19-04-04 The scandal of over-stated reserves has cost Shell dear, and evidence is accumulating from operations in Oman that suggests the problem was known about for some time. Shell’s public recognition that urgent remedial work was needed to reverse a sharp decline in the oil reserves of its 34 %-owned subsidiary Petroleum Development Oman (PDO) was reflected in the 2003 launch of a $ 2 bn five-year programme of work, which has significantly improved forecasts of the Sultanate’s future economic performance.
But questions remain about the extent to which PDO’s reserves are lower than originally thought, and about Shell’s strategy after the biggest Omani field -- Yibal, with output of 1.6 bn barrels to date -- started to decline, from a peak of 251,592 bpd to around 88,000 bpd.

The scandal over Shell Group’s overall reserves -- lowered in January by 20 % or 3.9 bn barrels -- has cost the jobs of chairman Sir Philip Watts and other senior executives. Enquiries into Shell’s performance in Oman -- where its proven reserves figure was cut by 40 % in December, after the first audit in four years -- highlight the extent of the problem.
In Muscat, the reserves question and oil development strategy are the subject of ongoing talks between the government, Shell and other partners. On 8 April, Shell said its contacts with the Omani government (60 % shareholder in PDO) had been "extremely cordial and constructive".

The government and internal Shell reports have linked the data shortfall to international oil companies’ need to deliver short-term results for their shareholders. Producing countries may have more long-term interests, but such is PDO’s importance to the Omani economy that the government too has pushed for short-term output hikes to help balance the books, as was recognised by Oil and Gas Minister Mohammed Bin Hamad Al-Rumhy, who commented on the Shell website: "We have been too preoccupied with trying to get that extra barrel, rather than formulating a plan for the long term."
According to PDO, its crude output fell to 703,000 bpd in 2003 from 771,000 bpd in 2002. Total oil production from all producers (including condensate) averaged 819,500 bpd last year, down from 897,400 bpd in 2002. Output is officially forecast to decline by a further 5 % in 2004, but overall the situation is improving. Oil Ministry officials have forecast that production will rise by 50,000 bpd in 2005, and PDO is committed to returning to 800,000 bpd production by 2007.

According to a report published on 8 April by The New York Times (NYT), internal documents and technical papers showed the Yibal field’s decline began in 1997, reversing a trend of consistently rising output since 1980; there was a decline of around 12 %/yr in 1997-2002. However, in an upbeat May 2000 report, referring to the use of Shell’s horizontal drilling technology, Watts (then still head of exploration and development) said "major advances in drilling" were enabling the company "to extract more from such mature fields" as Yibal.
The NYT reported that "internal Shell documents suggest that the figure for proven oil reserves in Oman was mistakenly increased in 2000, resulting in a 40 % over-statement." It quoted documents showing that executives were told reserves calculations were too high in 2002 -- two years before Shell downgraded its world-wide estimate.

Concerns were expressed that techniques lauded by Watts increased the amount of water in the extracted Yibal oil to as much as 90 % of total volume. The NYT quoted a December 2003 internal report that said Shell had overstated its proven Omani reserves, primarily because it had failed to trim its figures "in light of recent downturns in oil production rates".
Shell has since come clean about the shortfall, with spokesmen pointing to a 5 February presentation to analysts as an example of its willingness to discuss the issue. With remedial work under way, PDO met its 703,000 bpd target in 2003. Shell has also questioned some of its critics’ assumptions, arguing that "whilst the onsetof production decline was not fully foreseen, the Yibal field’s currently predicted ultimate recovery factor of over 55 % remains world-class."

Regulators in Europe and the USA, and the Justice Department in Washington, are investigating whether Shell’s reserves disclosures complied with securities laws.
Shell is carrying out an internal review, with the results expected soon.