BIKE: NYTimes.com Article: Oman' s Oil Yield Long in Decline, Shell Data Show

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Oman's Oil Yield Long in Decline, Shell Data Show

April 8, 2004
 By JEFF GERTH and STEPHEN LABATON 



 

The Royal Dutch/Shell Group's oil production in Oman has
been declining for years, belying the company's optimistic
reports and raising doubts about a vital question in the
Middle East: whether new technology can extend the life of
huge but mature oil fields. 

Internal company documents and technical papers show that
the Yibal field, Oman's largest, began to decline rapidly
in 1997. Yet Sir Philip Watts, Shell's former chairman,
said in an upbeat public report in 2000 that "major
advances in drilling" were enabling the company "to extract
more from such mature fields." The internal Shell documents
suggest that the figure for proven oil reserves in Oman was
mistakenly increased in 2000, resulting in a 40 percent
overstatement. 

The company's falling production and reduced reserves in
Oman are part of a broader problem facing Shell, the
British-Dutch oil giant that earlier this year lowered its
estimate of worldwide reserves, a crucial financial
indicator, by 20 percent, or 3.9 billion barrels. 

Documents show that senior executives were told the
calculations of reserves were too high in 2002, at least
two years before the company downgraded its estimate this
January. 

While Oman represents a small part of Shell's reserves, oil
industry experts say the company's experience there
highlights broader questions about the future role of
Western oil companies and their technology in the Persian
Gulf, which has most of the world's oil reserves. 

In the case of the Yibal field, for example, Shell and
Omani oil engineers and auditors have expressed concerns
that a technique Sir Philip said would recover more oil not
only did not do so, but also increased the amount of water
in the extracted oil to as much as 90 percent of the total
volume, increasing production costs. 

"In Oman, Shell seems to have fumbled on technology," said
Ali Morteza Samsam Bakhtiari, a senior official with the
National Iranian Oil Company. 

Perhaps more ominously for the world's oil outlook, he
added that the failure of Shell's horizontal drilling
technology in Oman suggested that even advanced extraction
techniques "won't bring back the good old days." 

In the last 10 years, horizontal drilling has become one of
the most important innovations in the oil production
business and is widely used around the world. If properly
managed, it can extract more oil from some fields, and can
pump it out sooner and more efficiently than traditional
vertical drilling. 

Shell helped pioneer the technique, and it did accelerate
production in Yibal, documents show. But a Shell document
last fall did oes not project the technique to increase the
amount of oil that will ultimately be recovered from the
field, and it resulted in additional water being mixed in
with the oil, increasing production costs. That suggests
that although it may work in some places, horizontal
drilling may not always be the answer to declining
production rates in the mature fields of the Middle East. 

Sir Philip made his optimistic assessment of the Oman field
in May 2000, when he was the company's head of exploration
and development. He was named chairman a year later. The
board dismissed him and Walter van de Vijver, chief
executive of the exploration and production business in
early March, about two months after Shell reduced its
reserves estimate. 

Regulators in Europe and Washington, as well prosecutors at
the United States Justice Department are investigating
whether Shell's disclosures about its reserves complied
with securities laws. The company says it is cooperating
with the investigations and expects to announce the results
of an internal review in the next few weeks. 

"Shell has been open about the production shortfall in
Oman, most recently in the presentation to analysts on Feb.
5," Simon Buerk, a company spokesman, said in an e-mail
message responding to questions. Mr. Buerk said that
production targets were met in 2003. Pending investigations
limited the company's ability to comment on Sir Philip's
statements, he said. 

Shell has been involved in Oman since the 1930's, when oil
was first discovered there. It owns 34 percent of Petroleum
Development Oman, the dominant oil and gas exploration
company. The Omani government owns 60 percent of the joint
venture, which accounts for 90 percent of the sultanate's
oil production and virtually all of its natural gas
production. The rest is owned by other European companies. 

Oman's oil problems are relatively recent. Annual
production rose from 1980 to 1997, when the 35-year-old
Yibal field began to decline. 

Two engineering papers written last year by Petroleum
Development Oman officials show that production in Yibal
has fallen at an annual rate of about 12 percent for six
years; that is more than twice the normal rate of 5 percent
in the region. Moreover, Shell overstated its proven oil
reserves in Oman, a December 2003 Shell report found,
primarily because the company had failed to trim the
figures back "in light of recent downturns in oil
production rates." 

This sober internal analysis differs from optimistic public
statements by Shell that continued even after news of
production difficulties began to circulate outside the
company. When an analyst asked in 2002 about problems in
Oman, for example, Sir Philip likened them to "a bit of
hiccup." 

Joseph I. Goldstein, Sir Philip's lawyer in Washington, did
not return a phone call. 

