http://query.nytimes.com/gst/abstract.html?res=F50E16F939540C718DDDAF0894DC404482
BUSINESS/FINANCIAL DESK | June 12, 2004, Saturday
An Oil Enigma: Production Falls Even as Reserves Rise
By ALEX BERENSON (NYT) 1991 words
Late Edition - Final , Section A , Page 1 , Column 1
For six consecutive years, ChevronTexaco has had good news for anyone
worried that the world is running out of oil: the company has found more
oil and natural gas than it has produced. Over that time, ChevronTexaco's
proven oil and gas reserves have risen 14 percent, more than one billion
barrels.
But near the bottom of ChevronTexaco's financial filings is a much less
promising statistic. For each of those years, ChevronTexaco's wells have
produced less oil and gas than the year before. Even as reserves have
risen, the company's annual output has fallen by almost 15 percent, and
the declines have continued recently despite a company promise to increase
production in 2002.
ChevronTexaco is not the only big oil company whose production is falling
despite rising reserves, though it has the largest gap. As consumers,
economists and governments around the world wonder if oil supplies can
keep pace with rising demand, production trends at the industry's publicly
traded companies are not promising.
Collectively, they paint a picture of an industry that has depleted nearly
all of the world's easily exploited reserves outside the Middle East and
that is now struggling to sustain production, much less increase it. Fears
about supply shortfalls and rising demand have already caused prices to
climb about 20 percent this year, hovering around $40 a barrel. The four
biggest companies own only about 4 percent of the world's reserves, which
are mostly government-held, but they offer a unique glimpse of supply
trends because they must disclose their reserves and production each year.
Historically, proven reserves and output have moved in tandem. Industry
experts disagree why the relationship has broken down. Although the
reserves are only estimates, federal rules require companies to calculate
them conservatively.
Some analysts and the companies themselves take a relatively benign view
of the production declines, promising that output will soon rise again as
big new projects come online around the globe.
ChevronTexaco said its production had declined in part because of asset
sales and production agreements that allocate it less oil when prices are
high, as they are now, than when prices are low, as they were in 1998. The
company says it expects production to stay flat through 2005, then begin
rising in 2006 as output increases from fields in Chad, Kazakhstan,
Venezuela and Angola.
But ChevronTexaco has promised to reverse its production declines before.
In 2002 the company said that it expected its output to rise more than 20
percent by 2006, a forecast it has now dropped.
Royal Dutch/Shell, the world's third-largest oil company, admitted this
year that it overstated its oil and gas reserves by 22 percent, the
equivalent of 4.5 billion barrels of oil. Regulators and prosecutors in
Europe and the United States are investigating Shell, which in March
forced out Sir Philip Watts, its chairman.
Some analysts say that the debacle at Shell proves that companies
sometimes bend the rules to satisfy Wall Street's intense hunger for new
reserves.
In the 1990's, many public companies used aggressive accounting gimmicks .
some legal, some not . to satisfy investors' demands that they report
higher earnings. Oil companies face similar pressures to build reserves.
And intentionally or not, some companies may have booked reserves that are
not technically or economically viable, said Matt Simmons, a Houston
investment banker who has warned of a potential supply crisis. Outsiders
have essentially no way to know whether estimates of reserves are
accurate, he said.
"We're going to have another Shell," Mr. Simmons said. "They're not the
only company that got optimistic on proved reserves." Neither Mr. Simmons
nor anyone else is asserting that ChevronTexaco did anything illegal.
Once a year, companies announce their "reserve replacement ratio," telling
investors whether they have found enough new oil and gas during the year
to make up for their production.
Energy investors scrutinize the reserve replacement ratio more closely
than any other measure of corporate performance, said Fadel Gheit, senior
energy analyst with Oppenheimer & Company. Every company aims to replace
at least 100 percent of its production every year. And for the last
decade, the industry's four giants, Exxon Mobil, BP, Shell and
ChevronTexaco, have met that goal with remarkable consistency, at least
until Shell's admission in January.
But outsiders cannot tell whether companies are properly estimating their
reserves, Mr. Gheit said. The calculations are extremely complicated, and
companies do not disclose the raw production and seismic data that would
enable an outside analyst to check their estimates. Nor are the reserves
subject to third-party audit.
"Reserves are very important but are extremely difficult to verify," Mr.
Gheit said.
Oddly, Wall Street pays less attention to actual production, which is
generally relegated to a few lines in quarterly and annual reports. But
output data deserves more attention, because reserves can be manipulated
more easily than production, said John H. Lichtblau, chief executive of
the Petroleum Industry Research Foundation in New York.
"Reserves are an estimate of what's in the ground; production is what you
see coming out of the wells," Mr. Lichtblau said. "You don't have to take
their production on faith."
The fall in production at the big oil companies does not portend an
immediate crisis in the industry. The four so-called supermajors produce
only a small fraction of the world's oil; together, they extracted 3.2
billion barrels last year, about 10 percent of production worldwide. (Some
analysts classify Total, a French company slightly smaller than
ChevronTexaco, as a fifth supermajor.)
