Shell, Nigeria and Oil & Gas Reserves Revision - Sloppiness or Fraud?

Introduction

I have been following with a deep level of interest – and not a little trepidation – the unfolding saga of re-categorizations of its international oil and gas reserves by Royal Dutch/Shell Group of Companies (“Shell”), which has already resulted in the toppling (on March 3, 2004) of its Chairman, Sir Phillip Watts;  a tumbling of its stocks (see Figure 1) and the filing of a $1 billion dollar lawsuit in the US.  In the United States, the powerful Securities & Exchange Commission (SEC) has since upgraded its informal inquiry of Shell to a formal investigation.

Pardoning the pun, in a nutshell – and bomb-shell – it all began on Jan. 9, 2004, when, following an internal review of its reserves late last year, Shell announced a 20 percent reduction in its recoverable hydrocarbon reserves worldwide, with the company assuring investors and regulators that there is no difference in the volume of oil and gas in place.  

Naturally, that is assured by God Almighty Himself.

In fact, Shell re-categorized approximately 3.9 billion barrels of oil and the natural gas equivalent, comprised of two thirds (2.7 billion barrels) related to crude oil and natural gas liquids, and one third (1.2 billion boe or roughly 7.2 trillion standard cubic feet ) related to natural gas.   This represents the company’s largest re-categorization of reserves ever.   More than 90 percent of the re-categorization is a reduction in the “proved undeveloped” category, with the remaining 10 percent in the “proved developed” category. The company said in a press release that “most of these reserves will be re-booked in the proved category over time as field developments mature.”

The catch in all of this is that much of the re-categorized reserves were in Australia and Nigeria.   In fact, confidential documents from late last year show Shell concluded that more than 1.5 billion barrels – almost 40% of the re-categorization, and 67 percent of its 2.2 billion barrels of Nigerian reserves booked for the year 2002 alone (see further discussion on this one-year booking below) -  did not meet accounting standards for "proven reserves."

Yes, our dear Nigeria again, always in the news.

Nigeria is the world's seventh-largest oil exporter,  and produces about two million barrels a day, earning us over 80% of all government revenues, 90-95% of our export revenues, and over 90% of our foreign exchange earnings. At the same time, it constitutes roughly 40% of our GDP.  Nigeria ships 40 percent of its oil exports to the United States,  which constitutes about 10%  of U.S. oil imports, its fifth largest importer (after Saudi Arabia, Mexico, Canada and Venezuela.)  It has been clamoring for an increase in its OPEC quota, which is partly based on reserve estimates.  In fact, it hopes to double its daily output to 4 million barrels by 2010.

So all of this news could be pretty serious stuff, if not properly investigated.

Some “reserves” lingo

Taking a look at Figure 2, which outlines the terminologies used by the Energy Information Administration (EIA) in the US for reserves, one will find that all of this is a combination of technology and economics of oil and gas.

Let us begin at the top of the figure,  and assume that there is absolutely no production yet, of either oil or gas.  Only God knows the total oil and gas resource base of the world and of any given country, and it is left for Man in his adventuresome-ness and within the limits of technology and economic feasibility – some will say greed - to try to find that out.   In the interim, only some of this oil and gas has been discovered in place, of which only a fraction is ultimately economically feasible to recover.

It is this ultimately economically recoverable portion of the in-place already-discovered oil and gas that is classified as either other unproved reserves (with two subclasses: possible reserves, probable reserves) or proven reserves (with two subclasses: cumulative production (by depletion of proven reserves to date) and , the three categories being jointly called “ultimate proved reserves.”  According to the Society of Petroleum Engineers (SPE), World Petroleum Congress (WPC) and the American Association of Petroleum Geologists (AAPG)   “proved” reserves are the amount of oil and gas believed to be recoverable with “reasonable certainty” (90 percent probability), based on current economic conditions and technology; “Probable” reserves indicate additional resources more likely to be recovered than not (50 percent probability), while “possible” reserves are less certain to be recovered (10 percent probability).

