Royal Dutch Shell Evaluation of Oil Reserves — страница 12

2.2 the proved reserves of RDS are classified as developed and undeveloped. The quantity of developed reserves is 8.6 billion barrels or 60% of the proved reserves, whereas the quantity of undeveloped reserves is only 5.8 billion barrels or some 40% of total proved reserves. On the other hand, restated reserves containing 88% of undeveloped reserves and only 12% of developed reserves. The developed reserves are the ones that are already set to produce oil and for which no major capital expenditures will be required, whereas the undeveloped reserves require additional capital expenditure in order to be produced. That may include additional Royal Dutch Shell: Evaluation of Oil Reserve expenditures for exploration, costs of lifting facilities set and so on. For these reasons it is

obvious that undeveloped reserves would in average bring lower cash flow to the company and therefore the reduction of the reserves value in this case was significantly lower than it would be in case if the majority of restated reserves were developed. This conclusion is rather strait forward and will be used in Chapter 3 and the later chapters in order to make the assumption regarding market reaction for the restatement announcement. 2.4 Summary of Chapter Two First of all, this chapter discusses the methods of reserves representation by the company management in the public reports, such as annual report and F-20 form, as well as for the internal reporting with respect to reserves quantity and value. As it was shown in this chapter, the quantity of company’s oil reserves

are highly uncertain and often can be modeled assuming lognormal distribution of the reserves. In addition, there is a material degree of contradiction on how the oil reserves quantity should be reported. The contradictions between two major reporting methodologies are summarized in Table 2.3: Method Representation Use Probabilistic Reserves are random distributed variables. Internal company reporting; Industry reporting Key points of distribution are represented Deterministic Represents single best estimate for oil reserves Public reporting These contradictions are often confusing and led to certain extend to the restatement of oil reserves by Royal Dutch Shell, which took place in the beginning of 2004. Estimation of oil reserves value that is made by management for public

reporting is rather loose and concentrated in so called SMOG report that is made according to FASB regulations and consists of NPV estimation of the cash flow from oil production assuming year-end oil prices and continuation of the present economic conditions as far as production costs are considered. According to SMOG report, RDS management estimated its proved oil reserves at the level of $53 billion (after restatement). The value of restated reserves is estimated to be $6.6 billion in the same report. One can notice that the restated reserves have substantially lower value per barrel than average oil barrel on SMOG report. 3 Reserves Restatement – Event Study As it has been mentioned in Chapter 2 starting from January 9, 2004 until April 19, 2004 Royal Dutch Shell

announced series of reserves restatements that came as the surprise for capital markets and pushed the shares prices of both parental companies down by some 12% on the day of the announcement (Louth, 2004). However this event represented a significant shock to the stock for the oil and gas industry in general and RDS in particular, it embodies a very convenient possibility to assess the evaluation of capital markets regarding the oil reserves of Royal Dutch Shell. Although, the oil reserves are representing a large portion of RDS’ assets as well as oil production is representing significant part of company’s revenue, without this restatement it would be hard to “single out” company’s assets in oil exploration and production unit from other

company’s assets. In this sense, this restatement represents a unique possibility to check how do the market players evaluate the oil reserves as well as to try to replicate market calculations with own evaluation models. Two most important questions that one should answer before the market evaluation becomes clear are: 1) How much of the reserves were restated? 2) What is discount in market capitalization of parental companies attributed to the restatement? Although, these questions seem trivial, answering them is a rather complicated issue. First of all, the restatements were not made in one day, but were rather starched along three and a half month period and then followed by another series of restatements in the end of 2004 and beginning of 2005. Therefore, the amount