The supermajors control an even smaller share of global reserves.
Together, the four companies have about 40 billion barrels of oil, or 4
percent of the world's proven reserves. They also have about 150 trillion
cubic feet of natural gas, enough to produce the energy of 25 billion
barrels of oil.
No one really knows how much oil remains worldwide, or whether existing
fields can be quickly squeezed should more oil suddenly be needed.
Estimates range from just under one trillion barrels remaining worldwide,
about 34 years at current production levels, to more than two trillion.
Saudi Arabia alone says it has proven reserves of 260 billion barrels of
oil.
But these estimates are far from exact. For most countries, the details of
reserves and output are closely guarded secrets. During the 1980's, the
members of the Organization of the Petroleum Exporting Countries sharply
raised their reserve estimates, because OPEC's output quotas were based in
part on national reserves.
"Countries want a higher allocation, so they tweak their numbers," Mr.
Gheit said. "Everybody lies about the reserve, so you want to make sure
that you lie even more than the guy next to you."
On the other hand, the Securities and Exchange Commission requires
companies like ChevronTexaco to disclose detailed production data and
reserve estimates to their investors each year.
The S.E.C. rules are deliberately conservative and intended to prevent
companies from overstating their reserves. The mere existence of oil and
gas does not make a proven reserve; companies are supposed to report
reserves as proven only if they can be recovered with current technology
and are economically viable.
Reserves classified as proven do not have to be producing at the time. But
companies must usually have made a financial commitment to bring them into
production before classifying them as proven.
New discoveries, lease extensions that give a company more time to exploit
a field, or a more optimistic view of a field's potential are all cause to
increase reserves. On the other hand, companies must cut reserves if they
think that their initial estimates have been too high.
"The studies that I have seen show there have been upward and downward
revisions, but over time, the revisions have been modestly upward," said
Gene Gillespie, senior energy analyst at Howard Weil. "You're measuring
something that's a couple miles under the surface of the earth that you
can't see. It amazes me that over time they come as close as they do."
But in the long run, actual production is the most important proof that
reserves exist. And the relationship between reserves and production is
weakening.
At Exxon Mobil, oil reserves rose from 9.6 billion barrels at the
beginning of 1994 to 12.1 billion barrels at the start of this year, a 26
percent increase. But Exxon Mobil's production fell 2 percent, from 909
million barrels in 1994 to 893 million last year.
At ChevronTexaco, oil reserves jumped from 6.9 billion barrels at the
beginning of 1994 to 7.7 billion barrels in January 1998 to 8.6 billion
barrels at the start of this year. But after surging from 644 million
barrels in 1994 to 757 million in 1998, production plunged to 641 million
barrels last year.
At BP, the data is considerably more confusing, because the company has
had so many acquisitions and sales over the last several years. Still,
BP's production at its wholly owned fields has plunged to 562 million last
year from 672 million barrels in 1998, while its reserves have risen to
7.5 billion from 6.5 billion over that span.
(BP, ChevronTexaco and Exxon Mobil are all the products of mergers within
the last decade; the reserves and production data reflect what the
companies would have done if they had existed in their current form for
the entire period.)
Shell has actually increased its production slightly since 1994, despite
the embarrassment of its announcement in January that it had improperly
classified billions of barrels of reserves as proven instead of probable
or possible. Shell's admission shows just how muddied reserve data can be,
analysts say; the reserves it reclassified are real, but they will not be
developed for years because of technical and political problems, so they
should not be called proven. In coming years, if those problems can be
solved, Shell may be able to once again classify them as proven, said
Jennifer Rowland, senior oil analyst at J. P. Morgan.
"It's not like all of a sudden those assets are gone," Ms. Rowland said.
Mr. Simmons, the Houston investment banker, said that the output declines
suggested that the companies needed to disclose more information about the
performance of individual fields so that outside analysts could judge the
companies' reserves estimates.
"What we have now is meaningless data," Mr. Simmons said. Big oil
companies once prided themselves on conservative reserve estimates. But
today, to justify multibillion-dollar investments in politically or
technologically risky fields, companies have become much more aggressive,
he said.
Gerald Kepes, managing director for PFC Energy, a consulting firm based in
Washington and Paris, said that the slowdown in production underlined the
transition period that big publicly traded energy companies face.
"The areas that have been long producing are really starting to become
very mature," Mr. Kepes said. "For the integrated oil companies, more of
the remaining reserves and reserve potential are in areas where the risks
are higher."
Combined with a survey from the International Energy Agency that shows
rising demand, the drop in production at the supermajors offers more
evidence that energy prices may stay high for the foreseeable future, said
Steven Pfeifer, senior oil analyst at Merrill Lynch.
"The data is starting to say that underlying all this, the supply-demand
balance is tighter than we thought," Mr. Pfeifer said. "The maturing
geological base is starting to rear its ugly head." (1 image)