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The oil company Shell has had a rocky time this year, downgrading its estimate of its reserve levels not once but twice, losing its chairman and financial director and being investigated by authorities on both sides of the Atlantic. Shell then followed that all up by taking the unprecedented step of delaying its annual shareholders’ meeting and report. Yet a meeting that starts late is the least of the company’s problems. Shell’s reserves revisions have shaken an industry that is in denial over its dependence on a limited product. And it’s not just the oil industry that’s facing problems: the revisions are a reminder that broader society, with energy use and policy structured largely around oil, has some serious thinking to do.
The size of their reserves is extremely important to energy companies: they define future production, and production is a key factor in determining share price – and success. No wonder Shell apparently ignored alleged internal warnings that it had overestimated its reserves. This “oversight’ is now under investigation by the Financial Services Authority, for UK stock market rules state that companies must warn shareholders about developments that could affect share price.
The Shell downgrades were made so as to comply with the rules of the US financial regulator the Securities and Exchange Commission (SEC), which has tightened up its guidelines in the wake of corporate accounting scandals such as the Enron affair. A Deutsche Bank analyst has criticised the SEC’s crackdown, claiming that stricter guidelines for reserve accounting undermine oil firms’ abilities to raise investment, for that investment depends on the size of reserves.
Yet oil companies’ future finances are threatened by a structural problem that dwarfs the significance of accounting guidelines: the fossil fuel on which these firms depend is a finite resource; contrary to oil industry orthodoxy, reserves cannot be refilled indefinitely.
Shell’s reserve revisions have meant a massive drop from 105 per cent to 57 per cent in its replacement figures for 1997 to 2002. The revisions come against a background of claims from scientists and petroleum geologists that the peak for global oil production is coming approximately in the next 10 years. Crucially, this does not mean that oil will be scarce in this time; it means that oil companies will find it increasingly difficult to renew reserves.
There will, of course, be further exploration attempts, but when the energy expended on extraction and production is greater than that yielded by the oilfield, oil will have ceased to be a viable energy source. Indeed, a spate of oil mergers at the end of the 1990s was described by Goldman Sachs as “nothing more than a scaling-down of a dying industry in recognition that 90 per cent of global conventional oil has already been found’.
However, there is an even bigger structural problem than this; one that gives a bittersweet edge to the industry’s refusal to admit an approaching production peak. For, even in the unlikely scenario of enough reserves being found to drive society in its current form for an indefinite time, the emissions from the use of that oil and gas would accelerate climate change and overheat the planet that much more. We simply cannot use that extra oil and gas. We need to use what can only be a limited allocation in more intelligent ways – developing an energy transition strategy, for example.
And Shell? Well, staff and accounting changes will not be enough to deal with the challenges the oil industry will face as it struggles to deny that it has had its day. May I be so bold as to suggest that the company’s delayed annual report includes the following paragraph:
“We recognise that ours is a dying industry. We also recognise that our industry causes devastation on a scale that will only increase as the impacts of climate change intensify. Therefore as a company we will cease trading. We will put our embarrassingly extensive profits into clean-up projects in lands we have violated, and into community-defined and community-led initiatives in places that we have exploited. We will provide generous redundancy and re-training packages for our staff. We encourage the rest of the industry to follow suit.’
Would that really be so much more painful than the position Shell is in anyway?
For further analysis on Shell, BP and the oil industry overall, see www.platformlondon.org.Melanie Jarman is a writer and activist on environmental and social justice issues. She lives in Manchester, but gets around a lot (in a geographical way)
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