When geology/technology and economics jam probability and international politics – with relatively scarce and critical commodities such as oil and gas (See Figure 3) -  uncertainty galore creeps in.  In fact the EIA states that

QUOTE

http://www.eia.doe.gov/emeu/international/sources of reserve estimates.html

“Reserve estimates for crude oil and natural gas are very difficult to develop.  As a convenience to the public, EIA makes available these crude oil and natural gas reserve estimates from other sources, but it does not certify these data. Please carefully note the sources of the data when using and citing estimates of crude oil and natural gas reserves.

UNQUOTE

Ironically, according to one Professor Kovarik of Radford University, the US Department of Energy (DOE) does not use the US Geological Survey (USGS) numbers for oil reserves, and when the former was asked, it had no comment.  The latter, a technical agency simply stated that it was not a “political department.”! 

Summary so far:  at one level of discussion, the total oil and gas resource base of the world or any given country can be divided into undiscovered resources, unproven reserves and proven ultimate reserves, with geology, technology, and economics  - as well as politics - determining which is which at any given time.

$hell and Nigeria:  Distilling the Figures

The temptation to divert here into the history of $hell in Nigeria, conflicts in the Niger-Delta, particularly with respect to the Ogoni and the death of Saro-Wiwa is very strong, but I shall resist it.

But let us calm down and try to estimate what all of this might really mean to Nigeria.

According to the Oil and Gas Journal (published by Penwell Corporation), as of January 1, 2003. Nigeria has 24 billion barrels of oil in “reserves,” and 124 trillion cubic feet of gas (roughly 21.4 bbls of oil equivalent, at 5.8 tcf of gas per 1 bbl of oil).  However, according to World Gas (Gulf Publishing), those numbers are 32 bbls of oil and 178.5 tcf. of gas (roughly 30.8 bbls of oil equivalent). See for example these various quotes in http://www.eia.doe.gov/emeu/iea/table81.html.    Some 1993 estimates for the various categories outlined in Figure 2 for Nigeria and several other countries are given in a USGS table: http://energy.er.usgs.gov/products/papers/WPC/14/table1.htm.

These estimates are significantly different to question the legitimacy of any of the numbers.

Now Shell reportedly has half of these proven reserves, whichever figure is “correct.”  Let us use, for definiteness, 24 bbls of oil and 124 tcf of gas (21.4 billion boe).  Even though Shell has not disclosed the full data for Nigeria – purportedly fearing ongoing litigation and potential damage to Nigeria’s request for increased quota from OPEC – let us assume that for Nigeria’s re-categorized 1.5 billion barrels:

(i)               All were oil.  This would amount to a 6.25% downgrade in oil reserves for Nigeria – or 12.5% of Shell’s oil reserves for Nigeria.

(ii)              All were gas.  That would amount to a 7.0% downgrade in gas reserves for Nigeria – or 14% of Shell’s total gas reserves for Nigeria.

(iii)            All were two-third oil and one-third gas, to follow the international trend of Shell’s re-categorization.   This would amount to 4.2% downgrade in proven oil reserves and and 4.7% downgrade in proven gas reserves for Nigeria.

(iv)            An undefined re-categorization: 1.5 barrels out of  45.4 boe corresponds to a 3.3% downgrade of total Nigerian reserves and 6.6% of Shell’s.

In short, however way we dice it, we are talking about a 3.3 – 7.0% downgrading in our total proven reserves – or 6.6 – 12.5% of Shell’s proven reserves in Nigeria

By themselves, these figures for downgrades would be serious, but they are made more serious because they are  for the year 2002 ALONE and for just one company, if my reading of the rather difficult-to-read news is correct.  Note in particular the following passages from Friday March 19, 2004 International Herald Tribune report on the matter:

QUOTE

http://www.rigzone.com/news/article.asp?a_id=11688

Shell Concealed Extent of Its Problems to Protect Nigeria Partnership

….. …….

But the company continues to conceal the extent of its problems in Nigeria, the country with the largest reserve restatement, to avoid endangering its partnership. Shell operates the largest joint venture with the Nigerian government. Confidential company documents late last year show that more than 1.5 billion barrels, or 60 percent of Shell's earlier estimate of proven Nigerian reserves, were not fully compliant with accounting rules and company guidelines……..

