AmerCon : Energy : Oil : Over Reporting

Opec Reserve Reporting

The main OPEC countries expropriated the holdings of the foreign companies during the
1970s, following the precedent of Iran’s action against BP in 1951. State enterprises were
formed to produce the oil, inheriting the technical data and reserve estimates from the
private companies. In 1985, Kuwait reported a 50% increase to its reserves overnight
although nothing particular changed in the reservoir. It did so to increase its OPEC
production quota, which was based on reserves. Then three years later, Venezuela
doubled its reported reserves by the inclusion of large amounts of long-known heavy oil
that had not previously been reported. This led Iraq, Iran, Dubai, Abu Dhabi and later
Saudi Arabia to retaliate with huge increases to protect their quotas. Some revision was
called for, as the earlier estimates were too low, having been inherited from the private
companies before they were expropriated. But the revisions, whatever the right number
might be, have to be backdated to the discovery of the fields concerned, which had been
made up to fifty years before. In total about 300 billion barrels were added in this way
during the late 1980s, greatly distorting the apparent discovery record. It is noteworthy too
that in several cases the reported reserves remain implausibly unchanged for years on
end despite production. It is staggering that such obviously flawed information is recorded
in the public database, substantially without comment or qualification.

The expropriation of the foreign companies had far-reaching and unforeseen
consequences. Had they retained control of the cheap and easy oil in the Middle East,
they would have produced it before turning to the more difficult and costly oil offshore and
in polar regions under a normal progression that would have drawn attention to gradual
depletion, growing scarcity and rising cost. But when they lost control, they turned to the
difficult and expensive sources, and they worked flat out, leaving control of the cheap and
easy with the Middle East governments. The latter then found themselves facing the
difficult task of exercising a swing role in making up the difference between world demand
and what the other countries could produce within their depletion profiles. Furthermore, it
means that when the cheap and easy oil in the Middle East peaks and declines, there is no
cushion left of more difficult and costly oil to turn to. It follows that world production will fall
more precipitately and with less warning than would have been the case had the industry
evolved in a normal fashion.

What to measure?

Still another source of confusion is the fact that there are several different categories of oil,
there being clearly a huge difference between a free flowing Middle East well and digging
up a tar sand in Canada with a shovel. Each category has its own endowment in nature, its
own costs and characteristics, and above all its own depletion profile. The easy and cheap
categories, commonly termed Conventional, have supplied most oil to-date and will
dominate all supply far into the future, but there is no standard agreement on where to
draw the boundary with the Non-conventional categories.

The Phase Problem

Hydrocarbons occur in solid, liquid and gaseous phases, which is a cause of more
confused reporting. In the same way as moisture in the atmosphere condenses as rain, or
as bubbles form in a glass of champagne, hydrocarbon phases change under differing
conditions of temperature and pressure. Saturated oils release gas, which forms a gas
cap in the reservoir. Gas dissolved in oil in the reservoir may separate on being brought to
the surface, being termed Condensate, which may or may not be metered with the oil.
Additional liquids are extracted in gas plants. Ideally it would make sense to treat
condensate with oil, where it is related to an oilfield, because it would deplete in relation to
the oil, but to distinguish the liquids associated with a gas field, again because they would
deplete in relation to gas production. But in practice the database is far from allowing
accurate differentiation

Still More Confusion

The measurement of gas has its own problems, it being often uncertain if the reported
volumes include the non-flammable components, which are often present. The flaring and
re-injection of gas are further areas of uncertainty.

If all of this was not enough, a single field often appears under different names where it
crosses national or concessional boundaries. The largest hydrocarbon accumulation in the
world is such a case being known as the North Field in Qatar and South Pars in Iran.

Some studies, notably that by the USGS in 2000, stress the so-called resource
pyramid, claiming that the exploitable resources grow as the need arises. This
notion is inherited from mining minerals or coal, where the concentration of the ore is
critical. If prices rise or costs fall, lower concentrations become viable. But it fails to grasp
the polarity of oil which is normally either there in profitable abundance or not there at all.
The oil-water contact in a reservoir is abrupt giving virtually no possibility of tapping lower
concentrations. The heavy oil and bitumen deposits, which could be considered as the
lower part of the pyramid, are present in large quantities only in western Canada and
eastern Venezuela.

The foregoing discussion suffices to explain the magnitude of the confusion resulting from
the ambiguous definitions and lax reporting practices. It further explains how the
proponents of doctrinaire flat-earth economic principles have been able to free themselves
from the measurement constraints of actual discovery trends.

