Proven Oil Reserves?
The ongoing shakeup at Royal Dutch/Shell over the recent restatement of their oil reserves is beginning to acquire the whiff of scandal, with coverage shifting from the business section to the front page, and with headlines verging on the sensational: "Oil Giant's Officials Knew of Gaps in Reserves in '02".
Whatever the ultimate outcome of current investigations at Shell, the end result will restore the company to conformance with SEC standards for the booking of oil reserves, which are meant to indicate an oil company's future production potential. Instead of viewing this situation through the lens of Enron/Worldcom/Parmalat paranoia, one could actually see it as an example of the system working, albeit a bit slowly. In any case, it offers an important caveat for international oil investors.
As the energy business becomes increasingly global, and as the number of players from outside the traditional circle of US and European majors--where standards such as the SEC's hold sway--expands, it is useful to remember that not every foreign company's reserve estimation processes would withstand such scrutiny. Before piling into shares of Russian and Chinese oil companies, for example, or partially-privatized entities such as India's ONGC, investors should make sure they truly understand what they are getting for the price.
While it is disconcerting to find that an established firm like Shell overstated reserves, a similar revelation about a company just coming into the world market would be disastrous for anyone who had bought into it. I suspect a lot of hard questions will be asked in the next weeks and months, in places that are less accustomed to that kind of transparency.