Royal Dutch Shell Evaluation of Oil Reserves

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Royal Dutch Shell: Evaluation of Oil Reserves Master Thesis To obtain the degree Master of Science in Economics and Management School of Business and Economics Humboldt University of Berlin By Roman Kremer (Matriculation Number 188623) Prof. Ernst Maug, Ph.D. Berlin, July 26, 2005 Abstract................................................................................................................................. 3 Oil Industry and RDS Group...................................................................................... 4 Unification of Royal Dutch and Shell........................................................................ 8 Summary of Chapter One ......................................................................................... 10 Legal Framework for Oil

Reserves Reporting ............................................................... 12 Legal Regulations and Definitions of Oil Reserves ................................................ 12 Standardized Cash Flow Calculation under the SEC and FASB Rules................... 19 Mis-presentation and Restatement of Oil Reserves by Shell Management..............21 Summary of Chapter Two ........................................................................................ 24 Reserves Restatement – Event Study .............................................................................. 25 Estimation of Reserves Restated Amount ................................................................ 26 Estimation of Market Capitalization Discount for Parental Companies ..................

30 Event Study Results.................................................................................................. 33 Estimation of Oil Reserves Value with Own Calculations ............................................. 35 Calculation Using DCF Methodology...................................................................... 36 Calculation Using Real Options Methodology......................................................... 44 Calculation Results................................................................................................... 49 Conclusion.......................................................................................................................... 50 References

.......................................................................................................................... 51 Appendix ............................................................................................................................ 54 Abstract In the beginning of 2004, Royal Dutch/Shell group announced that it reduces the quantity of its proved oil and gas reserves. This announcement was the beginning of the largest accounting scandals in history of oil and gas industry. This event had some very negative consequences for Royal Dutch /Shell and for oil industry in general, but in the same time it represents a brilliant and in some sense unique opportunity to assess the fair value that market grants to oil and gas reserves of an actively traded company.

This is also a good opportunity to try to replicate the calculations that the market participants would make in order to arrive to the conclusion about the fair value of reserves. Later, it would be possible to compare these calculations with the fair value observed on the market. This paper will consist of four chapters. In the first chapter, some background will be given on what meaning reserves restatement could have for the group and for the oil industry as a whole. In addition, the overview will be given regarding the consequences of the scandal for corporate structure of Royal Dutch/Shell. The second chapter will deal with the issues of legal framework for reporting of oil reserves. It will provide an overview on what stands behind the figures of proved oil reserves (that