From data to financials—a small step indeed!

Oil IT Journal editor Neil McNaughton reflects on Shell’s embarrassing restatement of reserves. Generally, reserve computation has acquired a nerdy, academic air—with probabilistic analysis, portfolio management and whatever the latest economic fad happens to be. But recent developments show that all this is far from theory. Reserve numbers—in all their multiple manifestations depend on good data and underpin financial reporting and investor confidence.

Working with data can be a thankless task. If you have your nose to the grindstone and are trying to persuade your co-workers that consistent naming conventions really matter. Or that by tagging information with metadata on units of measure or projection systems can help avoid costly disasters like wells drilled in the wrong place. But readers of Oil IT Journal and its predecessor Petroleum Data Manager know all this. Surely this is not going to be another ‘data quality’ editorial...


Well, in a way that is exactly what it is going to be. Recent events have pretty well forced me to write on what is admittedly a delicate matter. I will try to be diplomatic. As any casual reader of the financial pages will have noticed, Shell was forced into an embarrassing re-evaluation of its reserves last month, revealing that it had overbooked reserves by a whopping 20%. This wiped some $15 billion off its market capitalization—a loss to shareholders someplace between a Parmalat and an Enron! How could this happen?

El Paso

I have to come clean and admit that I have no idea how it happed to Shell—nor to El Paso—which has just reduced its proved reserves base by 41% and taken a $1 billion ‘non-cash’ charge. A partial explanation was offered in an Financial Times (FT) article covering Shell’s discussions with the Nigerian government about its reserves numbers.


On February 2nd, the FT, citing Nigerian government officials, revealed that Nigeria accounted for a third of Shell’s ‘surprise enforced cut’ in proved reserves. Actually Shell’s reserves position in Nigeria, and indeed that of other operators, was already the subject of a tax dispute before the latest reserves revision. In particular, Nigerian presidential advisor on petroleum and energy matters, Edmund Daukoru was quoted as saying, ‘The basic deciding factor in the dispute with the companies was the quality of data used to justify the new reserves’.

Tax breaks

To hear the words ‘data quality’ in connection with a tax dispute and a billion dollar reserves write-down stopped me in my tracks. OK, we are in no position to judge the merits of the case. But the connection from data—i.e. reserve calculations—to the corporate bottom line could hardly be made more starkly. In the Nigerian dispute—affecting eight oil multinationals and amounting to some $580 million—the argument revolves around tax breaks designed to encourage exploration—by rewarding successful explorers. Again according to the FT, companies get tax breaks (and bottom line benefits) if their annual reserves increase more quickly than their production.


In other contexts (unrelated to the Shell debacle), reserves numbers are used to determine amortization of capital expenditure. Early in the field’s life, amortization rates, and hence taxes, are calculated from the initial estimates of reserves. Again, the reserve numbers go straight to the bottom line.


For an in-depth analysis of reserve restatement issues I would recommend a paper by IHS Energy’s Kenneth Chew*. Chew explains the intricacies of reserves reporting with the US Financial Accounting Standards Board (FASB) standards, used by the Stock Exchange Commission (SEC). According to Chew, new technology has complicated matters for the SEC—and hence for investors. Advances in seismic, reservoir simulation etc., make for ‘far greater precision in establishing in-place and recoverable hydrocarbon volumes than was possible a quarter of a century ago’ (when the FASB regulations were established).

Lost information

One issue stems from the inherent conservatism of the SEC’s reporting rules—which exclude ‘probable’ reserves. Chew argues that this is a ‘serious loss of valuable information’. Chew goes on to explain how ExxonMobil gets around this difficulty by reporting its resource base and annual resource base additions in a Financial and Operating Review. Year end 2002, ExxonMobil’s SEC proved reserves amounted to only 29% of the company’s ‘discovered resource base’.

Portfolio management?

All these considerations are at once close to, and a million miles away from a great hobby horse of the upstream software business—portfolio management. How many times have we heard the economists explain that things have to change in the boardroom. That the old way of ‘one reserve’ number should be abandoned in favor of a statistical approach? Well it turns out that those folks in the boardroom already have to juggle with a lot more than one reserve number! There’s one for the local government—for the local tax situation, another for the SEC for the reporting and third for the annual report for consummation by the investment community.

It’s the data stupid!

The point of all this? Data managers, application developers, geoscientists and engineers are not, as it sometimes feels, engaged in some kind of back-room twiddling. These numbers generate, not just the ‘reserves’, but a goodly chunk of the corporate bottom line. Quality data, quality software and rigorous procedures are at the forefront of corporate integrity.

* Reserves Reporting. What’s it all about? K. Chew, IHS Energy.

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