WASHINGTON Oct 5, 2006 (Dow Jones Newswires)
Royal Dutch Shell PLC (RDSB.LN) is one of several oil companies preparing a case to convince the U.S. Securities and Exchange Commission to allow it to book reserves from Canadian oil sands.
Although a significant portion of Canada's oil sands are bookable under SEC guidelines, much are not. If granted, SEC approval could open the door to radical reserve revisions for many companies.
Shell Oil Company President John Hofmeister said his company wasn't in active discussions with the SEC over booking of oil sands. But he said "We are preparing our stance" to present later to the SEC. "We are not aware of any moves by us (Shell) or the SEC to change that," said a Shell spokesman in London, declining to comment further.
However, Shell chief executive Jeroen van der Veer said in July the company is in talks with the SEC about whether reserves held through another non-conventional technology should be booked under the regulators' rules. That month, the company approved a final investment decision for its 140,000-barrel-a-day Pearl gas-to-liquids project in Qatar, due to start by the end of the decade.
SEC spokesman John Heine said he wasn't aware of any formal proposals to change the rules before the commission, and couldn't comment on possible discussions between SEC staff and companies.
As Shell has been increasingly moving into the unconventional type of hydrocarbon production - such as oil gleaned from oil shale in the Rocky Mountains or bituminous sands in Canada - a 35% reserve replacement rate based on bookable reserves means the company is keen to have all of its oil resources recognized as booked reserves. It also needs to convince shareholders its oil sands resource estimates are legitimate.
In early 2004, Shell disclosed it had overstated its proven reserves, sparking a dramatic fall in the company's share price and loss of faith in senior management. Many top executives, including the chief executive, were forced to resign in the wake of the scandal. After the first cut, Shell then revised downward its reserve estimate repeatedly throughout the year.
The Anglo-Dutch energy titan isn't the only one seeking to authenticate its oil sand resource estimates, with reserve bookings sanctioned by the SEC a key metric for analysts and investors to assess a company's health and longevity.
Greg Stringham, vice president of the Canadian Association of Petroleum Producers, said although his organization was actively campaigning for the SEC to change its guidelines, "some companies are planning to take their cases individually later this year."
SEC Oil Sand Assessment: Capricious?
Rising oil prices over the past four years have made it economically feasible to process oil from tar-like Canadian oil sand, which requires unconventional extraction and production methods. Output in the key oil sand output province of Alberta is set to jump from around 1 million barrels a day currently to more than 3 million barrels a day by 2015, according to industry estimates.
The SEC treats oil sands in two different ways, depending on the process of extraction. Around 80% of Canada's probable recoverable resources of bitumen are bookable as oil reserves because of the production process. Oil companies use specialized technology that heats the sand up with steam, transforming it into a liquid state, and then extracts it. The other method is mining, literally shoveling and trucking the resource to production plants. These bitumen resources aren't allowed to be booked as oil reserves, but rather as mining resources.
That makes it difficult for analysts, investors and accountants to assess the actual value of a company's assets. As a key metric, reserve bookings can affect the market's perception of the company's value.
CAPP's Stringham says his group's campaign for the SEC to change its guidelines is progressing slowly. He last met with SEC officials in June, "and they listened intently." "But they were not able to comment on which way they're planning on going," he said. Stringham said he expects the two-year education campaign may pay off, however, when the companies present their arguments in January.
"Right now many companies are planning to re-book their reserves," Stringham said, with bitumen prices several times higher than they were at the end of 2005 and expected to remain relatively strong into winter.
Massive Tracts Of Land
Directly, Royal Dutch Shell only owns 219,000 acres of land in the oil sands province after paying C$465 million to the government in a March auction. But its 78%-owned subsidiary Shell Canada Ltd. (SHC.T) owns the Athabasca and Peace River projects and recently purchased BlackRock Ventures INC (BVI.T).
According to Shell Canada's2005 report, although the company had around 167 million barrels classifiable as oil reserves in early 2004, another quirk of SEC guidelines meant that it was only able to book around 28 million barrels for the two years.
In December 2004, the quirk - valuing reserves based on prices at the end of December, when bitumen prices are typically at their lowest - meant many Canadian oil sand companies had to take hundreds of millions of barrels of bookable reserves off their balance sheets. Since then, companies have slowly been re-booking the reserves.
Shell Canada's minable proved and probable reserves - not classifiable as oil reserves under SEC regulations - totaled around 865 million. That's before it bought BlackRock Ventures and doesn't include a possible major expansion at its Athabasca project.
Furthermore, says Shell Canada spokeswoman Janet Annesley, Shell has "vast amounts of land holdings" that don't have development plans, which are required before classifying as reserves.
Annesley said if there are any changes to Shell's SEC reserves booking - including from the BlackRock purchase and an Athabasca expansion plan, which would increase daily production by around 100,000 barrels a day the company would alter it at the end of the year.
Copyright (c) 2006 Dow Jones & Company, Inc.
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