So far Shell has not released a country breakdown of its reserve restatements, but it told oil industry analysts last month that Nigeria and Australia were the two largest. Company documents show that Shell's senior managers were told in December that 720 million barrels in Nigeria were non-compliant with SEC guidelines and an additional 814 million barrels were potentially noncompliant. At the end of 2002 Shell booked 2.524 billion barrels of proven reserves for Nigeria, but after internal reviews and a tightening of company guidelines, the December report said only 990 million barrels fully complies with current Shell guidelines. …….

Reserves are a key input in quota discussions, the report says, and since Shell's portion of Nigeria's reserves constitutes about 50 percent of total country reserves, an external disclosure indicating that estimates have been overstated could negatively impact the government's position. An OPEC spokesman said Thursday that a team from OPEC's secretariat visited Nigeria last month and that the organization would discuss a new formula for determining quotas this year. Proven reserves, the spokesman said, were part of the quota calculation. Oil yields 90 percent of Nigeria's export revenue, and a doubling of its production could mean tens of billion dollars in extra annual income.
……

UNQUOTE

Thus except one reads the news very carefully, it would appear that the 1.5 billion barrels were re-categorizations of ALL proven Shell reserves, rather than for just the one year 2002.  That is not so.

There you have it.

The Bottom Line

In the oil and gas business – and one would say in general mining industry, there are standard cautions for reserves which are widely known, namely:

QUOTE                                                                                                                          

http://www.naturalgas.org/overview/ng_resource_base.asp

Proved reserves can be found as the 'on the books' reserves in operational and financial data of natural gas exploration and production companies, carrying with them economic implications for the company. These companies have economic incentives to not overstate these 'on the books' estimations of their reserves as this classification carries with it a high degree of certainty. In order to not overstate the actual amount of natural gas (and suffer the potential financial side effects of such an overstatement or miscalculation), many companies list a high percentage of their reserves as unproven. It follows then that most of the natural gas that exists in the United States does not fall under the proven reserves classification. It may be misleading, then, to look only at levels of proved reserves as an indication of how much natural gas there really is. Instead, the entire supply picture should be examined, including conventional and unconventional natural gas, discovered and undiscovered, and economically recoverable or unrecoverable.

UNQUOTE                                                                                                                       

Bearing in mind that there are different ways of defining and calculating reserves and resources, which vary between companies, between countries and even within organizations of a give country, one does know whether this Shell re-categorization was one of genuine technological uncertainty, administrative sloppiness or outright fraud.

The bottom line here is that we in Nigeria do not know what the re-categorization figures might be for 2003, 2001, 2000, etc., and we do not know whether or when any or all of them will be ultimately re-booked.  We do not know how this will affect Nigeria’s aim to increase its OPEC quota – or whether it is even wise to do so at this time and thereby possibly mortgage future generations’ access to the oil, bearing the mind the danger of over-production from a reduced proven reserve.

What we know are that: 

(1) all agents here must come clean – the Nigerian government, and not only Shell, but ChevronTexaco, MobilExxon,  Agip, TotalFinaElf, BP,and other oil companies - about this particular re-categorization and possibly others, for the country to determine the true extent of its impact:  no ands, ifs or buts, no hiding behind fingers, no denials before facts are in.    The use of a battery of independent  auditors – some indigenous and patriotic to Nigeria – is recommended here.                                                                                                                                          

                                                                                                                                       (2) there is a serious need to quickly come to agreement about common international standards for defining reserves, as being currently canvassed by the United Nations Framework Classification for World Petroleum Resources (see Figure 4).

(3) while Nigeria continues with its monoculture of oil and gas - roughly 40% of our GDP, 80% of all government revenues, 90-95% of our export revenues, and over 90% of our foreign exchange earnings -   our country will continue to be haunted by upheavals like this one, over which it has absolutely no control.  Even under our civilian democracy, our government has not come to grips with this reality, and if it has, its policies do not indicate an appreciation of its effects.  In fact, ongoing 2004 budgetary machinations, already three months late into the new year,  center around what price of oil to base revenue calculations on:  $23 or $25 per barrel.

Best wishes all.

