Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on May 11, 2016
The Massive Decline In Crude Oil Reserves
I spent a lot of time in 2015 warning that at year-end we would see a huge decline in crude oil reserves. As I have explained in the past, the reason I expected this is because of the relationship between proved oil reserves and oil prices. This relationship is important for understanding oil reserves. Some articles that recently began making the rounds made certain conclusions from this paper — A global energy assessment — in which some subtleties about oil reserves have been lost. So let’s review.
An oil resource refers to the total amount of oil in place in particular area. Generally, most of a resource can’t be technically recovered, but the resource refers to the amount that could potentially be recovered. These estimates can go up and down, but the resource is what could be recovered at 100% recovery based on current estimates.
As an example, it is estimated that the Bakken Shale centered under North Dakota contains several hundred billion barrels (bbl) of oil (the resource). However, what is technically and economically recoverable in the Bakken has been estimated at less than 10 billion barrels (<10% of the resource).
The portion that is technically AND economically recoverable at prevailing oil prices may be classified as proved oil reserves. (The same concept applies for natural gas). This means that proved reserves are a function of prevailing oil prices. This qualifier is often misunderstood.
It was estimated that when oil was $100/bbl, there was a total of 1.7 trillion barrels of proved oil reserves globally. The aforementioned article argues that this estimate may be overstated by about 875 billion barrels. It may very well be, but that doesn’t mean the oil isn’t there. It just means that at $40/bbl, there aren’t 1.7 trillion barrels that can be economically produced. The inverse of this is why Venezuela’s proved reserves went from ~80 billion barrels in 2004 to nearly 300 billion barrels in 2014. Oil at $100 meant that more of Venezuela’s heavy oil was economical to produce, shifting it from the resource category into the proved reserves category (and of course it can be shifted right back out of the proved reserves category).
Each year, companies trading on U.S. exchanges must report the amount and estimated value of their oil and gas reserves. These estimates are done according to U.S. Securities and Exchange Commission (SEC) guidelines, and are provided in each company’s annual report.
The value of reserves is reported as a standard discounted cash flow (DCF), which is typically known as the standardized measure (SM). The SM is defined as the present value of the future cash flows from proved oil, natural gas liquids (NGLs), and natural gas reserves, minus development costs, income taxes and exploration costs, discounted at 10% annually.
Annual reports have now been filed, so the results are in. Of the 125 oil and gas companies in my database that reported proved reserves to the SEC, 92 reported declines in their proved oil reserves. The largest decline was reported by Royal Dutch Shell, which saw a decline of 827 million barrels in its proved oil reserves in 2015. Other large declines were recorded by Occidental (461 million barrels), Hess (246 million barrels), Apache (225 million barrels), and Anadarko (216 million barrels).
Cumulatively, these 92 oil companies reported a decline in reserves at the end of 2015 of about 3 billion barrels (11 billion barrels of oil equivalent if natural gas proved reserves are included). That’s a big number, but it only becomes truly impressive when the value of these reserves is tabulated.
Keep in mind that the Standardized Measure is based on both the overall amount of proved reserves — which declined — and also the value of reserves that remain on the books. The decline in commodity prices had an enormous impact on the latter.
At year-end 2014, the SM of companies reporting to the SEC was $1.4 trillion. At year-end 2015, that number was reported to be $560 billion — a year-over-year decline of $840 billion. Only three of the 125 companies in my database reported a year-over-year increase in the value of its reserves. The Energy Information Administration (EIA) recently tabulated that U.S. oil companies lost of total of $67 billion in 2015, but given the dramatically reduced value of reserves that’s a drop in the bucket compared to what it could be with an extended oil and gas bear market.
But, don’t expect a repeat in 2016. The nearly 80% gain in crude prices since the February lows make it likely that some of the write-down in 2015 will be recovered this year.
Consumer Energy Report » R-Squared Energy Blog by Robert Rapier
21 Comments on "The Massive Decline In Crude Oil Reserves"
dave thompson on Wed, 11th May 2016 11:46 am
Interesting from an “econ 101” perspective. Reality is that $100 oil is unafordable to the consumer and crashes the economy. $40 oil is unafordable to the producer and crashes the supply. What to do? Face the limits of physics and the second law of thermal dynamics, industrial humanity is f**ked.
