El Paso Says It Misstated Oil, Natural Gas Reserves

Some El Paso Corp. employees used “aggressive” and “unsupported” methods to book oil and natural gas reserves from 1999 to 2003, the company said Monday, confirming that it would restate figures for that period.

An independent review found that employees provided estimates “they knew or should have known were incorrect,” the Houston-based company said. The review also revealed that certain employees used “aggressive and, at times, unsupported methods to book proved reserves” from 1999 to 2003.

Proven reserves are a closely watched estimate of a company’s profit potential.

In February, El Paso, the nation’s largest natural-gas pipeline company, announced a reduction in proven reserves, which would require a $1-billion write-down of those reserves’ value. The write-down is expected to be more than initially reported, El Paso spokeswoman Kim Wallace said Monday.

John Olson, a Sanders Morris Harris analyst, said it would be a “wait-and-see situation” as El Paso reviewed its reserves and costs to determine how large the write-down would be.

El Paso said it was cooperating with the Securities and Exchange Commission and the U.S. attorney’s office on the results of the review.

Conducted by law firm Haynes & Boone, the review set out to find the reasons for the revisions, evaluate them and make any recommendations for improvements of internal controls, El Paso said. Another goal was to determine whether any misconduct occurred.

More than 200 interviews have been conducted and 10,000 documents reviewed so far, the company said.

The review supported the restatement of financial reports for El Paso Corp., El Paso CGP Co. and El Paso Production Holding Co.

The company said Monday that investors should not rely on previously filed reports dating back to 1999.

In addition, the review determined that current management did not “participate in the inaccurate booking and the resulting overstatement of reserves,” the company said.

El Paso’s board of directors said it was implementing controls, including forming an internal committee to review the company’s oil and gas reserves; using an independent engineering firm to report to the company’s audit committee; forming a centralized reserve reporting system; and revising the company’s documentation procedures and controls for estimating reserves.

El Paso shares fell 13 cents to $6.88 on the New York Stock Exchange.