BIBLIOGRAPHY

http://news.bbc.co.uk/1/hi/business/3529801.stm

Shell chairman is forced to quit

March 3, 2004

http://news.bbc.co.uk/1/hi/business/3503833.stm

US watchdog opens Shell inquiry

February 19, 2004

http://news.bbc.co.uk/1/hi/business/3433335.stm

Shell Facing $1 bn lawsuit

January 27, 2004

http://www.radford.edu/~wkovarik/oil/2worldoil.mideast.html

The Oil Reserve Fallacy: Proven Reserves are Not a Measure  of Future Supply

Bill Kovarik, 2003

http://www.eia.doe.gov/emeu/iea/table81.html

World Crude Oil and Natural Gas Reserves , January 1, 2003

Energy Information Administration (EIA)

http://www.eia.doe.gov/pub/oil_gas/natural_gas/data_publications/crude_oil_natural_gas_reserves/current/pdf/appg.pdf

Appendix G: Estimation of Reserves and Resources

http://www.geotimes.org/current/resources.html

(Re)Classifying Oil Reserves

http://www.nytimes.com/2004/03/19/business/worldbusiness/19OIL.html

Shell Witheld Reserves Data to Aid Nigeria
 

http://news.yahoo.com/news?tmpl=story&u=/ap/20040319/ap_on_bi_ge/nigeria_shell

Nigeria:  Shell Reserve Estimate Exact

http://www.mbendi.co.za/indy/oilg/af/ng/p0005.htm#10

Nigeria: Oil and Gas Overview

http://www.npd.no/NR/rdonlyres/ech35rennaxu6vy33ynbtd5g5i7h426vkzsmviqhli4mnf3dqquzzkecewdjmghau2fp36ia53p43jteygxyfmzq5fc/SPE84142presentationpblyDenver.pdf

The United Nations Framework Classification for Petroleum Resources (UNFCP)

http://www.unece.org/ie/se/pdfs/OPECMay03/kelterwecser.pdf

The United Nations Framework Classification as a Support Tool for Worldwide Energy Resource Evaluation

Articles by Bolaji Aluko on Oil and Gas in Nigeria follow:

http://www.dawodu.com/aluko80.htm

Nigeria and its Membership of OPEC

January 24, 2004

http://www.dawodu.com/aluko79.htm

STAR REVELATION: Nigeria Doesn't Have As Much Oil Reserves as Publicized - Shell
January 9, 2004

http://www.dawodu.com/aluko60.htm

Why Not Build More Refineries?

July 7, 2003

http://www.dawodu.com/aluko58.htm

NNPC and Mr  President:  Where is our subsidy?

July 5, 2003

http://www.dawodu.com/aluko35.htm

On Fuel Scarcity, Politics and NNPC

March 10, 2003

http://www.dawodu.com/aluko33.htm

On the Resource Control Battle:  From Dichotomy to Quartonomy, From Isopatials to Isobaths

February 19, 2003

http://www.dawodu.com/aluko26.htm

Before Obasanjo signs the Onshore/Offshore Abrogation Bill

December 12, 2002

Figure 1:  Shell Trading and Transport Co. Market Data (Nasdaq)

http://newsvote.bbc.co.uk/1/shared/fds/hi/business/market_data/shares/3/23216/three_month.stm

Market Data

Last Updated: Sunday, 21 March, 2004, 09:36 GMT 

Shell Transport and Trading Co

Shell Transport and Trading Co three month chart

Figure 2:  Components of the Oil and Gas Resource Base

Source: http://www.naturalgas.org/overview/ng_resource_base.asp

The Natural Gas Resource Base

http://www.eia.doe.gov/pub/oil_gas/natural_gas/data_publications/crude_oil_natural_gas_reserves/current/pdf/appg.pdf

Figure 3:  Graphical Summary of Oil and Gas Distribution around the Globe

“Based on a thorough investigation of the petroleum geology of each province, the assessment couples geologic analysis with a probabilistic methodology to estimate remaining potential. Including the assessment numbers for the United States from USGS and the Minerals management Service (MMS), the world's endowment of recoverable oil which consists of cumulative production, remaining reserves, reserve growth and undiscovered resources is estimated at about 3 trillion barrels of oil. Of this, about 24 percent has been produced and an additional 29 percent has been discovered and booked as reserves. The natural gas endowment is estimated at 15.4 quadrillion cubic feet (2.5 trillion barrels of oil equivalent), of which only about I I percent has been produced and an additional 31 percent has been discovered and booked as reserves. “

