NationStates Jolt Archive

Replacing reserves an aim not a forecast, says Shell

Terry Macalister
Friday May 5, 2006
The Guardian

Shell's attempt to rebuild its reputation following the fiasco two years ago when it mis-stated its reserves suffered a setback yesterday when the oil group admitted it could miss its target of finding enough new oil and gas to replace all of its resources each year.

Jeroen van der Veer, the chief executive, said Shell was no longer looking at a 100% replacement rate as a forecast but merely as a desired "outcome". At the same time he reported profits of £1.5m an hour over the first quarter of the year, due to soaring oil and petrol prices.

Shell insisted it was not to blame for forecourt prices of nearly £1 a litre and said $100bn of "speculative money" was sending prices soaring at a time when there were no actual shortages.

Soaring rig and other equipment costs were also forcing Shell to postpone a range of new projects. It was the rise in costs as well as a move to less conventional developments - such as oil sands in Canada - that had forced it to reassess its reserves targets. Oil sands and gas-to-liquids projects may not qualify for the proved reserves replacement figures under guidelines from the securities and exchange commission (SEC), the US regulator.

Shell had promised to replace 100% of its reserves under the SEC's rules, following the debacle in 2004 when the regulator forced it to mark down its stated oil and gas reserves by 25%.

"We now see SEC reserves replacement across 2004-2008 as an outcome of our investment choices, rather than a forecast. Our goal is to invest in the right projects, at the right time, within our framework of capital discipline," Mr van der Veer said. "We still have a fair prospect of achieving that [100%] target. However, we do not want this target to drive the wrong business decisions ... The industry is seeing a very tight market for materials and contract rates."

Despite a warning that some high-cost projects such as an extension of the Mars field in the Gulf of Mexico could be put on the back burner, Shell was planning to spend $19bn this year and $21bn next year on new exploration and production. The additional spending would help open up 20bn barrels of oil equivalent - including gas - by the end of the decade. Only the smallest percentage of this spending was likely to go on renewables projects.

The strategy update came alongside strong financial results. Profits were up 12% to $6.1bn, despite a 3% fall in production in the first three months of the year. Total oil and gas output fell by 3% to 3.7m barrels a day due to civil unrest in Nigeria and the hurricanes in the Gulf of Mexico.

Mr van der Veer could not say when Nigerian production would be back on stream. Shell was also not optimistic about the potential in Iraq. The company had completed "various studies" but said it needed a proper legal framework outlining the role of foreign firms.

Despite oil prices of $70 a barrel and petrol at nearly £1 a litre, Shell said its UK retail profits were "disappointing". Mr van der Veer refused to say what direction commodity prices might go in future, saying they were too hard to predict.

http://business.guardian.co.uk/story/0,,1767827,00.html

OK, so even with the help of the reserve growth con and refusal to backdate oil to discovery year, they can't replace what they extract. And let's have a look at the second bolded area in greater detail...

They are hoping to discover 20bn barrels of "oil equivalent" in the four years to 2010. For a start, as the fuzzy terminology implies, that's going to be mostly gas, not oil. Secondly, we are using 30bn barrels per year already, and finding 6bn barrels globally. So one of the largest oil companies in the world is hoping to discover, in four years, a few percent of what we use in a single year, and it won't cover what it's pumping.

I don't see why it has taken them a near-Enron financial regulatory incident to own up to what is in the public domain already, that world oil discovery peaked in 1965, that the consumption/discovery balance went into deficit in 1981 and continues to grow, and that the peak plateau is right now.

It is gratifying to see the debate finally move from the deeply patronising question of whether it is happening or not, to the more useful question of how unpleasant it will be. It is too late to do much about it really, but not too late to warn against the reassuring predictions of those who initially denied the whole reality.

On the bright side my stocks ae doing great. :)

I know I've been saying this a lot lately, but I'm glad I have my bike.

I know I've been saying this a lot lately, but I'm glad I have my bike.

As am I. It's a kick-ass 21-speed aluminum model, too. And it's blue!

On the bright side my stocks ae doing great. :)
Well that's the thing, there is no reason why the energy companies cannot maintain their current profitability for decades, and they probably will. It does not matter if the physical supply of an item halves and the operating expenses increase five-fold, if demand remains constant and the market price increases ten-fold. It means financial ruin for many, but not for the guys taking ever-increasing amounts of money from the dwindling number of people who can afford the product.

Well that's the thing, there is no reason why the energy companies cannot maintain their current profitability for decades, and they probably will. It does not matter if the physical supply of an item halves and the operating expenses increase five-fold, if demand remains constant and the market price increases ten-fold. It means financial ruin for many, but not for the guys taking ever-increasing amounts of money from the dwindling number of people who can afford the product.
Yep. Now it's just about what you can do for yourself. Not to sound completely narcisitic, but at this point I need to worry about me. I'll throw my money and my time in with who I think the winners in the oil end game will be. The world has already made the choice of blissful ignorance. Nothing I can do about that.

