June 12, 2004
An Oil Enigma: Production Falls Even as Reserves Rise
By ALEX BERENSON
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 â?? some legal, some not â?? 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."
Copyright 2004 The New York Times Company
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