Figure 4: United Nations Framework Classification for Petroleum Resources

http://www.npd.no/NR/rdonlyres/ech35rennaxu6vy33ynbtd5g5i7h426vkzsmviqhli4mnf3dqquzzkecewdjmghau2fp36ia53p43jteygxyfmzq5fc/SPE84142presentationpblyDenver.pdf

SOME EXTENDED ARTICLES:

http://www.geotimes.org/current/resources.html

horizontal rule

(Re)Classifying oil reserves

On Jan. 9, the Royal Dutch/Shell Group of Companies (Shell) announced a 20 percent reduction in its recoverable hydrocarbon reserves. The company assured investors and regulators that there is no difference in the volume of oil and gas in place, saying that development has been slower than originally thought. Nevertheless, the significant downgrade is raising questions as to the legitimacy of the earlier estimates and whether there should be an international and industry-wide standard for reserves classification; currently, there is none.

“Reserve” refers to the amount of oil or gas that has been discovered and that can be extracted profitably with existing technology under present economic conditions. Following an internal review of its reserves late last year, Shell recategorized approximately 3.9 billion barrels of oil and the natural gas equivalent, representing the company’s largest recategorization of reserves ever.

According to company executives, more than 90 percent of the recategorization is a reduction in the “proved undeveloped” category, with the remaining 10 percent in the “proved developed” category. And much of the recategorized reserves were in Australia and Nigeria. The company said in a press release that “most of these reserves will be re-booked in the proved category over time as field developments mature.”

Under Shell’s system, “proved undeveloped” is differentiated from “proved developed” based on whether or not the infrastructure is in place to extract the hydrocarbons, says Peter McCabe, a geologist with the U.S. Geological Survey (USGS).

“Unfortunately, there are many disparate ways of calculating reserves and resources,” he says. “Definitions vary between companies, between countries, and even between organizations within a country.”

Together, the Society of Petroleum Engineers (SPE), World Petroleum Congress (WPC) and the American Association of Petroleum Geologists (AAPG) have developed three primary categories of their own for reserves. They define “proved” reserves as the amount of oil and gas believed to be recoverable with “reasonable certainty” (90 percent probability), based on current economic conditions and technology. “Probable” reserves indicate additional resources more likely to be recovered than not (50 percent probability). And “possible” reserves are less certain to be recovered (10 percent probability).

The proved reserves represent an estimate based on geology, engineering and economics, McCabe says. It’s all “risk management,” says Robert Laing, a geophysicist with Chevron/Texaco. Recategorization of reserves, such as with Shell, however, should not affect the market for petroleum geology, Laing says.

Indeed, reclassifications happen frequently for various reasons, says David Abbott Jr., a consulting geologist in Denver who spent many years as a geologist with the U.S. Securities and Exchange Commission (SEC). “Changing oil and gas prices can make a big difference for some projects,” he says. And some geologic or engineering parameters may only become apparent after the first few wells are drilled and produced.

McCabe adds that reserve estimates may also be recategorized because initial estimates were based on poor geologic interpretations, overly optimistic calculations of engineering costs, or unreal expectations of market demand. “One would require a lot of knowledge about the internal decision-making process in a company to know the full story,” he says.

Still, in the wake of the Shell recategorization, industry insiders are speculating whether or not the SEC might now mandate independent reserves audits, greater transparency in reporting of reserves, or industry-wide standardization of classification schedules. The SEC has guidelines for companies reporting proved reserves and allows for reclassification of proved reserves. The agency has not yet announced whether any changes to the system will be made nationally.

On the international stage, a committee of the United Nations has been working for seven years to address reserve and resource terminology. In 1997, the U.N. Economic and Social Council passed a “framework” classification standard for reserves and resources of solid fuels and minerals commodities. And in 2002, an ad hoc committee formed to further classify world energy reserves and resources.

“The ultimate goal is to have a harmonized terminology and definitions for each category of reserves and resources to permit international comparisons and facilitate communication, valuation and trading,” says Thomas Ahlbrandt, chief of the World Energy Project at USGS and vice chairman of the ad hoc committee.

For petroleum, the committee has already developed a classification system that incorporates the SPE/WPC/AAPG reserve and resource classification, which it has presented at meetings throughout the world. It remains to be seen, however, if an international classification standard will be adopted and followed, Ahlbrandt says.

