Dutch courage

“No money disappeared, [there were] just non-existent assets.” — Michele Ributti, lawyer for Callisto Tanzi, former CEO of scandal-plagued Italian company Parmalat.

How reassuring to know that the euros that vapourized in the Parmalat scandal were not cash but accruals. Say what you like about lawyers, Signor. Ributti does have a reassuring way about him.

And count on it: we can use all the reassurance we can get. The existence or non-existence of assets is a puzzling question in this post-modern age. Gone are the days when property, plant and equipment were there to be visited, audited, and inventoried. Assets are now, pace Humpty Dumpty, just whatever we choose them to be. They can even be “virtual” — or rather, they used to be, back when “virtual” was a useful business buzz word rather than stock-market poison.

There are those who argue that the physical existence of assets is a creation of the rationalist oppressor class, a legacy of all those dead white male accountants. These people, often called “chief financial officers,” say assets are a hegemonistic construct.

That is why the writedown of reserves by oil giant Royal Dutch Shell is such a watershed. At the stroke of a pen, or maybe at the blink of a cursor, 3.9 billion barrels of oil vanished from Shell’s proven reserves.

Those troublesome rationalists, making perfectly good assets vanish. Post-moderns in the oil business must have been scandalized to hear of it. Why, next time, what will it be? Will they start demanding pump tests on every well?

Perhaps we were too sanguine back at the time of the Enron and WorldCom affairs, thinking that accounting scandals would stay neatly where they were in the utilities and telecommunications businesses. When the world’s second-largest oil company reclassifies 20% of its proven reserves to “probable,” what exactly is going on?

What seems to be going on is a change of culture at Shell, probably for the better. The company’s reserves were always calculated with an adding machine — they were merely the sum of reserves reported by different business units and national subsidiaries, and not calculated consistently. The writedown of reserves, in Shell’s case, represents a tighter classification of reserves and probably presents a more accurate picture of the company’s production potential.

Chairman Sir Philip Watts took a lot of flak for his absence from the conference call when the writedown was announced, though at the time of the conference, he was prevented from saying anything by a “quiet period” in advance of Shell’s annual results release. But he may prove to be doing something more courageous than just showing up to face the investors’ music. A willingness to make the necessary adjustments to reserves is important for Shell’s credibility, and by extension, for the whole industry’s credibility with investors.

Given that the Shell writedown is a bad development for the company and shareholders, but probably a good one for the oil industry and its potential investors, what lessons does this hold for mining, where reserve reclassifications are common enough as it is?

First, nobody is likely to loosen the definition of reserves in a hurry. They are far more likely to tighten it. In this, we are lucky to have much better progress on an international definition of reserves and resources than the oil industry evidently had.

The mining industry, happily, has been anxious to prove its bona fides by adopting national standards, such as the Joint Ore Reserves Committee Code and the Canadian Institute of Mining and Metallurgy Resource and Reserve Definitions, . . . and, as a side-effect, anyone who hasn’t made a point of meeting the industry’s new standards is doing a good job of marking his company out as less trustworthy than its peers.

Investors, whose temper with the post-modern is notably short, are probably not quite ready for non-existent assets.