Anton Barendregt, the oil and natural gas auditor

Dan Ferris - Wed 19 May, 2004

...Anton Barendregt could have blown the whistle on his bosses at Royal Dutch/Shell...but he didn't...

  
 
Anton Barendregt could have blown the whistle on his bosses at Royal Dutch/Shell...but he didn't.

"It would have cost me my job, but I should have," says Anton today.

Anton is an employee of Royal Dutch/Shell. His job is to audit Shell’s oil and natural gas reserve estimates. He’s supposed to make sure they’re not saying they have more oil and gas reserves than they really do.

The fact that Anton didn’t question reserve estimates because he feared for his job is not remarkable...it’s typical to see blame cast where it doesn’t belong. But I was really surprised when I found out that Anton works part-time...and that he works alone.

That’s right. A lone, part-time employee was charged with the responsibility of auditing the entire reserve base of the second-largest company in the largest industry on the planet.

A total of three write-downs since January 9, 2004 have resulted in the instant consumption, sans revenue, of 4.35 billion barrels of oil, reducing Shell’s total reserves by 22%.

Shell’s confession opened the floodgates. On January 27, Forest Oil (FST) publicly lit a match to 49 million barrels of oil previously attributed to its Redoubt Shoal field in Alaska’s Cook Inlet. The company finished its destruction of its phantom oil reserves with a revelation on February 12, which made an additional 23.8 million barrels vaporise. Nexen (NXY) chimed in on February 3, reducing its reserves by 67 million barrels of oil. The day after Nexen’s admission, Husky Energy (HSE.T) eliminated 275 billion cubic feet of natural gas reserves. El Paso Energy (EP) recorded a 1.8 trillion cubic foot negative revision to its gas reserves, about a 40% reduction, according to a February 1 SEC filing. Eighteen days later, the scandal-ridden Westar Energy lowered its Powder River Basin natural gas reserves by 123 billion cubic feet.

Someone should have told Anton Barendregt (and his counterparts at Forest Oil, Nexen, Husky, El Paso and Westar) about the events that took place in Texas and Canada in the mid-1990s...

Back in the mid-1990s, the Railroad Commission of Texas put all the gas fields in Texas on ‘absolute open flow,’ or AOF. That means that they were allowed to produce as much gas as they could sell, and weren’t subject to the monthly production limits. Prior to the announcement, they’d been on ‘full allowable,’ which meant that companies would have to lock in production for the following month - to work off the ‘overage’ - if the production limit had been exceeded in the current month.

Apart from the insanity in Texas maintaining its own microcosmic version of OPEC - the Railroad Commission - the real rub here is that Texas gas producers had been using their allegedly abundant gas and oil reserves to secure numerous revolving credit facilities.

Imagine the chagrin of investment bankers when they realised that putting the entire Texas gas industry on absolute open flow did not increase the gas output one iota. The reserves were “phantom” reserves, just like those of Royal Dutch/Shell. The non-existent reserves couldn’t be said to be worthless, however...they had proven themselves to be excellent tools for acquiring cheap loans. It’s just that you can’t fill gas pipes with them.

Equally curious was the incident involving the Alliance Pipeline. The pipeline was completed about 10 years ago, solving a gas transportation bottleneck in the Canadian province of Alberta. Before and during the pipeline’s construction, Alberta gas producers had been complaining that they would’ve produced much more gas if it hadn’t been for a dearth of distribution infrastructure [i.e., pipelines]. Then you’d have seen some production, by God. Yet, once the Alliance Pipeline was completed, Alberta gas production levels didn’t rise dramatically...in fact, they didn’t rise at all. So where was all the gas that was allegedly sitting around, waiting for a ride to market?

The events in Texas and Alberta were simply write-downs that occurred at the wellhead, instead of during the audit process. Maybe Shell and the others are to be commended for ‘fessing up now. It appears that in writing down Shell’s reserves, too few drill bits and too many tool-bag bureaucrats seem to have been involved. As a result, who really knows how much oil and gas Shell has today, and how much Shell really had last year? Not me, and not anybody I trust.

Of course, none of this changes the fact that both Texas and Alberta are prolific gas-producing regions. It just shows you that investing in an oil and gas company is a statement of trust, and an acknowledgement - conscious or otherwise - of risk.

Anton, though culpable, was clearly under pressure as a part-time subordinate. He was inherently motivated not to challenge his superiors. One of the larger US-based independent oil & gas producers, Anadarko Petroleum, does all its own internal reserve auditing, too, just like Shell. They’re probably good people doing honest work, but think about this for a minute. If a publicly traded company the size of Royal Dutch said it trusted the auditing of its financial statements to a lone, part-time underling, shareholders would tar and feather the CFO. And he’d deserve it.

It only makes sense, then, that petroleum reserves - the one and only source of an oil company’s value - should be reviewed by an independent, outside auditor. And to avoid the development of Andersen/Enron levels of coziness, one might even employ several different audit firms over the course of several years.

Or you could go one better, like some other investor-conscious oil and gas companies do. To be quite technically correct, these select few do not use mere reserve audits or reviews. They provide the basic drilling and seismic data to outside consultants. The outside consultants then tell the oil companies what their reserves are, via complete, detailed evaluations from that basic data. Full reports are completed on all of the reserve properties every year. There are only a few large oil and gas companies where all of the published reserves are the result of reports by independent reserve evaluators, which themselves are rotated to further increase transparency.

In the post-Enron financial era, it is inexcusable for companies in any sector to be overstating the value of their assets. But for the world’s second-largest oil company to overstate its reserves by 22% goes beyond criminality...it’s downright incompetence, nothing less than shoddy, careless management. Thus, four Shell executives, including CFO Judy Boynton, have been replaced. Shell’s earnings will be reduced by $100 million annually - about 1% to 2% - for each of the past four years. I wonder how many 30-hour weeks Anton will have to put in to make up for that loss?


Regards,

Dan Ferris
for The Daily Reckoning