Still, the sticky business of classifying oil reserves continues. “It’s all a matter of managing uncertainty,” Laing says. “We never know what we will find until we drill the well.”

Megan Sever

http://www.rigzone.com/news/article.asp?a_id=11688

Shell Concealed Extent of Its Problems to Protect Nigeria Partnership

International Herald Tribune        Friday, March 19, 2004

The Royal Dutch/Shell Group has kept secret key details of its sharp reduction of oil and gas reserves for fear of damaging its close ties to Nigeria, whose oil production quota set by OPEC might be jeopardized if the facts were disclosed, internal company documents show.

Nigeria is seeking a significant increase in its quota with the Organization of the Petroleum Exporting Countries, which sets production levels for its members in an effort to control prices. A lower quota would mean less income for Shell and Nigeria and less Nigerian oil for the United States, the largest customer for its exports.

Since Shell disclosed two months ago that it had overstated its oil and gas reserves by 20 percent, or 3.9 billion barrels, the company's senior executives have pledged greater openness to investors, who were stunned by the revelations.

The company announced Thursday that it was again cutting its estimates of its reserves by the equivalent of 250 million barrels, mostly involving a natural gas field near Norway. Shell also postponed the publication of its 2003 annual report for two months to complete a review of its oil and gas assets.

But the company continues to conceal the extent of its problems in Nigeria, the country with the largest reserve restatement, to avoid endangering its partnership. Shell operates the largest joint venture with the Nigerian government. Confidential company documents late last year show that more than 1.5 billion barrels, or 60 percent of Shell's earlier estimate of proven Nigerian reserves, were not fully compliant with accounting rules and company guidelines.

A report on Dec. 8, 2003, prepared for senior executives by Walter van de Vijver, then the top official for exploration and production, recommended that the revised Nigerian reserves stay confidential in view of host country sensitivities. Identifying the extent of Shell's lowered reserves in Nigeria, the report warned, could affect that country's quota discussions with OPEC.

Nigeria has been seeking a large increase in its quota, currently at about two million barrels a day, as part of a plan to double its daily production over the next several years.

Reserves are a key input in quota discussions, the report says, and since Shell's portion of Nigeria's reserves constitutes about 50 percent of total country reserves, an external disclosure indicating that estimates have been overstated could negatively impact the government's position. An OPEC spokesman said Thursday that a team from OPEC's secretariat visited Nigeria last month and that the organization would discuss a new formula for determining quotas this year. Proven reserves, the spokesman said, were part of the quota calculation. Oil yields 90 percent of Nigeria's export revenue, and a doubling of its production could mean tens of billion dollars in extra annual income.

Andy Corrigan, a spokesman for Shell, the world's third-largest publicly traded oil company, declined Thursday to provide details about restated reserves in Nigeria, saying only that they constitute a significant proportion of the overall restatement.

E.E. Imohe, the economics minister at the Nigerian Embassy in Washington, said he had passed on questions from a reporter to his government this week about Shell but had not yet received a reply.

Behind Shell's confidential stance are the company's own financial motivations, too. The report said negotiations with Nigeria over $385 million in bonus payments could be jeopardized by publication of too much information.

While reserves are a key indicator by which outsiders assess an oil company's future prospects, Shell's dealings with Nigeria resonate beyond the stock market.

Nigeria is the world's seventh biggest oil exporter. Shell's documents about Nigeria portray a sometimes fragile marriage of the two sides and offer a window into the kind of relationship that is vital to global energy security. Most of the world's oil resides in less-developed countries like Nigeria, yet much of the financial and technological resources needed to develop that oil belongs to Western oil companies.

The documents give a far bleaker assessment of Nigerian operations than the company's public disclosures.

For example, Nigeria has called for an end to the daily practice of releasing billions of cubic feet of natural gas into the atmosphere by 2008. The flared gas, a byproduct of oil production, has become an environmental and political issue. Shell's Web site says this opportunity to gather gas is going well. Corrigan said the company is committed to meeting the target.

But a high-level company review last December found that many oil field projects were now seen as immature because of the lack of gas- gathering plans, many of which were still a long way from a possible request for funds. This, in turn, prompted concerns that oil production would have to be shut in without a way to utilize the gas. Natural gas is more expensive to transport than oil, so flaring the gas has been the most economical approach.

