The first, reserve replacement ratio (RRR), ought to be simplicity itself, and all oil companies should follow the same set of rules, if only so that investors get a clear picture of where everyone stands when it comes to future production potential.
In fact, what we currently have is a hodge-podge of rules which make it virtually impossible to know who’s got how much, and for how many years output can be sustained.
The event which triggered Slugcatcher’s bout of confusion was the latest RRR of Royal Dutch/Shell.
According to its report to the market late last week, Shell achieved an RRR in 2004 of (a) 49%, or (b) 19%.
Just to further cloud the issue these results were within previous estimates of 45%-to-55%, and/or 15%-to-25% -- and represented the fifth re-estimate of Shell’s RRR in the past year.
Like most confusing issues in the oil industry, there is an explanation. The 49% is said to exclude the effects of divestments (asset sales) and year-end pricing, while the 19% includes those factors.
Clear, eh?
Yes, you’re right. It’s damnably unclear, and a perfect example of how Benjamin Disraeli got it so terribly correct many years ago with his famous saying about “lies, damned lies, and statistics”.
To be fair to Shell, and let’s face it Shell needs all the friends it can get, the confusion over RRR is not new, and Shell is not alone. The problem all comes down to an acceptable definition, one that even the hard-nosed securities regulators in the U.S. will accept.
But, to be unfair to Shell, whether you use the 49% or the 19%, and whether you can accept that this latest attempt at reporting an accurate RRR after four previous attempts over a 12-month period, there is a screaming need for consistency, certainty and stability.
There is also, to state the bleeding obvious, a desperate need for Shell to crank up its exploration efforts because both 19% and 49% represent that same thing – a serious decline which starts with the fact that one of the world’s biggest oil companies has just 9 years of reserves left at current rates of production.
If the RRR issue is not confusing, then the second mystery of the oil patch certainly is; the question of calculating bonus payments for senior staff.
In the case of Shell, the solution seems to be along the lines of: did the chaps have a tough time, and did they have to work hard explaining what went wrong.
That is one of the explanations for members of the Shell executive board getting a 90% bonus in 2004.
Another explanation is that no-one got a bonus in 2003, so it was time to make up the shortfall.
Slugcatcher may be old-fashioned but he had always imagined that a bonus payment was based on success. In Shell’s case it can be argued that profit is up, thanks almost entirely to the high world oil price – but that RRR is down, well down.
The real question about RRR and bonus payments is that if the oil industry can’t arrive at an acceptable explanation don’t be surprised if governments impose one.
