Colin Campbell interviewed by Julian Darley on 2004-06-24
Q1: Could you give us your assessment of the latest BP Statistical Review, especially saying what do you think is different about it, and what are the implications as you see them?
Well BP has been putting out the statistical review for at least 30 years now, and it’s followed a consistent pattern, but there are certain changes that have occurred from time to time, and when somebody changes something, I think one has to ask why they changed it, what the motives are, what the results are, and before coming to the present one [BP statistical Review], I would like to go back to a much earlier one in the 70s, which plotted the reserves by year as reported, and there was a little footnote there that said ‘revisions backdated to discovery,’ and this is an eminently sensible thing to do. To get the valid discovery trend, you have to backdate discovery to the fields themselves, and BP correctly did that in the early days, when BP was more or less the foremost of the major companies drawing attention to the issue of depletion. And since then the statistical review has evolved and become more comprehensive, but it did carry a little footnote in all these years, simply to say that the reserves as reported were taken from the Oil and Gas Journal, and did not in anyway reflect the confidential information known to the company. Well, that was a fair enough disclaimer – we don’t ask BP to reveal anything confidential – a perfectly normal way to go about things. But in this edition it changes that long practice and says in the footnote that now it selects the information it’s showing as reserves from various different sources. This is a change. Now it’s quite a significant change, because under the old regime, they were just innocent bystanders, reporting the Oil and Gas Journal, which itself is a trade journal – all it could ever do was report what governments told it; no critics attaches to them whatever, and BP by reproducing this was simply reproducing what the official numbers were, and it made quite clear that this did not reflect any judgment on its part. But under the new regime which now goes into effect, by selecting its sources, which it knows itself full well to be partially erroneous in many cases, it takes responsibility for that selection and thereby the numbers it publishes.
Q2: How do we assess the importance of this, or what does this mean for BP for instance?
Well BP – in the introduction to this and in the public statements that were made when this report was published just the other day – BP seeks to maintain this myth that current reserves are sufficient today to support current production for forty years. Well, no one disputes that this is the mathematical relationship. Indeed if you divide one by the other, this is precisely the number you get. But it is, to put it mildly, misleading to imagine that reserves can stay flat for 40 years and then stop dead overnight on the 41st year. This is ridiculous, when all oil fields decline toward exhaustion. And so by perpetuating this misleading (although not strictly speaking erroneous) notion, I think one has to conclude that BP seeks to mislead—this is not just an accident.
Q3 Why do you think they’re doing that?
Well, it’s hard to know; I mean BP, well the directors of all major companies everywhere have a fiduciary duty to do as well as they can for their shareholders. It is simply not their job to alert governments to depletion or look after national interests or do any of those things. Their job is strictly to sing to the stock market to make as much money as they can, by any legal means, and I don’t accuse anybody of being illegal to that end. So it is simply not their job to come out and explain to us the fundamental nature of depletion. Now if they were public spirited or if they were a national company, they might take upon that roll, but it is not strictly speaking their job.
Q4. Hmm. BP had their own write-down, nowhere on the scale of Shell’s recently, I mean very recently, almost at the same time as they were releasing their new review and still producing the main line that the reserve crisis is happening – I think at the same moment that they had a 3% write-down – not huge – and they’ve had other write-downs in the past, but do you find that ironic or interesting that that should have happened, and yet they’re still talking about reserve growth?
Yes, one could talk about the Shell incident, and I think it is very interesting that these major companies, for all these years over a long period of time, reported under the strict stock-exchange rules. The stock-exchange rules were designed to prevent fraudulent exaggeration. That was their prime motive. But they smiled on under-reporting as simply commercial prudence. There was no problem to underreport—what you shouldn’t do is over report. And so over all these years the major companies simply reported as much as they needed to report to deliver a satisfactory financial result, and nothing wrong with that – that was normal commercial prudence—a perfectly normal way to do it. And the result of underreporting what they found – the reserves naturally grew over time, and a happy explanation for this change was the advance of technology, although in reality technology did not add much to the reserves themselves, although it did keep production higher for longer and delivered more profit. So in the Shell case I can imagine a situation in which Shell (a very well-established company following routines over many years) the central office was simply continuing this practice and would call around its various subsidiaries to say please send me a few more reserves; I need them this year. And in the past there would have been no problem in doing so, but evidently over the past few years, it became evident that there simply wasn’t enough reserves to report under the strict SEC rules, and I’ve no doubt that the reserves that they were talking about were there in the ground and were eventually producible, but they simply didn’t qualify the strict commercial criteria that the old stock exchange rules set, and I think far from criticism Shell deserves a medal to have come clean with this situation, when it reached the situation when it had to. Now BP is perhaps more hesitant to come forward with that, and it has a lot of reserves—I’m sure it has claims in Russia, which is a pretty uncertain place to have reserves, I would say, so I suppose some downward revision by BP, and I believe all the companies, is inevitable. After all there is the other case of Penzoil, who reduces its reserves quite a lot, by 40 percent I think.
Q5: Hmm. And are you expecting the other oil companies to do likewise?
I think they will – the major oil companies. I think that Exxon-Mobile stands out really as the most forthright and frank of the major oil companies, who already has published last year a paper showing that discovery has been falling since 1964, and that the world started using more than it found in 1981, and I think the financial community is beginning to wake up to this. I saw a report by a major bank the other day which said that the companies were far from replacing their reserves by new discovery, so they’re beginning to wake up I think.
Q6: There are some people who say that because of rising oil prices ( as we go into this tighter market situation, as it’s called), – they seem to discount or don’t consider the fact that the stock market does put a lot of weight on the reserves of these various petroleum companies – I am talking about certain financial investment analysts who do accept the peak thesis – but they still think that the petroleum companies will see their share prices rise for a very considerable period of time, I think entirely because oil price will rise, and they, therefore, are not worried about the lower reserve evaluations. How do you view this?
Well, I would say that you’re correct. If the oil price stays high or goes even higher, then the reserves of the major companies evidently become very much more valuable, and again it is simply not their job to worry about what this means for the world as a whole – they’re in business to make money on their own activities, and they will become more valuable no doubt. Of course the issue of high prices is an interesting one, and there is really no spare capacity today, so that means that prices can only rise upwards, albeit with fluctuations reflecting speculative positions and so forth, until the world demand is cut in some way, and that implies recession. Now recession, of course, will not help the major oil companies, because if they sell less in their downstream and in their refineries and so on, that could hurt them, but on balance, I would agree with you that high prices mean more profits for the oil companies, and the investment community sees this and are investing in oil companies, despite their falling discovery pattern.
Q7. So they don’t worry that the actual recoverable amount of oil in the ground is inevitably reducing (since discovery is not replacing production), and they appear to multiply the price of oil by the amount that’s expected to be recovered, and of course as the oil price goes up fast enough that could keep going for quite a long time. Is it your impression that they’re not looking beyond that and saying, “hey wait a minute, there’s something else going on here?”
No. I don’t think the investment community has a view of the future beyond a matter of a few months. All of those people in that domain are out to make quick money, and nobody has a long term investment view of the future. Again it simply isn’t their job
Q8: Grand. Thanks very much Colin. That was very helpful, very helpful indeed.
Transcribed by Rita Wiltsie
From: COLIN CAMPBELL
Transcript of ColinCampbell.2004-06-24
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