So far Shell has not released a country breakdown of its reserve restatements, but it told oil industry analysts last month that Nigeria and Australia were the two largest. Company documents show that Shell's senior managers were told in December that 720 million barrels in Nigeria were non-compliant with SEC guidelines and an additional 814 million barrels were potentially noncompliant. At the end of 2002 Shell booked 2.524 billion barrels of proven reserves for Nigeria, but after internal reviews and a tightening of company guidelines, the December report said only 990 million barrels fully complies with current Shell guidelines.

The document recommended that any debooking of proved reserves for Shell's venture in Nigeria not be identified publicly with Nigeria but classified under a wider geographic area.

Last month, when Shell reported more details about the reserve downgrading, it said African operations accounted for 1.5 billion barrels of the revision. Shell has other operations in Africa, including Libya and Egypt, but Nigeria is the only African country listed in a potential reserves exposure catalogue distributed to senior executives late last year.

The Shell documents make clear that geology is just one part of determining whether oil or gas is a proved reserve. A company must also have firm plans to extract the resource and the investments to implement those plans. The absence of such commitments, the documents show, is why the Nigerian reserves were seen as noncompliant.

From 1991 to 1999, Nigeria offered Shell and other oil companies an incentive to increase reserves, the Reserves Addition Bonus. Shell contended that it was owed $385 million under the bonus program, but it only sought 30 percent to 50 percent of the claim, according to Shell's December report. The bonus program applied to a different, less-probable category of reserves than the publicly reported proved reserves, which have been downgraded.

In principle, the December document said, Shell's bonus claim should therefore not be impacted by reduction in Shell's proved reserves in Nigeria, but disclosing their exact amount is likely to undermine the current resolution process and put $115 million to $170 million at risk. There are more than financial issues behind the decline in reserves.

Community disturbances and political instability were also to blame, according to the Shell report late last year. Most of Nigeria's oil reserves are in the Delta region, where unrest caused a reduction in production last year.

The Royal Dutch/Shell Group has kept secret key details of its sharp reduction of oil and gas reserves for fear of damaging its close ties to Nigeria, whose oil production quota set by OPEC might be jeopardized if the facts were disclosed, internal company documents show.

Nigeria is seeking a significant increase in its quota with the Organization of the Petroleum Exporting Countries, which sets production levels for its members in an effort to control prices. A lower quota would mean less income for Shell and Nigeria and less Nigerian oil for the United States, the largest customer for its exports.

Since Shell disclosed two months ago that it had overstated its oil and gas reserves by 20 percent, or 3.9 billion barrels, the company's senior executives have pledged greater openness to investors, who were stunned by the revelations.

The company announced Thursday that it was again cutting its estimates of its reserves by the equivalent of 250 million barrels, mostly involving a natural gas field near Norway. Shell also postponed the publication of its 2003 annual report for two months to complete a review of its oil and gas assets.

But the company continues to conceal the extent of its problems in Nigeria, the country with the largest reserve restatement, to avoid endangering its partnership. Shell operates the largest joint venture with the Nigerian government. Confidential company documents late last year show that more than 1.5 billion barrels, or 60 percent of Shell's earlier estimate of proven Nigerian reserves, were not fully compliant with accounting rules and company guidelines.

A report on Dec. 8, 2003, prepared for senior executives by Walter van de Vijver, then the top official for exploration and production, recommended that the revised Nigerian reserves stay confidential in view of host country sensitivities. Identifying the extent of Shell's lowered reserves in Nigeria, the report warned, could affect that country's quota discussions with OPEC.

Nigeria has been seeking a large increase in its quota, currently at about two million barrels a day, as part of a plan to double its daily production over the next several years.

Reserves are a key input in quota discussions, the report says, and since Shell's portion of Nigeria's reserves constitutes about 50 percent of total country reserves, an external disclosure indicating that estimates have been overstated could negatively impact the government's position. An OPEC spokesman said Thursday that a team from OPEC's secretariat visited Nigeria last month and that the organization would discuss a new formula for determining quotas this year. Proven reserves, the spokesman said, were part of the quota calculation. Oil yields 90 percent of Nigeria's export revenue, and a doubling of its production could mean tens of billion dollars in extra annual income.

