Royal Dutch Shell Evaluation of Oil Reserves — страница 5

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be traded in New York. As previously, the share of “A” stocks in the new company will be 60% and share of “B” stocks 40%. Also, the dividend policy of RDS will become clearer, as all the dividends will be announced in Euros. In Chapter 3, it will be shown that previous dividend policy lead to inequality between Royal Dutch and Shell shareholders. Finally, the event day of unification was July 20, 2005. On that day, RDS was floated on all three bourses and this ended almost hundred-year history of Royal Dutch/Shell partnership. As the result of unification, new company becomes the biggest oil and gas enterprise on FTSE index ahead of BP and one of the biggest companies in FTSE 100 index. The overall reaction of markets on the unification was positive. The

shares of RD and Shell went up after the announcement and short before the event day. Still it is difficult to filter out markets reaction, since one day before the unification, RDS announced that the costs of oil exploration for one of its projects in Russia would be substantially higher than expected, which pushed the stocks down. 1.3 Summary of Chapter One In this chapter, several consequences of the recent oil reserves scandal at RDS were discussed. It was shown that oil and gas exploration and production is meaningfully large line of RDS’ business both in terms of revenues and assets. It is clear that any asset and income restatement in Exploration and Production unit will have immediate large-scale consequences on the stock price of parental companies in RDS Group. It

was also shown that Royal Dutch Shell was one of the leading oil companies in the world, though its share in oil and gas production constituted only about 3% in 2003. Therefore, the restatement of oil reserves by RDS had also consequences for the oil industry as the whole. The standing of RDS in comparison to industry average deteriorated on the restatement. It was shown that “reserves life” measure of RDS went down to 10 years, which is significantly lower than world and regional average. Additionally, one of the possible sources of problems that lead to reserves restatement was discussed, namely, the corporate structure of RDS. Then the consequences of the restatement for the corporate structure were presented. Partially due to the scale of the scandal that was

generated by the oil reserves restatement, management of parental companies decided to push forward with the changes in group’s corporate structure and unified two parental companies. In the following chapters, the further consequences of the scandal will be represented and evaluated. 2. Legal Framework for Oil Reserves Reporting Before one can continue with the analysis of oil reserves restatement assessment of reserves’ value, it would be important to understand what stands behind the figures and values restated in 2004. It is vital to remember that during the scandal company announced the restatement of proved oil reserves. This chapter is dealing with the question of whether proved reserves is the same as overall reserves and what are the figures that are used by

market participants and that should be used in for the analysis in this paper. In the first and second section of this chapter, the legal framework will be provided for two key figures that will be used in the following chapters: -Quantity of oil reserves reported by company -Value of oil reserves on company’s balance sheet In the third section of this chapter, the assessment will be made on what role might have the existing legal framework in the reserves mis-presentation in case of RDS. This chapter is aimed at explaining how the present reserves disclosure system works, what are the number reported by energy and oil companies and what is degree of freedom given to the company in reporting of the reserves. Later the particular misuse of the existing rules by Shell will be

discussed as well as the consequences of the oil reserves scandal in Royal Dutch Shell. 2.1. Legal Regulations and Definitions of Oil Reserves The way in which management calculates its oil reserves’ value and quantity may be not totally transparent and understandable for investors, which in turn adds to the risk and uncertainty in the evaluation of oil producing companies in general and Shell in particular. Unlike most of the other figures on the company’s balance sheet the value of oil reserves is not based on the historical value or on the value observed on the free active market. The oil reserves as well as gas reserves are represented based on the volume of hydrocarbons companies believe they can produce with reasonable certainty based on the scientific and