World Oil reserves declining – but how fast?

OPEC said last week its proven crude oil reserves rose 4 percent in 2009 to 1.06 trillion barrels, led by an increase in Venezuela. BP estimated last month total global oil reserves were over 1.33 trillion barrels — equivalent to more than 40 years of consumption at current rates.
But many industry analysts have cast doubt on these figures, saying estimates may be inflated for a variety of reasons.

Following is a selection of some of the key issues involved:

CLASSIFICATION

* The Society of Petroleum Engineers has a committee for its
Petroleum Resources Management System (PRMS), which has drawn up
a set of standards to measure petroleum reserves to which
companies are expected to conform. The PRMS divides recoverable
oil and gas into proved (1P), proved and probable (2P) proved,
probable and possible (3P). The “best estimate” is normally
taken as 2P. The definitions are on an ascending scale of the
“chance of commerciality”.

* On Jan. 1, 2010, the U.S. Securities and Exchange
Commission (SEC) updated its rules for oil and natural gas
reserves reporting. The SEC rules largely follow the PRMS, but
it bases its guidelines on “economic producibility” while the
PRMS uses “commerciality” as a measure. The SEC’s classification
of reserves also excludes oil from bitumen and other
“non-traditional” resources. Companies must disclose proved
reserves — oil that can be expected to be produced under
current economic and technological conditions.

CORPORATE MISREPORTING

* The SEC move this year is the latest attempt to
standardise oil and gas reserves reporting to try to help
investors make reasonable assessments of the assets held by oil
companies and their likely future production.

* In the past, some oil companies have inflated estimates of
their oil reserves or sought to massage their figures to impress
shareholders or reassure them over their long-term prospects. In
some parts of the world, oil reserves may be taxed, encouraging
companies to report lower figures. In the United States, oil
companies can under some circumstances reduce tax to reflect
depletion of oil reserves, which may also encourage
under-reporting, analysts say.

* In 2004, Royal Dutch Shell (RDSa.L: Quote), the world’s third
largest oil company, slashed its proven oil and gas reserves by
a fifth, or 4.47 billion barrels, prompting an investigation by
the SEC and Britain’s Financial Services Authority (FSA)
industry watchdog. It subsequently downgraded its reserves even
further. Several top Shell executives lost their jobs in the
wake of what the FSA called Shell’s “reserves scandal”. Shell
agreed to pay a record 17 million pounds ($31 million) to the
FSA for breaching market-abuse provisions and listing rules, and
a civil penalty of $120 million to the SEC for violation of U.S.
laws and SEC rules.

RESERVES ARE POLITICAL

* Members of the Organization of the Petroleum Exporting
Countries face pressures which may affect their reporting of oil
and gas reserves. Since the early 1980s, OPEC members have
operated a system of production targets in an attempt to
influence oil prices and their quotas have at times broadly
reflected the size of their official reserves. This may have
encouraged OPEC members to try match their rivals’ estimates.

* The reserves of some countries, including Kuwait, the
United Arab Emirates and Nigeria, have not changed for several
years according to OPEC, a trend that for some observers makes
the figures questionable.

* In January 2006, leading industry newsletter Petroleum
Intelligence Weekly (PIW) said it had seen internal Kuwaiti
records showing that Kuwait’s actual oil reserves, which were
officially stated at around 99 billion barrels, were in fact
much lower. PIW said it had seen evidence that Kuwait had only
24 billion barrels of fully proven reserves and another 24
billion barrels of non-proven reserves. If PIW’s figures were
correct, it would have meant Kuwait was only sure of having
around another nine years of production left at the output rate
of the time — around 2.7 million barrels per day (bpd). Kuwaiti
officials dismissed the PIW story.

* Several OPEC members have made substantial revisions to
their reserves data over the last 25 years. In 1985, Kuwait
announced an increase in its reported reserves to 90 billion
barrels from 64 billion, despite saying nothing radical had
changed in the oilfields. By 1989, Kuwait was saying it had
around 97 billion barrels and these had grown to over 101
billion by the end of last year.

* In 1988, Abu Dhabi raised its reserves estimate to 92
billion barrels of reserves from 31 billion. Other countries
have also raised their reserve estimates sharply: Iran raised
its reserves to 93 billion barrels, up from 49 billion, Iraq
moved its reserves estimate up to 100 billion barrels from 47
billion, while Venezuela jumped to 56 billion barrels from 25
billion including heavy oils not previously counted.

* The government of Venezuelan President Hugo Chavez said
last week it hoped to end 2010 with the incorporation of another
105 billion barrels of proven oil reserves, giving it 316
billion barrels, making it “the country with the biggest
certified crude reserves on the planet”.

* Saudi Arabia has reported official oil reserves of around
260 billion barrels for the last 20 years, despite pumping as
much as 4 billion barrels a year from its maturing oilfields.

ALTERNATIVE ESTIMATES

* Analysts who support the “peak oil” supply theory, arguing
world oil production has already passed its peak, say some OPEC
countries may be reporting total oil found and producible to
2100, not the amount remaining in the ground. That could explain
the PIW figures for Kuwait and the lack of change in Saudi
reserves data (see above).

* If some countries, including some OPEC members, are in
fact reporting total oil reserves discovered instead of oil
still to be extracted, remaining global oil reserves could be
much lower than official figures imply.

* Independent petroleum Geologist Colin Campbell believes
official estimates overstate global oil reserves by as much as
60 percent, arguing that the maximum future global oil
production will be around 828 billion barrels, well below
official estimates of closer to 1.33 trillion.

* BP’s latest annual Statistical Review of World Energy,
which compiles a variety of official reserve data, estimates the
global Reserves-to-Production (R/P) ratio at almost 46 years,
but the usefulness of this ratio has been questioned. The R/P
equation — official total remaining reserves divided by current
annual production — assumes dwindling oil reserves can all be
extracted at the same rate as they were while oilfields were
young. In fact, geologists say, production will decline slowly
but over a much longer period.

PROVED RESERVES TABLE (SELECTED)*

Official Estimates Alternative Estimates!

billions of barrels
Country Now¦ End-1999 End-1989 Total Past Future

Discovered
S.Arabia 265 263 260 260 118 142
Russia 74 59 – 230 146 84
USA 28 30 34 200^ 178^ 22^
UAE 98 98 98 85 29 56
Kuwait 102 97 97 80 36 44
Venezuela 172 77 59 75 50 25
World 1,333 1,086 1,006 1,900 1,072 828

* None of the global oil reserve totals incorporate the most recent higher projections for Venezuela.

Reuters