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Promise of black gold reserves tarnished
By Alex Bernson
The New York Times
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 15 percent, more than 1 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 about 14 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 whether 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 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, to near $40 a barrel. Big companies produce only a fraction of the world's oil, which is mostly government owned, 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 on 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 on line around the globe.
ChevronTexaco said its production has 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.
Earlier this year, Royal Dutch/Shell, the world's third-largest oil company, admitted overstating 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 Philip Watts, its chairman.
Some analysts say the debacle at Shell proves that companies sometimes bend the rules to satisfy Wall Street's intense hunger for new reserves.
During the 1990s, many public companies used aggressive accounting gimmicks -- some legal, some not -- to satisfy investors' demands that they report higher earnings. Oil companies face similar pressures to build reserves, and some companies may have -- intentionally or not -- 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 reserves estimates are accurate, he said.
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 past decade, the industry's four giants, ExxonMobil, BP Amoco, 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, 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.