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Cenovus defends report on resources Add to ...

Call it a word problem with consequences.

Cenovus Energy Inc. was forced to defend itself against investors Thursday after unveiling a "contingent resources" report showing how much oil it believes it can pull from its oil sands lands.

But the number - 5.4-billion barrels of bitumen - was just over half of the number the company published in a similar report four years ago. That spooked investors, who brought Cenovus shares down nearly 5 per cent in midday trading, and triggered a quick defensive reaction from the company, which argued that its newly issued numbers had been misunderstood.

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Cenovus chief executive officer Brian Ferguson also argued that the company has so much lucrative land it will look to joint ventures or other corporate transactions to help speed some of its development.

But the confusion over the Cenovus resource figure has highlighted a critical gap in how oil and gas companies report how much crude they have, and how investors can use those measurements to compare one company with another.

The issue for Cenovus lies in an arcane - yet critically important - difference in definitions. In 2006, when Cenovus predecessor company EnCana Corp. reported how much bitumen it could extract from its lands, it used a measurement of "total recoverable bitumen" and produced a number of 9.2 billion barrels.

Thursday, it produced a number using contingent resources. It's a different measure of crude, and a more rigorous one, which helps explain the lower number. But the use of contingent resources has sparked a broader problem: nobody can say exactly what they are.

The term has crept into corporate reporting in the last three years and gained popularity because it allows companies to describe bitumen deposits they won't be able to tap for years to come.

It's useful tool, but for now it's effectiveness is hampered by the fact that it is not well understood.

"A lot of people don't really know what contingent resources means, especially in the context of oil sands," said Phil Welch, the president of McDaniel & Associates Consultants Ltd., the reserves evaluator that published both sets of numbers for Cenovus.

Even McDaniel admits it's not entirely clear how to define a "contingent resource." The industry Bible on defining barrels in the ground is called the Canadian Oil and Gas Evaluation Handbook. But while that handbook does provide a basic definition of contingent resources, "there's no detailed guidance in terms of how it should be applied to oil sands or other types of resource plays," Mr. Welch said.

The Cenovus example shows how that can lead to confusion. Cenovus based its 5.4-billion-barrel estimate on an oil price assumption of $61 (U.S.) a barrel into the future. But it didn't disclose what oil price it used to come up with the 9.2-billion-barrel number.

Worse still, other companies typically base their contingent estimates on prices in the $80 to $100 range.

That's a huge disparity. Cenovus has said a higher oil price would make little difference to its contingent estimate - but because companies are, in part, valued by how much oil they can produce, analysts wonder how to compare Cenovus with, for example, Suncor Energy Inc. if they each use wildly different price assumptions.

"Right now is there a danger in trying to compare companies on a dollar-per-bitumen-barrel because it may not all be apples to apples," said Philip Skolnick, an analyst with Genuity Capital Markets. "Who knows right now?"

The Society of Professional Engineers, which writes the handbook, is drafting a chapter that, if accepted later this year, will clarify contingent resources.

For now, though, Cenovus was left to reassure investors that its 5.4-billion-barrel estimate is enough to fuel the company for years to come.

Cenovus is, in fact, currently hiring 180 people and looking to add a third construction management team, which will allow it to more quickly develop its oil sands.

"We have the potential for two decades of double-digit bitumen production growth," Mr. Ferguson said.

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