field, and erring on the most conservative side is usually the safest rule.” He said, “Occasionally you have a reservoir that tests good, but you put it onstream and it goes to water pretty fast and isn’t as productive as you thought it was.”

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