An Oil Enigma: Production Falls Even as Reserves Rise

By Alex Berenson - 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 14 percent, more than one 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 almost 15 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 if 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 now 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, hovering around $40 a barrel. The four biggest companies own only about 4 percent of the world's reserves, which are mostly government-held, 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 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 online around the globe.

ChevronTexaco said its production had 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.

But ChevronTexaco has promised to reverse its production declines before. In 2002 the company said that it expected its output to rise more than 20 percent by 2006, a forecast it has now dropped.

Royal Dutch/Shell, the world's third-largest oil company, admitted this year that it overstated 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 Sir Philip Watts, its chairman.

Some analysts say that the debacle at Shell proves that companies sometimes bend the rules to satisfy Wall Street's intense hunger for new reserves.

In the 1990's, 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 intentionally or not, some companies may have 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 estimates of reserves are accurate, he said.

"We're going to have another Shell," Mr. Simmons said. "They're not the only company that got optimistic on proved reserves." Neither Mr. Simmons nor anyone else is asserting that ChevronTexaco did anything illegal.

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 last decade, the industry's four giants, Exxon Mobil, BP, Shell and ChevronTexaco, have met that goal with remarkable consistency, at least until Shell's admission in January.