Truth Has A Liberal Bias on Wed, 11th May 2016 12:48 pm
it’ll be interesting to see how the economy responds as we approach limits to affordable oil. We’ll all know there’s still oil down there but accepting that we can’t afford to extract it will be difficult for many. This difficulty in acceptance will contribute to many strange behaviours, like banks lending money to companies to extract oil only to learn at a later date that the project wasn’t a profitable one, volatility in the oil market and much political discourse about how one party or another is better at creating conditions that are capable of producing more oil. I’m quite interested in this EV idea everyone latches on to, as if being able to drive around will somehow save us from a low energy future. People sure love to drive. So much so that they think EV driving will solve a coming famine.
Roger on Wed, 11th May 2016 5:57 pm
The cited study has nothing to do with the “resource” vs “proven” reserves classification under SEC guidelines.
It’s unclear whether the author of the above article completely misses the point, or perhaps is pushing feel-good propaganda in an attempt to offset the sobering conclusions. The 875 billion barrels (half of what is commonly referenced as the world’s proven reserves) won’t be coming back at any price, because it was never really there. 435 billion is OPEC overstating what they have (they don’t follow SEC guidelines or do third party audits) and 440 billion was tar/heavy oil in Canada and Venezuela…which looks like oil, but the net energy returned is dismal.
Outcast_Searcher on Wed, 11th May 2016 6:35 pm
Wrong Dave Thompson. You keep saying on various articles that more expensive oil “crashes” the economy. Yet you give no specific reason.
So why did oil at about $100 on average for a good four years ending in 2014 occur while the global economy and the US economy was growing?
There are physical limits and BAU growth can’t continue forever. However, that does NOT mean that $100 oil will do anything remotely like “crash” the economy — just like it didn’t recently.
It’s not the 2nd law of “thermal dynamics”, it’s thermodynamics, by the way.
Do you have an actual case to make, or are you just parroting doomer talking points?
Andrew Rickard on Wed, 11th May 2016 6:56 pm
Easy there, naysayers, this is all the logical outcome when free market entrepreneurs compete in the same market as cartels and government backed companies.. When cartel members provide oil to some at below market prices, others have to pay more for the energy they want. This attracts entrepreneurs who see a chance to sell at above the “free market value” casing supply to increase. This forces cartels and goverment backed companies to need to restrict supply to maintain the ability to provide to some for less than market value. As their market then erodes they open up production to kill off the higher priced producers. A crash is sure to follow in the now oversupplied market. All the while the “free market price” has continued to inch slowly up. Now comes the underinvestment due to the market price being below the free market price. Production falls. Prices again will overshoot the free market price to the high side. And so we continue. The free market price is the price that is required to produce the last needed barrel and this will inch up at a very gradual rate as we deplete the easier recovered barrels. As alternative energy sources begin to compete as this goes ever higher the gradual increase will slow and the producer will become more efficient.
But it isn’t ever going to go away it will just occilate around the free market price which is controlled to the upside by what people will pay for it. Someone will pay for it because it is cheap energy. Right now it should be 65-70 $/bbl
Davy on Wed, 11th May 2016 7:19 pm
Andrew, nothing is going according to scrip. You can’t base a prediction on some vague free market criteria when we no longer have free markets nor normal markets.
Davy on Wed, 11th May 2016 7:22 pm
“Central Banks And The Rise Of Extremism”
http://www.zerohedge.com/news/2016-05-11/central-banks-and-rise-extremism
“Debt drains away vital resources from economic growth. Fighting a debt crisis with more debt is doomed to failure, yet that is not only what global central banks did during the crisis but long after markets stabilized (though the crisis never truly ended, just slowed). This was an epic policy failure that continues today.”
“regulators estimate that insurers will begin to fail after 2018 due to the impossibility of operating in a negative interest environment with over 80 percent of said insurers’ investments in fixed income. “
Roger on Wed, 11th May 2016 7:43 pm
“regulators estimate that insurers will begin to fail after 2018 due to the impossibility of operating in a negative interest environment with over 80 percent of said insurers’ investments in fixed income. “
Nah, the gov’mnt will just make us buy more.
