Royal Dutch/Shell 'Oil Reserves' Controversy



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Introduction

On January 09, 2004, after an internal review, Royal Dutch/Shell group's (Shell) management announced that it was downgrading nearly four billion (bn) barrels3 of its 'proven' oil and gas reserves to the 'probable' category. This represented about one-fifth of Shell's total 'proven' oil reserves.The announcement from Shell which had been considered as a conservative company shocked the financial markets and the oil industry. Soon after, Shell's share price fell by 7%. (Refer Exhibit I for the stock price chart of Royal Dutch/Shell).

Shell's recategorization of oil reserves raised questions among analysts about the procedures followed by oil companies to 'book' reserves. The episode led to calls for an industry-wide standardization of accounting practices. The Securities and Exchange Commission (SEC)4 started investigating the reasons for the controversy over Shell's oil reserves. Soon after Shell's announcement, BP5 announced a reduction of 2.5% in its 'proven' oil and gas reserves estimate at the end of 2003, which was equivalent to 445 million (mn) barrels of oil....

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In late 2003, El Paso Corporation6 announced a 34% reduction in its gas reserves. Analysts believed that in Shell's case, there was no evidence of criminal wrongdoing - there was no precise legal standard or industry agreement on the method of classifying reserves.Under the SEC guidelines for booking of proven reserves, managerial discretion and reclassifications were allowed. Robert Plummer, an analyst with Wood Mackenzie Limited, said, "They are not reducing the number of barrels in the ground, but the time when they would be developed."7....

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