Biofuels and Oil Reserves
Two articles from this week's Economist caught my attention. The first discusses the application of biotech to fuels and related products, such as plastics. Although I've been critical of the current US ethanol policy, there is tremendous potential in tapping the energy content of agricultural waste. New enzymes and "bio-refineries" are making this possible, but as the article points out, the economics still hinge on the price of oil.
The second article poses some useful questions for the current debate on how oil companies book their oil and gas reserves. This measure serves two important purposes, one of which is important primarily to a company's investors, the other of broader interest.
First, reserves are a measure of the firm's potential for future value creation through the exploitation of assets it already controls, as well as providing insights into the relative competitive efficiency of its operations for finding and producing oil and gas. Both are of critical importance to stock prices.
The second purpose of the reserves data is more basic, as a snapshot of the company's ability to sustain its current production volumes of oil and gas. This has implications not only for shareholders, but for those concerned with the ability of the industry to cope with growing energy demand, shifting geopolitics, and industry restructuring. For instance, in the aftermath of the industry consolidation of the 1990s and early '00s, are the collective reserves of the merged companies greater or lesser than the sum of the parts that went into them? If claims of synergies are to be taken as more than ephemeral cost savings, they should manifest in an increased capability to convert probable reserves to proved reserves and reserves to dollars.
The standards that support a uniform view across all companies in the industry need to take both of these perspectives into account, as well as the issues of changing technology and markets identified by the Economist. I doubt this concern will fade as Shell gets its house in order.
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