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Sakhalin blow hits Shell’s reserves


Oil giant Shell may be forced to cut the oil and gas reserves on its books by up to a billion barrels after the halving of its stake in the Russian Sakhalin-2 joint venture, according to analysts.

Shell was forced to cede its majority stake in the massive project off the east coast of Russia to state-owned energy group Gazprom before Christmas.

The move followed prolonged pressure from the Kremlin, which accused the Anglo-Dutch company of violating environmental standards and failing to manage costs effectively. The news comes with the City already expecting a drop in Shell's fourth-quarter earnings, which are announced this week.

The issue of booked reserves is highly sensitive for Shell. Two years ago it was forced to drastically reduce its total because much of what was on its books did not qualify under regulations set by the US Securities and Exchange Commission (SEC). This plunged the company into crisis and led to the resignations of several senior executives, including the then chief executive, Sir Philip Watts.

Leading analysts indicate that as the majority stakeholder in the project, Shell booked the entire capacity of Sakhalin-2 onto its own reserves. However, now that it has had its stake reduced from 55 per cent to 27.5 per cent, it will have to reduce its booked reserves to that level - a 72.5 per cent fall. One analyst says: 'Shell was not specific about how much of Sakhalin-2 was booked in 2003/04, but it could mean a reduction of up to one billion barrels of oil equivalent.'

Another observer commented: 'They had majority ownership of the asset so they booked 100 per cent. They will have to reduce not just from 55 per cent of the reserves to 27.5, but from 100 per cent to 27.5, which could amount to a billion barrels.'

A reduction at that level would see a fall from a total 11.5 billion barrels of reserves - already the lowest among the supermajors such as BP and Exxon - to 10.5 billion. It would also reduce the number of years before reserves run out. On one measure, which includes all projects in which Shell has a stake, this would fall from 9.2 years to just above eight. On another, which just includes those reserves owned by Shell corporately, it would fall from 7.9 years to less than seven, according to analysts.

Shell, however, believes that the SEC measures are misleading because they do not include non-conventional sources of oil, such as deposits in tar sands and 'gas to liquids' (GTL) projects. Shell is currently buying out minority stakes in Shell Canada, which is focused on tar sands. It claims current tar sands reserves of 4.2 billion barrels and GTL figures of 3 billion, neither of which can be included in its SEC total.

There has been speculation in the markets this week that Shell is close to an acquisition to shore up its reserve and production position. Speculation has focused on BG, along with several other US groups including Murphy and Devon Energy.

Analysts indicate that Shell needs to decide between such an acquisition and a distribution of capital to shareholders via a buy-back or special dividend.

They will have a chance to question chief executive Jeroen van der Veer at this week's fourth-quarter results. Analysts are expecting a year-on-year fall of about 3 per cent in net income thanks to falling oil prices and rising costs, though they still point to a record full-year net profit of $25bn.

© The Observer

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