Data Sources

The most widely used public source of information comes from annual
compilations made by the Oil & Gas Journal and World Oil. Being trade journals,
they are not in a position to verify the validity of the information they receive. It is
noteworthy that the two data-sets differ greatly, despite being compiled in a
similar fashion from government and industry sources. One obvious weakness is
the fact that reserve estimates in many countries remain implausibly unchanged
for years on end despite production, signifying that the country concerned has
either not updated its estimate or has simply failed to respond. As many as sixty-
three countries reported unchanged estimates in 2002.

Another widely used source is the BP Statistical Report of World Energy. Many analysts
mistakenly believe that the data have at least the tacit blessing of a knowledgeable and
experienced oil company that is capable of assessing their validity. But BP simply
reproduces the Oil & Gas Journal material, understandably not wishing to expose itself in
this sensitive area.

There is an industry database, which has been compiled over many years in close co-
operation with the oil companies, that does report full field reserves properly backdated to
discovery, but its cost puts it out of range for most analysts. In earlier years when the
industry was dominated by a few major companies, it was a comparatively easy task to
keep track, especially as the companies themselves supported the work. But it has become
increasingly difficult because the industry is more fragmented with many speculative small
companies at work and because of the growing control by state companies. Furthermore,
the United States and Canada operate in such a very different environment from the rest
of the world that it is difficult to integrate information from those counties into the world
picture.

A Flawed Study by the US Geological Survey

The US Geological Survey has investigated the world’s oil potential since the oil
shocks of the 1970s. It put out sound assessments, which were published at
three-year intervals until a new team issued a thoroughly flawed study in 2000. It
considered its remit was to look only at abstract geological factors to indicate the amounts
to be found in a 30-year study period from 1995, couching the results in terms of
subjective probability, quoted to three decimal places. It singularly failed to relate its
findings with past discovery and production trends, or estimate the scale of exploration
required to deliver the indicated amounts. The forecast is already discredited by the
actual discovery results of the first six years of the study period. Its Mean estimate
of discovery over the 30-year period is 732 Gb, giving an average of 24 Gb a year, when
the actual results to date have been less than half that amount. This is doubly damning
because the larger fields are found first. In addition, it introduced the notion of Reserve
Growth, proposing that present reserves will grow by between 46 and 130 percent, with
76% being the Mean value. Failing to grasp the nature of the reporting practices as
discussed above, it applied the experience of the old onshore fields of the United States to
the world as a whole, despite the very different environment. It also failed to understand
that reserve growth is mainly confined to large fields with several phases of development,
and will not be matched in the smaller fields of the future.

Estimates of the total endowment have been published over the years by major oil
companies, consultants, and other authorities. The average of some sixty-five estimates is
just under two trillion barrels, although the definitions of what was being measured may
have varied somewhat from author to author. At all events the ASPO estimate of 1900 Gb
for the total amount to be produced to the year 2075 is close to the consensus.

The Inescapable Nature of Depletion

The foregoing discussion has explained the extreme weakness of public data on oil
discovery and production. Many analysts, lacking direct experience of the oil business, can
be forgiven for taking apparently authoritative data at face value. They cannot be expected
to understand the subtleties of definition and reporting practice. That said, the fact remains
that oil and gas are finite resources, formed on rare occasions in the geological past. It
follows that they are undeniably subject to depletion. An essential feature of depletion is
that the higher the production, the shorter the life-span. The world started running out
when it produced the first barrel, but “running out” is not really the key issue as the tail end
of production can drag on for a long time. A museum in Pennsylvania exhibits a well, drilled
over 100 years ago, yet still produces a few pints a day.

Production in a country starts and ends at zero, reaching a peak in between when
approximately half the total has been produced, as eloquently explained by M.
King Hubbert, who correctly predicted when the United States would peak fifteen
years before it did so (Hubbert 1956, 1962).

Much more important than final exhaustion, which will not happen for many decades, is the
issue of peak, when the growth of the past gives way to the decline of the future.

With oil providing 40% of traded energy and 90% of transport fuel, peak is set to
represent an historic discontinuity, affecting virtually all aspects of life on Earth
including agriculture, which means food.

                                       The Peak and Decline of World Oil & Gas Production
                                       K. Aleklett and C.J.Campbell
                                       Uppsala University, Sweden