Shell Cuts Oil & Gas Reserves by 20%
Category: Oil & Gas...
Posted Friday, January 09, 2004 at 08:48 AM [GMT-6]

In the oil and gas business, this story is the equivalent of "Existence of UFOs Confirmed by US Government." It's huge, and I don't remember ever seeing a similar announcement.

It's one thing to write off your investment in a big exploration project where you rolled the dice and came up snake eyes, or to announce that a tricky technological play (remember the Canadian tar sands projects of the late 70s/early 80s?) isn't going to be economic after all, but the announcement by Royal Dutch/Shell seems to indicate a more widespread systemic reserves estimation problem. The company got hammered in the overseas markets immediately following the announcement, and you can look for that to continue. I wouldn't be surprised to see some ripple effects in other international oil and gas stocks, like BP (bad news for my portfolio...again), ChevronTexaco and Exxon (the latter two being big partners in the Gorgon gas project in Australia, the biggest project being written down by Shell).

Energy stocks have made a remarkable recovery over the past six months, but this news is liable to be a major setback to that trend, despite the continuing strength in oil and gas prices. The energy market is characterized by jitteriness, more so, in my opinion, than almost any other segment. People are just hunkered down, waiting for the bad news that they feel is inevitable. Shell's announcement is exactly the sort of thing they need to justify their pessimism.

Update [20:52]: Well, I wasn't too far off on my prediction about the market's reaction to this announcement. Royal Dutch Shell's stock dropped almost 8%, ExxonMobil's dropped 1.5% and ChevronTexaco's dropped just over 1%. Thankfully, I missed the prediction with regard to BP, as it was actually up a penny. What I didn't know at the time of my original post was that neither Chevron nor Exxon had booked any proved reserves in conjunction with the Gorgon Gas Project, and therefore would not have to follow Shell's lead in the reserves writedown. In that respect, my observation about the market's jitters was also affirmed; both companies were apparently unfairly tarred by the brush directed at Shell.