Royal Dutch Shell Evaluation of Oil Reserves — страница 11

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of Shell this restatement was not conducted on time and this fact draws the attention of the stakeholders. Shell’s overstatement of proved reserves, and its delay in correcting the overstatement, resulted from its desire to create and maintain the appearance of a strong RRR. Another reason was the failure of its internal reserves estimation and reporting guidelines to conform to applicable regulations. And finally, the delay in restatement was result of the lack of effective internal controls over the reserves estimation and reporting processes (as it was discussed in Chapter 1, Shell’s corporate structure was not particularly reliable). In the interest of protecting the public against misleading financial disclosures by public companies, the SEC Security and Exchange

Commission filed the complain against Royal Dutch Shell Group (SEC v. Royal Dutch Petroleum Co., et al., 2004). As a result of the scandal, reserves were downward restated for 2003 and also reserves of 2002 and 2001 were backwardly amended. The investigation by SEC and by the private adviser company Davis Polk & Wardwell that was later initiated by Shell itself found that although since the 1970’s, Shell has utilized a series of comprehensive internal guidelines for the estimation and reporting of oil and gas resources, including its proved reserves, these guidelines failed to conform to the requirements of Rule 4-10, in a number of significant ways. Namely, the guidelines of Shell were originally designed and maintained to serve the probabilistic approach for reserves

booking, which is used in Shell for internal reporting. These guidelines failed to reproduce correct and reliable basis for reporting under deterministic approach. As a result, in some cases the P50 reserves (mean or proved + possible reserves) were included into the proved reserves under SEC definition. Shell also did not implement its own guidelines properly due to the lack of internal controls. Shell failed in several respects to implement and maintain internal controls sufficient to provide reasonable assurance that it was estimating and reporting proved reserves accurately and in compliance with applicable requirements. These failures arose in the first instance from inadequate training and supervision of the operating unit personnel responsible for estimating and reporting

proved reserves. The reporting units in Shell were highly decentralized, which in turn made the normal flow of technical and contractual data more difficult. The deficiencies in the internal reserves audit function played additional negative role in the case. The proper internal audit of oil reserves in Shell was either poorly financed or virtually inexistent (SEC v. Royal Dutch Petroleum Co., et al., 2004; Davis Polk & Wardwell, 2005). All this resulted in the public scandal after which Shell had to make a wide scale restatement of its oil and gas reserves. The restatement concerned some of the major oil and gas reserves of Shell, namely the reserves in Australia, Oman and Nigeria in the first place. Also, other oil fields of Shell suffered from restatement, so that overall

restatement was divided fairly among the production facilities of RDS around the globe. The summarized information about the backward restatement of proved reserves is represented in Table 2.2: (Source: SEC v. Royal Dutch Petroleum Co., et al., 2004) As it can be seen from the Table 2.2, the “final” cumulative restatement (that was also included in the annual report for 2003) was 4.47 billion barrels of proved reserves and the company’s management estimated the reduction in $6.6 billion in SMOG report. That gives us an average discounted value for one barrel of oil equivalent of approximately $1.5. For comparison, let us look at the average discounted net profit that is estimated by management from one barrel of oil. For that purpose, one can use the overall

estimations of company’s proved oil and gas reserves that are found in company’s Financial and Operational Information Report for 1999-2003 and that are represented in Exhibit 2.2. According to this measure developed and undeveloped oil and gas reserves of RDS in the end of 2003 after restatement, including company’s interest could be estimated in oil equivalent as approximately 14.3 billion barrels. According to SMOG, the future discounted cash flow that company’s management expects to receive from lifting and selling these reserves is estimated at $53.8 billion. This gives average net discounted revenue of $3.76 per barrel. The reasoning behind this could be the quality as well as other features of the reserves restated. As one can see from the Exhibit