dave thompson on Wed, 11th May 2016 7:50 pm
http://r.search.yahoo.com/_ylt=A0LEVitC0zNX7sEAMEEnnIlQ;_ylu=X3oDMTByNXM5bzY5BGNvbG8DYmYxBHBvcwMzBHZ0aWQDBHNlYwNzcg–/RV=2/RE=1463043011/RO=10/RU=http%3a%2f%2fhyperphysics.phy-astr.gsu.edu%2fhbase%2fthermo%2fseclaw.html/RK=0/RS=EHBeAuMZkEkf0lPMO0.X8HkRAPM-
dave thompson on Wed, 11th May 2016 8:06 pm
Outcast, case and point see above for 2nd law of thermodynamics. As far as growth goes my question is what growth? The top percentiles of income may have seen growth but the meat and potatoes of the middle class have not seen growth in over 30 years. The housing bubble crashed when oil hit well over $100.The economy for most of us average folk has been sputtering along now for the past 8-10 years at least in case you missed it. Look at the latest new jobs report. You want to call me a “doomer” fine so be it. I call it reality.
makati1 on Wed, 11th May 2016 10:03 pm
dave, we “doomers” see reality. Some here don’t or will not admit that they do. That government Koolaid is powerful stuff if you are addicted to it. The deniers give us a good idea of why the world is in such a shitty mess. They represent the majority, not the minority. Especially Americans. Most no longer have a brain that functions free of the bullshit that flows out of TPTB daily. Too bad. Too late to change now.
Stabilizer on Wed, 11th May 2016 10:05 pm
Oil will be replaced as follows:
Oil shortage causes $100 oil
$100 oil causes investment in alternatives
Drillers drill at $100 and supply quickly exceeds demand
Oil crashes well below $100
Investment in alternatives dies, but so does oil drilling
Soon, oil is short and zooms back to $100
Repeat as necessary, each time with alternatives taking more market share, until oil drops in price and nobody notices, or cares
Boat on Wed, 11th May 2016 10:19 pm
“regulators estimate that insurers will begin to fail after 2018 due to the impossibility of operating in a negative interest environment with over 80 percent of said insurers’ investments in fixed income.”
Insurance companies raising prices so high for area that business and home owners can’t afford to rebuild will be an early sign of future trouble. This hasn’t happened yet except on a small scale.
makati1 on Wed, 11th May 2016 10:26 pm
Stabilizer, not going to happen. The crash is already underway and there will be no “recovery” this time. The slope is only down. Sorry, but reality is a bitch that needs to be confronted if you expect to survive.
Sissyfuss on Wed, 11th May 2016 10:49 pm
Outpast sinecure, the only things growing at the end of 2014 was interest free funny money and debt upon debt papered over with more debt.
GregT on Wed, 11th May 2016 11:06 pm
“This hasn’t happened yet except on a small scale.”
Correction. It has already happened on a small scale, and that scale will continue to grow larger.
The exponential function, it’s a bitch, especially for the dumbed down masses that have such serious difficulties with basic arithmetic.
rockman on Thu, 12th May 2016 7:34 am
Just thought I would add the obvious: the “decline” in proved reserves is just on paper. The same amount of oil is still in the ground today as it was 3 years ago (less production during that time, of course). As pointed out the correct phase is “proven oil reserves based upon current price assumptions” and not “proven oil reserves”. There was a huge surge in the amount of reserves when the price of oil triple. Which means it shouldn’t come as a shock that the amount of proven oil reserves declined so much given the huge decline in prices.
The amount of physical producible oil in the shales has not decreased. Just the amount of commercially producible oil has significantly decreased.
PasoFino on Thu, 12th May 2016 8:55 am
Please Lord let there be another oil boom and this time I promise not to piss is all away….. yeah right. $100 a barrel will crash economies because the greed for even higher profits will never go away. Supply and demand will eventually force an equilibrium and the house of cards comes crashing down. Societies that depend on oil to support their government and social programs get used to the higher income then end up in dire straights in a matter of a few short months.
And the oil production companies don’t even track million dollar frack trucks when times are good and money is rolling in, but when it crashes you can’t buy a light bulb without VP approval – if any of the VPs are even left on the payroll.
rockman on Thu, 12th May 2016 10:54 am
Paso – So true. Been watching the dynamic from the inside for almost half a century and very little has changed in that time. Folks think they just witnessed a huge “slash and burn” in the oil patch. It was much more severe in the boom over 35 years ago.
Vaughan piano music theory on Fri, 18th Nov 2016 8:06 pm
What’s up to every body, it’s my first visit of this weblog; this blog carries remarkable and really fine information for
visitors.
onlooker on Fri, 18th Nov 2016 8:12 pm
Welcome Vaugn, hope you enjoy it here