The correct assessment of global oil reserves would allow us to judge whether we reached global Peak Oil. Unfortunately, while the definitions are clear, oil reserve figures remain ambiguous. There is good reason not to put too much trust into the official “proven reserves” figures.
Oil reserves are the cornerstone of Peak Oil theory. To determine whether global Peak Oil is nowadays a reality, we must focus on oil reserves. Are we halfway through our oil reserves and unable to expand production or is there still more to come?
Unfortunately, the more one researches oil reserves, the less clear the picture becomes. That’s why I’d like to start this chapter with two short stories.
I wrote my diploma about weapons of mass destruction in Arab countries. Iraq was one of the countries I had to focus on. This was back in 2001. As the US war against Iraq in March 2003 loomed, I knew exactly how many medium range SCUD missiles Iraq had. They had purchased 819 SCUDS from the former Soviet Union. UNSCOM, the organization formed by the United Nations to disarm Iraq, reported that two of those 819 missiles were still unaccounted for, so they were either stored at some hidden place inside Iraq or destroyed and the Iraqis were unable or unwilling to show any evidence as to what had happened with those missiles.
This seemed rather vague to me. It amounted to sentences like “they may still have a quantity of x or may still possess a quantity of y, but no one knows for sure”. I used to categorize my sources according to their reliability. This is one thing every intelligence agency does. German Federal Intelligence (known as BND or Bundesnachrichtendienst) for example categorizes its human sources (a pretty nice term for a spy) with grades from A to F. A source with a grade of F is maybe mentally ill, a heavy drug abuser and known to have told outright lies in the past. A source with a grade of A is simply the perfect informer. Of course, there are normally neither grade A sources (this is simply too good to be true) nor grade F sources (who needs unreliable story inventors?).
UNSCOM was a very good source; they didn’t know everything, but what was stated by UNSCOM was proven by facts. When it comes to the world of oil reserves, there is nothing similar to UNSCOM. It is even worse, you have to assume that there are some sources which would get a grade F, but the data they provide on their oil reserves is treated like the word of the mighty Lord, no one really challenges it. Matthew Simmons, the former investment banker who wrote “Twilight in the Desert” once described reserve estimation as “voodoo”. Coincidentally I know one “voodoo master” personally, as I once had to write an article about him for the newspaper I worked for, and the voodoo guy seemed to me more trustworthy than the guys estimating today’s oil reserves. He truly believed what he told me.
When you enter the world of oil reserves, a barrage of terms and cryptic abbreviations is thrown at you combined with seemingly precise numbers, so everything seems to be scientific and precise, for an outsider. So we will start with the cryptic language used by geologists and oil majors to explain to the world how much oil they have under their control.
OOIP (Original Oil-in-Place): That is the amount of oil inside the rock formation of an oil field as it starts to be produced.
OIP (Oil-in-Place): This is the amount of oil which is at the moment inside the oil field
Reserves: This is the amount of known oil which can be recovered with current technology and which is economically recoverable according to the oil price we have right now.
Reserves are further divided, as we will see.
URR (Ultimately Recoverable Resources) and EUR (Estimated Ultimate Recovery): This is the sum of what has been produced from an oil field until now and how much is likely to be produced due to current technology and prices (if it is economical to recover this oil)
Every oil field is different, but as a rule, one-third of the OOIP is recoverable.
Non-Recoverable: It is impossible to recover this oil with the technology we have at the moment.
Seems to be quite simple: We just take the number of OOIP for the fields not yet in production minus the non-recoverable oil, and add the cumulated numbers of OIP minus non-recoverable oil for the productive fields and we are done.
Don’t worry about this formula, as it is totally useless.
For a start, no one knows OOIP for sure. When an oil field is discovered, based on the drilling results and the seismic exploration data, the geologists estimate how much oil is inside the field. Yes, they simply estimate it – think about this for a moment. As they produce oil from this field, they learn more about the field, its rock formations and so on. But OOIP is a guessing game, as much as URR/EUR and the amount of non-recoverable oil.
There is only one way to know exactly how much oil can be extracted from an oil field: deplete the oil field completely until you can’t get another barrel out of it!
Nevertheless, everyone deals with figures about reserves, OPEC member countries, oil majors, oil experts, Peak Oil experts and so on. So let us dig a little bit deeper.
Oil reserves are what can be economically recovered with available technology at current prices. There are different ways to distinguish reserves. One method is to distinguish according to the probability, so you will see figures for reserves P90/proved reserves, P50/probable reserves and P5/P10/possible reserves. Let us decipher this jargon.
P90: There is a probability of 90 percent that the real amount of oil will be higher than this estimated figure and there is a probability of 10 percent that the amount of will be less than this figure.
P50: There is an equal probability of 50 percent that the real amount of oil will be higher or lower.
P5/P10: There is a probability of five percent (or 10 percent) that the real amount of oil is higher.
