Oil and Gas Reserves, Ultimate Recovery, and Resource

We are not running out of oil and we are not running out of gas. Surely the time for alternatives will eventually come but for now their present value is essentially zero and with massive government subsidies it becomes negative, a huge burden on society and economy.

More than 160 billion barrels of oil are postulated to be recoverable in the US. At current production rates this also translates to almost 80 years of oil.

The comments I got in my last blog about oil supply made me realize how confusing it is, even among presumably savvy observers of the oil and gas industry, to distinguish among linguistically similar terms on the quantity of natural gas (and oil) that is currently available for future production.

These include the words “reserves,” “ultimate recovery” and “resource.” The ratio of reserves-to-production (R/P) is another meaningful term that is often misunderstood by writers, members of other industries and politicians. Often, expressed in years, it creates frequent alarms such as “in ten years all oil (or gas) will disappear.” Even more to the point, for the entire 150 years of oil and gas production on at least a dozen occasions misunderstanding of these terms has led to speculation of “peak oil” and “peak gas” and frenzy over escalating prices.

Below I will outline a number of important issues and expound on definitions to allow for a better understanding and a more coherent dialog.

Oil- or gas-in-place

It is relatively easy to estimate the amount of oil- or gas-in-place in a given reservoir. It is simply the product of the area times the net thickness times the porosity times the fraction of the pore volume that is not occupied by the water saturation. Thus, the hydrocarbon pore volume can be calculated and given the reservoir pressure and temperature and well established phase and thermodynamic relationships on can readily estimate the oil, associated gas, and/or gas-in-place. Clearly not all this volume of hydrocarbons can ever be recovered.

Recovery and Ultimate Recovery

Factors affecting recovery include pressure, which cannot go below a certain threshold, relative permeability, and rock-fluid interactions, that result in irreducible oil or gas saturations. In general, for some reservoirs, recovery cannot exceed 20 percent of the original oil- or gas-in-place. Advanced technologies such as enhanced oil recovery and advanced reservoir exploitation strategies may increase recovery to 50 percent or even higher But these numbers depend greatly on the technological prowess of a company or a country.

Thus, estimates of ultimate recovery favored by the International Energy Agency (IEA) in Paris and many foreign governments is an intelligent (more or less) speculation as to how much of the oil- or gas-in-place can be produced with current and, especially, extrapolated technologies, some of which may yet to be invented let alone be applied or economically deployed. This is why the IEA literally shocked the world in November 2009 when in the annual energy outlook doubled their estimate of ultimate natural gas recovery from 15,000 Tcf to 30,000 Tcf over their estimate of just a year earlier. Such an unprecedented jump was the result of the developments of shale gas production in the United States, something that happened over the previous three to four years.

Reserves

This is a far more stringent definition demanding rigorous methods and evidence. It is primarily an American invention and it has been fed by the fact that it is the only country in the world where mineral rights are owned by individuals (other than those under federal lands.) For a resource to become reserves requires a series of hurdles to become which include: 1) definitive geological definition (only during the past years have seismic measurements have been allowed to contribute) 2) the drilling and testing of wells, 3) the appropriate completion and stimulation of these wells, 4) their connection with surface facilities and 5) that all production meets the economics of the day.

The term reserves is a legal definition sanctioned by the Securities and Exchange Commission (SEC) and it is used in filings, transactions and official statements by publically traded companies. Other countries do not espouse the SEC rules and politically they actually want to develop their own definitions and nuances.

To understand the situation one may look at the United States natural gas reserves as reported by the Energy Information Administration (EIA). In 1989, US proved reserves stood at 167 Tcf in natural gas wells, not counting associated gas or the more recent shale gas. A decade later, in 1999, after 169 Tcf of gas was produced the US proved reserves were again at 167 Tcf. Another decade later in 2009 and after 175 Tcf of gas was produced reserves increased by more than 100 Tcf to over 272 Tcf (EIA, 2011 and other sources.)

Because governments will not do it, it falls to a few magazines such as the Oil and Gas Journal and World Oil to publish reserves figures for many countries, trying to use similar to the SEC criteria.

The total world reserves of natural gas amount to about 6,609 Tcf but the world recoverable gas, listed at 30,000 Tcf means that 78% must still be discovered and added to reserves. The share of US proven gas reserves is only 272 Tcf, 13% of US recoverable gas. More than 1,770 Tcf or 87% of ultimate recovery still needs to be discovered. At current consumption rates US ultimate recovery amounts to 100 year supply. These figures do not include natural gas hydrates which would dwarf any estimates of other natural gas resources. Technology is not available for their exploitation yet.

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