Andy Corrigan, a spokesman for Shell, the world's third-largest publicly traded oil company, declined Thursday to provide details about restated reserves in Nigeria, saying only that they constitute a significant proportion of the overall restatement.

E.E. Imohe, the economics minister at the Nigerian Embassy in Washington, said he had passed on questions from a reporter to his government this week about Shell but had not yet received a reply.

Behind Shell's confidential stance are the company's own financial motivations, too. The report said negotiations with Nigeria over $385 million in bonus payments could be jeopardized by publication of too much information.

While reserves are a key indicator by which outsiders assess an oil company's future prospects, Shell's dealings with Nigeria resonate beyond the stock market.

Nigeria is the world's seventh biggest oil exporter. Shell's documents about Nigeria portray a sometimes fragile marriage of the two sides and offer a window into the kind of relationship that is vital to global energy security. Most of the world's oil resides in less-developed countries like Nigeria, yet much of the financial and technological resources needed to develop that oil belongs to Western oil companies.

The documents give a far bleaker assessment of Nigerian operations than the company's public disclosures.

For example, Nigeria has called for an end to the daily practice of releasing billions of cubic feet of natural gas into the atmosphere by 2008. The flared gas, a byproduct of oil production, has become an environmental and political issue. Shell's Web site says this opportunity to gather gas is going well. Corrigan said the company is committed to meeting the target.

But a high-level company review last December found that many oil field projects were now seen as immature because of the lack of gas- gathering plans, many of which were still a long way from a possible request for funds. This, in turn, prompted concerns that oil production would have to be shut in without a way to utilize the gas. Natural gas is more expensive to transport than oil, so flaring the gas has been the most economical approach.

So far Shell has not released a country breakdown of its reserve restatements, but it told oil industry analysts last month that Nigeria and Australia were the two largest. Company documents show that Shell's senior managers were told in December that 720 million barrels in Nigeria were non-compliant with SEC guidelines and an additional 814 million barrels were potentially noncompliant. At the end of 2002 Shell booked 2.524 billion barrels of proven reserves for Nigeria, but after internal reviews and a tightening of company guidelines, the December report said only 990 million barrels fully complies with current Shell guidelines.

The document recommended that any debooking of proved reserves for Shell's venture in Nigeria not be identified publicly with Nigeria but classified under a wider geographic area.

Last month, when Shell reported more details about the reserve downgrading, it said African operations accounted for 1.5 billion barrels of the revision. Shell has other operations in Africa, including Libya and Egypt, but Nigeria is the only African country listed in a potential reserves exposure catalogue distributed to senior executives late last year.

The Shell documents make clear that geology is just one part of determining whether oil or gas is a proved reserve. A company must also have firm plans to extract the resource and the investments to implement those plans. The absence of such commitments, the documents show, is why the Nigerian reserves were seen as noncompliant.

From 1991 to 1999, Nigeria offered Shell and other oil companies an incentive to increase reserves, the Reserves Addition Bonus. Shell contended that it was owed $385 million under the bonus program, but it only sought 30 percent to 50 percent of the claim, according to Shell's December report. The bonus program applied to a different, less-probable category of reserves than the publicly reported proved reserves, which have been downgraded.

In principle, the December document said, Shell's bonus claim should therefore not be impacted by reduction in Shell's proved reserves in Nigeria, but disclosing their exact amount is likely to undermine the current resolution process and put $115 million to $170 million at risk. There are more than financial issues behind the decline in reserves.

Community disturbances and political instability were also to blame, according to the Shell report late last year. Most of Nigeria's oil reserves are in the Delta region, where unrest caused a reduction in production last year. The Royal Dutch/Shell Group has kept secret key details of its sharp reduction of oil and gas reserves for fear of damaging its close ties to Nigeria, whose oil production quota set by OPEC might be jeopardized if the facts were disclosed, internal company documents show.

Nigeria is seeking a significant increase in its quota with the Organization of the Petroleum Exporting Countries, which sets production levels for its members in an effort to control prices. A lower quota would mean less income for Shell and Nigeria and less Nigerian oil for the United States, the largest customer for its exports.