The other kind of cryptic figures are 1P, 2P and 3P. This is now quite simple.
1P: proved (P90)
2P: proved + probable (P50)
3P: proved + probable + possible (P5/P10)
So let us now simulate how reserves react to different events. I used to believe that increased reserves meant that more oil was discovered. At some point I found out that I was completely wrong.
There are many different ways to increase oil reserves without discovering any new field. First, initial assumptions about the total amount of oil in place could prove to be too low. During the production of the field, geologists discover that it contains more oil than they estimated at the beginning of production. The result: higher reserves.
Second, advanced technology enables the companies to recover oil which was initially seen as unrecoverable. A good example is deepwater exploration, the kind of exploration BP did with its now infamous Macondo well in the Gulf of Mexico. These reserves didn’t exist 20 years ago as it was not possible to recover oil from such a deep place beneath water.
Third, prices surge enormously. This makes oil economically recoverable which was previously known to be in place but seen as uneconomic to recover. Take deepwater exploration again. Oil prices eight years ago were about 20 to 30 dollars a barrel. To produce oil from a deepwater well offshore close to Brazil is only economically possible with a price of 45 $/b or higher.
Lesson to be learned: Oil reserves can increase even without the discovery of a new field.
The situation becomes even worse when we take a look at the source of all these estimated figures. One should expect them to be trustworthy as it is very important for the world economy.
There are two main sources of information: governments and oil companies.
The major listed oil companies are subject to the rules of the SEC, which means they have to inform their shareholders and investors correctly about their business in order to comply with the rules of the stock exchange.
Oil reserves are like a prediction of a future cash flow for oil companies as these reserves will become production and earn the company money. So investors naturally have a look at those figures stating oil reserves. But how good can all this be? The managers know very well how reserves affect share prices. Does anyone really believe that geologists in those companies are like free scientists just delivering there figures and returning to the fields or is it more plausible to assume that there may be a temptation to make things look a little bit better?
Shell reduced its reserves of oil and gas by 22% in 2004. After this, SEC started to investigate. There were rumors that a soaring oil price saved other companies from a similar fate as they were able to increase their reserves, as I explained above.
But Shell and others are still the good guys in this game. The other sources of information are governments, oil ministries and state-run companies. Among them trustworthy people like the late Saddam Hussein, to mention just one name.
Iraqi oil minister Shahristani announced in October 2010 that Iraq’s oil reserves had increased by roughly 25%. This was the information about 66 oil fields in Iraq. He further added that this figure didn’t include the oil in the fields that have not been discovered yet. And he wasn’t joking.
Iraq is a magical country. It is the only state where the president was once elected by 100% of the voters (Saddam Hussein). What is even more remarkable is that the Iraqis managed to extract for many years exactly as much oil from their oilfields as they increased their reserves by. While the Iraqis produced oil, they managed to find the new oil inside their fields at exactly the same rate, and this for many years.
So we may think of the Iraqis as true masters of oilfield management, and we should bow down and ask them politely to teach us their secret skills which must have enabled them to accomplish this task. The alternative: They just changed the date on the letter and sent the very same statement to OPEC (or whoever collected their figures) year after year. Go figure it out yourself.
To say something positive about the Iraqis, they are not alone in this game. Steffen Bukold wrote in his book “Oil in the 21st Century” in 2009 that 17 countries have reported the same reserves for 15 years!
Let us summarize briefly: There are questionable figures as there is an enormous incentive for companies to cheat, and there are figures that must be false as it is physically impossible that they are true.
Debating oil reserves can be even more fun when there are no figures at all! There is a lack of figures about Russia, which produces roughly 11 percent of the world’s oil.
What is the solution to this? Experts guess the Russian reserves. This means that experts make a guess about what the Russian experts might have guessed.
Iraqi oil minister Shahristani said that his figures didn’t contain the oil from the fields that have yet to be discovered. The simple thought behind this statement is: “There is oil in Eastern Iraq, there must be oil in Western Iraq.”
As mentioned before, there are four preconditions for the existence of oil: Source rock, cap rock, reservoir rock and the source rock must have been inside the oil window, which means between a range of 7,500 to 15,000 feet beneath earth. The source rock produces oil, but only between 7,500 and 15,000 feet below earth, the reservoir rock stores the oil, and the cap rock prevents the oil from dissipating.
No one knows whether even one of these conditions is met in Western Iraq or whether this part is as empty as neighboring Jordan when it comes to oil.
But once again, the Iraqis are not alone in this view about the world of oil. There are forecasts that there is a probability of 10 percent that about 100 GB will be discovered, so they claim that there is a probability of 50 percent that about 50 GB will be discovered. Personally, you can switch to the Astrology channel and ask one of those artists to take a look into his or her crystal ball to tell you how much oil we will discover within the next 20 years or so.