ONE thousand Shell geophysicists and petroleum engineers worked on the oil company’s comprehensive review of its reserves during the past year.

The massive exercise, which tested decline rates in thousands of wells around the world, is designed to produce a figure that the oil company can deliver to the US Securities and Exchange Commission without fear of quibble. Sadly, it was a fruitless exercise. Asked whether training some 3,000 engineers in the niceties of SEC reporting had hindered Shell’s exploration efforts last year, Malcolm Brinded, head of exploration, demurred. However, at the same time his boss, the chairman Jeroen van der Veer, appeared to smile and nod.

Shell’s business is investing in oil production, not conducting audits, and Mr Brinded confidently talks about 60 billion barrels’ worth of potential projects, compared with the 12.9 billion barrels he is prepared to put his signature to in the SEC filing. The difference in the two figures is mainly about nearness to production but the latest 1.4 billion barrel downgrade is highly technical. Must an oil company use straight-line extrapolations when plotting an oilfield’s future decline or can it use simulations based on historical data from analagous oilfields? The SEC does not like simulations but oil companies rely on them to make investment decisions, knowing that decline rates tend to flatten as oilfields mature.

While Shell retrains staff in arcane SEC procedures, it needs to run its business and, urgently, to find more oil. After a year in which it replaced as little as a fifth of production, Shell is boosting spending from $13.5 billion to $15 billion. Mr Brinded’s team was successful in five of the 15 “big cat” opportunities he spoke of last year, an acceptable one in three, but the quantities of oil and gas were, he admits, a little disappointing.

Anecdotal evidence suggests Shell is not alone in struggling to find new sources of oil. Mr Van der Veer said: “If you expect that the world should be supplied from traditional, on-shore, near-to-the-market oil and gas, then there are not sufficient supplies.” Shell reckons that oil sands and gas-to-liquids technology will fill the gap. But if others in the industry are better placed it is because they bought reserves when oil was cheap — BP’s relative abundance has as much to do with writing cheques as with drilling wells. Shell’s strategic blunder could prove to be much more costly than its quarrel with regulators in Washington.

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts