Oil Reserves vs. Strategy
The Wall St. Journal has done an excellent job of covering the reserves problems at Shell without resorting to sensationalism. On Friday's front page they stepped above the questions of who knew what--and when--to raise a more profound question about the company's strategy.

The overstatement of Shell's reserves as far back as the mid-1990s distorted key indicators such as reserve replacement rates--their success at finding new oil reserves to replace what was pumped in a given year--and finding and development costs--how much they paid for each new barrel in the ground. As a result of these distortions, was Shell lulled into believing that it could deliver the results investors demanded via organic growth alone, when their competitors had concluded they must replace reserves through significant mergers and acquisitions?

This is a critical question, because by now the best opportunities of this kind have been snapped up by others. Amoco, Texaco and Mobil are gone, and only Marathon, ENI, and ConocoPhillips--itself the result of several mergers--remain in this size category. In order to be material to a company of Shell's size, growing reserves through M&A would now likely require buying multiple smaller firms, against a background of significantly higher oil prices than obtained when the transactions creating ExxonMobil, BP-Amoco-Arco (pronounced "BP"), and ChevronTexaco took place.

It may be that Shell's existing asset portfolio can deliver the desired growth, and that most of the reserves recently un-booked can be restored with time and prudent investment. If not, the shareholders of Royal Dutch and Shell Trading & Transport will have grounds for second-guessing management's decision to go it alone.

In response to my earlier comments on this situation, one colleague responded as follows:
"Reassessment is a painful and long process. They could've said that they were not in compliance when they first knew, but they probably could not have estimated the amount of the change without a rigorous survey of all the reserves.

Texaco had a similar problem in the 1990’s as management found out it may not be anywhere near its production growth targets. Even the analysts, in that case, knew that the forecasts were off. But it was only after a rigorous survey that took the better part of a year that a better picture emerged."

Finally, on the non-energy front, I am trying to digest the implications of the Socialist's come-from-behind win in yesterday's election in Spain. I don't understand all the complexities of Spanish politics, but it appears on the surface that the terrorists succeeded in scaring voters into a more isolationist view. Should we now expect a similarly aimed attack here in early November?