Royal Dutch Shell Evaluation of Oil Reserves — страница 2

were restated during the above mentioned scandal) and how this figures different from the ones that market participants would take into account. Furthermore, there will be a discussion regarding other figures on company’s annual report related to oil and gas reserves and that can be further utilized for fair value calculation. In the third chapter, event study will be represented. The aim of this event study would be calculation of fair value observed on the free market using the conclusions of previous chapter Finally, the fourth chapter will be dedicated to own calculations aiming at replication of the fair value of oil and gas reserves observed on the market. The calculations will be made using discounted cash flow methodology and real options methodology. As the

conclusion of this paper the assessment will be made on how well do different calculations methods can predict the fair value for oil and gas reserves (if at all) and what are the possible factors that influence the quality of this estimation For the sake of convenience Royal Dutch/Shell Group and parental companies will be defined simply as RDS or Shell as well as word “oil” will de used both for oil and gas. All the figures related to oil and gas reserves (unless mentioned otherwise) represent measure of so called barrels oil equivalent (boe), where 5800 cubic feet of gas equal 1 barrel of oil 1 Royal Dutch Shell Group: Background Information On May 28, 2002 sir Philip Watts, then chairman of the Comity of Managing Directors (CMD) at Royal Dutch Shell Group wrote

e-mail to the CEO of Exploration and Production Unit (EP) in the Group Mr. van de Vijver, which said: “You will be bringing the issue to CMD shortly. I do hope that this review will include consideration of all ways and means of achieving more than 100% (reserves replacement ratio) in 2002. To mix metaphors considering the whole spectrum of possibilities and leaving no stone unturned” This e-mail gives a good illustration of the aggressive policy that was undertaken in RDS in order to meet its external promises regarding reserves replacement ratio (RRR) or in other words, the ratio of discovered reserves to production. In fact, the problems did not start in 2002. Ever since Mr. van de Vijver succeeded the position of EP CEO from sir Philip in 2001, he has noticed that

the actual situation with oil discoveries is not as rosy and optimistic as it seems to be from company’s reports (Davis Polk & Wardwell, 2005). This aggressive policy to push as much oil reserves into balance sheet as possible was one of the reasons behind the oil reserves scandal that struck one of the oldest and well-established oil companies in the world in the beginning of 2004. This chapter will give some background on Shell’s place in world oil industry. This information will be useful in understanding the scale of recent scandal for oil industry and Shell itself. Afterwards some information will be given on the recent unification announcement, which is also may be regarded as one of the scandal outcomes. 1.1 Oil Industry and RDS Group Royal Dutch Shell

Group of Companies is one of the biggest vertically integrated oil groups in the world that has about 119 thousand employees in 145 countries. Shell unifies practically all the stages that involve energy and chemicals production in its five units: EP, Gas and Power, Oil Products, Chemicals and Renewable Energy. Group’s activities involve marketing, transporting and trading oil and gas; providing oil products for industrial uses including fuel and lubricant for ships and planes; generating electricity, including wind power, and producing solar panels; producing petrochemicals that are used for plastics, coatings and detergents; developing technology for hydrogen vehicles (RDS: The Shell Report, 2003). The split of company revenues between different units in 2003 is shown in

Figure 1.1: 4% 14% EP 9% Power Oil Products Chemicals Others 73% (Source: RDS Form F-20) As in this paper the main attention will be drawn to the oil reserves, the figures in interest will be those of EP unit. The figure shows that the unit provides some 14% of revenues and it is second most important unit after Oil Products. So, the performance of this unit is of importance for the overall company performance. The picture becomes even clearer as one looks at company’s assets distribution in Figure 1.2: 8% 1% EP Power 30% Oil Products Chemicals 57% Others 4% (Source: RDS Form F-20) The figure shows that most of RDS’ assets (57%) are concentrated in EP unit. As most of these assets are attributed to oil and gas reserves, it is easy to imagine that any change in