Royal Dutch Shell Group more than doubled its 4Q earnings on soaring oil and natural gas prices, but the positive news was completely overshadowed with the company’s announcement Thursday that it will reduce its proved reserves for the fifth time in just about one year’s time.

Shell, which has now completed a year-long internal and external review of its global reserves, reduced its proven reserves by 1.4 billion boe for 2003, a much higher revision than the 900 MMboe expected by analysts. Over 2004, it reduced its proven reserves numbers four times, leading to an investigation by U.S. and European regulators and a $151 million fine (see Daily GPI, May 25, 2004; Aug. 25, 2004).

During a conference call with analysts, CEO Jeroen van der Veer called 2004 “a year of extremes, with the reserves recategorization on one hand and record net income and cash generation on the other.” He acknowledged disappointment in announcing the reserves cut, but in prefacing his discussion with analysts, he detailed how the company has revamped its internal auditing system and has begun to hire more exploration and production staff.

Shell set up its internal systems to comply with rigorous Securities and Exchange Commission guidelines, even though the oil major is headquartered in Europe. The latest proved reserves restatement was one “we did not anticipate,” but van der Veer said most of the changes were “largely of a technical reporting nature. Now that we’ve completed the reserve review, we intend to move on. The hydrocarbons are still in the ground, and our production outlook is unchanged.”

Malcolm Brinded, executive director of the Exploration and Production (E&P) business, also expressed disappointment in Shell’s organic reserves replacement in 2004, which was estimated at 45-55%, excluding year-end pricing. Including year-end pricing, Shell’s reserve replacement ratio was 30-40%, and including pricing and divestments, it was 15-25%.

Shell managed to hit the high end of its oil and gas production guidance in 4Q2004 of 3.8 MMboe, but the company still is not where it wants to be — nor will it be this year.

This year’s production, said Brinded, “will be at the low point for production.” He blamed the lack of reserve growth on projects that had not yet ramped up and noted Shell’s decision to hire nearly 1,000 new E&P engineers.

Overall, all five of the reserves restatements will equal 1% of 2000-2004 earnings, according to Shell. However, to make up for the earnings and reserves shortfall, Brinded said the company is targeting 100% reserve replacement between 2004 and 2008, with stronger growth by 2009. Shell intends to “unlock 13 billion boe of resources by the end of 2009. We are now at the turning point, and we’ve taken all the steps to put the reserves issues behind us.”

There was more encouraging news from Shell’s growing liquefied natural gas business, where sales grew 9% in 2004. Van der Veer said Shell continues to be an industry leader in LNG, with new projects coming on stream and the anticipated opening of more markets for some of its gas at future LNG terminals in Mexico and the United States.

“We expect LNG capacity to increase about 14% a year between 2003 and 2008,” said van der Veer.

Van der Veer also reiterated that The Hague-based Royal Dutch Petroleum, representing 60% of the assets, and London-based Shell Trading and Transport, representing the remaining 40%, will merge subject to shareholder approval in late June.

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