Royal Dutch/Shell has sliced its proved reserves estimate a third time, replaced its chief financial officer and unveiled changes to its reserve-booking practices. Following a reserve review by consultant Ryder Scott, Shell has downgraded another 200 million barrels of oil equivalent (BOE) of proved reserves as of year-end 2002, and cut the volume of proved reserves it expects to report for 2003 by another 500 million BOE. This brings its total 2002 downgrade to 4.35 billion BOE, and its 2003 downgrade to 720 million BOE. Closing balances for the 2002 and 2003 proved reserves are now approximately 15.0 billion BOE and 14.5 billion BOE, respectively. Shell's 2003 reserve-replacement ratio is now about 60%, and its reserve life is 10.2 years. Going forward, external experts will be involved in the annual audit and reporting of reserves. "The controls we now have in place will be rigorously enforced and will be subject to far greater levels of scrutiny within Shell," said Jeroen van der Veer, chairman of the committee of managing directors. "Despite the difficulties of recent months Shell is a sound and profitable business. We are making the changes to our reserves practices to ensure that that remains the case." Standard & Poor's Ratings Services lowered its long-term rating on Shell to AA+ from AAA, and kept the status on review with negative implications. It affirmed its ratings on the company's short-term debt. The features of Shell's E&P program that are not consistent with an AAA rating include a short reserve life of 10.2 years, some two to three years below that of its peers; a very weak ratio of production replacement by proved reserves from 1999 to 2003; and a below-standard quality of upstream exploration spending, S&P reported. Moody's Investors Service downgraded the long-term debt ratings of the company's guaranteed subsidiaries to Aa1 from Aaa. In addition to operational measures, Moody's cited "the organizational and cultural challenges manifested by the serious breaches in executive-level oversight and governance." While the company's reform efforts could be effective, "considerable time and effort will be necessary to absorb the changes given the group's dual corporate and board structures and global operations, and to enhance its credibility in the financial community. "Moreover, efficient, low-cost replacement of large volumes of oil and natural gas production will remain the group's central challenge."
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