Value or volume?
The booking of oil and gas reserves is an inexact science. First, many technical variables need to be taken into account to establish the volume. Then, economic parameters are superimposed on this volume in order to calculate the ‘proved’ reserves that can be produced at current prices. This volume is then reported in the year end financial statements and is widely accepted as gospel truth. So much so that, of all of the factors that drive share price movements, changes in the volume of ‘proved’ reserves have the most influence. It is therefore no surprise that, when Royal Dutch recently decided to ‘recategorise’ 20 per cent of its proven reserves base, the equity market reaction was so negative.