Nasser bin Khamis al-Jashmi, an under secretary at Oman's
Ministry of Oil and Gas and a member of the board of
Petroleum Development Oman, declined to speak publicly
about the matter this week. "I will not be able to answer
your questions as we are still discussing the whole issue
with our partners," he said. 

But some insight into Oman's views are contained in remarks
made a few years ago by its minister of oil and gas and
another director of Petroleum Development Oman. The remarks
were published in the venture's newsletter and posted on
Shell's Web site. "We have been too preoccupied with trying
to get that extra barrel" now, said the minister, Mohammed
bin Hamad al-Rumhy, "rather than formulating a plan for the
long term." 

Countries like Oman seek to husband their oil and gas to
extend their income over the long run, but Shell, aiming to
increase value for its shareholders, has a shorter time
horizon: its license in Oman expires in 2012, so it has
emphasized pumping more oil sooner. 

A Dec. 8, 2003, report to Shell's top managers about the
impending restatement of reserves criticized the operation
in Oman. The cause of the problems, the report said, was
"the extreme focus on short-term development opportunities
(`keep the rigs busy to keep the oil rate up') to the
detriment of defining long-term projects." 

Oil experts say the situation in which Shell and Oman,
which form one of the few government-company alliances in
the region, find themselves may portend problems for the
West's quest for energy security. Major energy companies
that had run oil operations in the Persian Gulf before they
were nationalized decades ago are looking to return to the
region and obtain concessions like the one Shell has in
Oman. 

"There is considerable ambivalence about foreign oil
companies in the Persian Gulf," said Valerie Marcel, an
expert on oil and the Middle East at the Royal Institute of
International Affairs in London. "Persian Gulf producers
would like to see their reservoirs handled with velvet
gloves - and that means a longer and flatter production
curve." 

Mr. Buerk of Shell said that his company was supporting
efforts of the joint venture to "maximize long-term oil
production," and that Shell and the Omani government had "a
close and strong relationship spanning more than six
decades." 

But the arrangement can also be "extremely sensitive,"
according to the internal Shell report of last December,
which recommended that the lowered amount of Oman's proven
reserves be kept confidential. (Shell officials have said
that the revision in Oman accounts for no more than 10
percent of the worldwide restatement, or 390 million
barrels.) 

The sensitive matter, according to the report, involves
negotiations over bonuses that the company can win for
increasing reserves. The basis for the bonus is a less
rigorous standard - called expectation reserves - than the
proven-reserves yardstick that the company is required by
American rules to list in periodic filings with the
Securities and Exchange Commission. The report said "the
expectation reserves may be overstated." 

The declines in the Yibal field are spelled out by
officials of the joint venture in two papers that were
published last year by the Society of Petroleum Engineers.
The papers have different numbers: both say production
peaked in 1997, but one said it declined to its current
rate of 88,057 barrels a day by 2000 from a peak of
251,592, while the other said it fell to 95,000 barrels
from 225,000. A spokeswoman for the society said she could
not explain the difference. 

Both papers say that about 90 percent of the liquid coming
out of the ground is water and 10 percent is oil. The high
volume of water, one paper said, comes in part from the
water that Shell injects into the ground as part of its
horizontal drilling technique, which it introduced to Oman
in the early 1990's. The relatively high volume of water
being pumped up adds considerably to the costs of
extracting the oil. 

While the field was declining, Sir Philip described it as a
marvel of "advances in well technology" that had, in four
years, produced additional production and "substantial
additional reserves," according to an account of remarks he
made on March 9, 1999, that is posted on Shell's Web site. 

The next year, Shell officials advised the joint venture
"to make an upward correction to proved reserves" based on
steady production rates for all of Oman over the next eight
years, according to Shell's senior management report dated
last December. 

The reserve estimate was increased even as overall
production began to decline. Nonetheless, Sir Philip, in
his remarks on May 29, 2000, continued to talk positively
about the effect of horizontal drilling and other
technologies on Yibal, saying it was "still the country's
most important producer three decades after coming
on-stream." 

Last December's Shell report said, "With hindsight, it
might have been more appropriate to correct the expectation
estimate down rather than the proved estimate upwards." The
report said that it was understood at the time when the
reserve estimate was increased that a more detailed
assessment would follow. 

But it was not until 2003, four years after the previous
audit, that Shell did an audit of proven reserves of its
operations in Oman. The audit found that "proved total
reserves are currently overstated by some 40 percent." 

Exxon Mobil, a competitor of Shell, says that it audits its
proven reserves annually. 

The lack of a timely assessment of Oman by Shell's
auditors, the internal December report explained, was "due
to the attention required by serious production decline
problems." 

http://www.nytimes.com/2004/04/08/business/08OIL.html?ex=1083312490&ei=1&en=02aac4b6f4f0f8f1


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