I know I've been saying this a lot lately, but I'm glad I have my bike.
I've been trying to get a new bike for ages. Still haven't managed it.

You guys are going to have more problems than just getting around. Having said that, getting around may be the only problem you'll have that you, personaly, can do anything about.

You guys are going to have more problems than just getting around. Having said that, getting around may be the only problem you'll have that you, personaly, can do anything about.
We're well aware of that, PD.

That is mainly because Shell is very poorly managed, all other big oil companies have increased their known reserves, Total-Fina ,for example, increased known reserves over 20% in the last 15 years. The called peak (point of as much extracted as still to extract), will be reached in 2008-2011, in conservative estimates (note that consumption is rising and is likely to continue to rise), this not incuding currently unexploited forms of oil, which are more than double what we have pumped to date. Oil is going to be around as a major energy source for another 75 years at least, as it gets more scarce under current exploitable forms, other forms of oil will become economically viable, in sands, and eventually in the oil soaked rocks around current deposits (through deep mining, mind you).

That is mainly because Shell is very poorly managed, all other big oil companies have increased their known reserves, Total-Fina ,for example, increased known reserves over 20% in the last 15 years.
True about Shell's management, but check how the other companies have increased their reserves. Most are increased not through finding new oil, but by buying smaller oil companies. Chevron bought Unocal, for example, and now can claim a greater than 100% reserve replacement. It's important to note, however, that this is not because they found new oil deposits.

The called peak (point of as much extracted as still to extract), will be reached in 2008-2011, in conservative estimates (note that consumption is rising and is likely to continue to rise), this not incuding currently unexploited forms of oil, which are more than double what we have pumped to date. Oil is going to be around as a major energy source for another 75 years at least, as it gets more scarce under current exploitable forms, other forms of oil will become economically viable, in sands, and eventually in the oil soaked rocks around current deposits (through deep mining, mind you).
But rate of extraction matters. The tar sands of Alberta expect to be in full swing by 2020 pumping about 3 million barrels/day which is roughly equivalent to the amount of production we will lose from Mexico by 2010.

A lot of people don't seem to get this. The total amount of hydrocarbons in the ground matters, but it's only half the story. What if I were to give you a bank acount worth $2 billion? Great, ha? Now what if I were to tell you that you can have the bank account but your spending limit is $10/day? Even if there were 400 trillion barrels of oil left in the ground if we can't get it out fast enough because of basic, physical limitations it wouldn't matter. The world is not running out of fossil fuels. It is running out of oil that flows like water and is under pressure so it shoots out of the ground. We've got plenty of stuff that flows like molasses and has to be strip mined, but whether we will be able to maintain the lifestyle we have become accustomed to in the West on tar-oil is a big question.

Seems to me a well placed story. RDS hoping for a $100 a barrel soon?:eek: Anyway those farmers in the midwest of America and Canada will make out like bandits if we get the corn fuel going. I guess no more farm support subsidy's from the government.

True about Shell's management, but check how the other companies have increased their reserves. Most are increased not through finding new oil, but by buying smaller oil companies. Chevron bought Unocal, for example, and now can claim a greater than 100% reserve replacement. It's important to note, however, that this is not because they found new oil deposits.


But rate of extraction matters. The tar sands of Alberta expect to be in full swing by 2020 pumping about 3 million barrels/day which is roughly equivalent to the amount of production we will lose from Mexico by 2010.

A lot of people don't seem to get this. The total amount of hydrocarbons in the ground matters, but it's only half the story. What if I were to give you a bank acount worth $2 billion? Great, ha? Now what if I were to tell you that you can have the bank account but your spending limit is $10/day? Even if there were 400 trillion barrels of oil left in the ground if we can't get it out fast enough because of basic, physical limitations it wouldn't matter. The world is not running out of fossil fuels. It is running out of oil that flows like water and is under pressure so it shoots out of the ground. We've got plenty of stuff that flows like molasses and has to be strip mined, but whether we will be able to maintain the lifestyle we have become accustomed to in the West on tar-oil is a big question.


I agree that our lifestyle will change, mainly american lifestyle, which is somewhat different to an european lifestyle (less car travel involved, less electricity and water wasted, more recycling, etc.) but oil is still the most efficient fuel for transportation if not for producing electricity, will cargo ships go nuclear? , cars go to hydrogen? Airplanes?!?!

If there are no radical changes in the energy business in the next 70 years, it will be bye-bye globalisation. I'm not sure it's a bad thing though...

I know I've been saying this a lot lately, but I'm glad I have my bike.

So am I:D

I know I've been saying this a lot lately, but I'm glad I have my bike.

Yeah, but what do you think lubricates the gears in the machine that made the bicycle spokes? Yeah, that's right! Oil! You might think you're so smart for having a bicycle, but you won't be laughing so hard when skyrocketing oil costs make the price of bicycle spokes go up by 0.025 of a percent, will you now? Ha ha ha, Mister smarty-pants!