Losing the Shell Game

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The world's second-largest oil company Royal Dutch/Shell -- represented by two trading stocks, Royal Dutch (NYSE: RD) and Shell Transport (NYSE: SC) -- cut its reported proven reserves of crude and natural gas by close to 3.9 billion barrels, correcting a reporting error that began as early as 1996. That means that 20% of previously proven reserves may not be commercially viable. This is not a definition of the word "proven" with which I am familiar.

The shell game (yep, it's a pun) of now-you-see-them now-you-don't "proven" reserves may not stop at Shell's doorstep. The only project named in today's announcement is the $8 billion Australian Gorgon natural gas venture. Shell owns 28.6% of this project, while ChevronTexaco (NYSE: CVX) owns 57.1% and is its operator. The third partner, ExxonMobil (NYSE: XOM) owns 14.3%. It is unclear if these giants will restate their reserves for this project too, but the market is certain to heavily scrutinize their claims.

Shell-shocked (yeah, sorry) oil exploration and production stock investors have a lot to assess, especially owners of Shell. The company's accounting was widely thought to have been quite conservative. Further, Shell, along with BP (NYSE: BP), was supposed to be constructively using oil money to build a beachhead in the alternative energy world of hydrogen and solar cells. Oil companies are at least partially valued based upon their proven commercially viable reserves, so this disclosure is far from esoteric. A 20% drop in proven reserves means that Shell is likely to need substantially higher capital outlays for exploration to yield the same lifetime amount of oil. After all, you can't pump it if you don't have it.

Most of the world's major oil companies are struggling to replace depleted oil reserves. Many of their fields are maturing and passing their peak production phase. Just last year, Shell stated that they would build reserves by 3% a year. It all sounds like Conspiracy Theory meets Three Card Monte -- and shareholders lose.

W.D. Crotty owns stock in ExxonMobil and ChevronTexaco -- and is anxious to learn what the decrease in Shell reserves really means. You can e-mail W.D. at wdcrotty@fool.com ,or join him on The Motley Fool's Oil and Gas discussion board. For a 30-day free trial to the discussion boards, click here.