Oil Reserves Part I: Who Has Them and Who’s Lying?

One of the determining factors of when peak oil will occur is whether reported proved oil reserves are accurate or whether they’re overstated. The United States defines proven oil reserves as those than can be developed economically (meaning development yields a profit rather than a loss), but apart from the US and a few other countries, published reserves are not well defined and estimation methods are not readily apparent.

According to Colin Campbell, Kuwait added 50% to its proven oil reserve figure in 1985 to increase its OPEC quota, which was based partly on reserves while no corresponding new discoveries had been made and nothing in particular changed in the reservoir. In 1987, Venezuela doubled its reserves by the inclusion of large deposits of heavy oil that had been known for years. Both instances forced other OPEC countries to retaliate with huge increases in their reserves.



Increases in previously discovered reserves can occur over time due to advances in technology, but 30% - 60% increases shown in the picture above aren’t likely.

And even within the United States, companies are toeing the line when it comes to reporting their reserves. Shell caused quite the scandal in April 2004 when it downgraded approximately 22% of its proven oil reserves to less certain categories (possible or probable). An honest mistake you ask? Ummm…no. Shell management allegedly knew about overreporting as early as three years before they came clean with the general public.

Walter van de Vijver complained about the estimates after he took over as chief of the division in June 2001, replacing Sir Philip Watts, who had been promoted to Shell chairman…The report said van de Vijver notified Shell's managing directors in February 2002 that the company's reserve classification rules did not match those of the U.S. Securities and Exchange Commission and that Shell might have overestimated its reserves by 2.3 billion barrels.

"I am becoming sick and tired about lying about the extent of our reserves issues and the downward revisions that need to be done because of far too aggressive /optimistic bookings," van de Vijver wrote in a November 2003 e-mail to Watts, released in the summary.

Other correspondence showed executives knew estimates were wrong but did nothing, the investigators found. Instead, investigators found, executives attempted to "manage" the problem and "play for time" in hopes that future growth would eventually obviate the need to come clean. But "this strategy failed — as business conditions either deteriorated or failed to improve sufficiently to justify historic bookings."

Although investors seem to be confident in US company reserve figures, the SEC is still toying with the idea of issuing new reserve reporting guidance. So you start to wonder, if Shell is monitored by the SEC and fudges its reserves a bit, how much do you want to bet that the remaining big dogs in the oil industry (Chevron-Texaco, Conoco-Phillips, etc) aren’t being as forthright either? Better yet, what about other countries who’s business environment and accounting rules aren’t as stringently regulated?

Al-Husseini just retired as vice-president of oil exploration at the Saudi oil company Aramco and in 2004 he was skeptical about oil production expectations projected by the International Energy Agency (IEA).

The IEA predicts that demand of energy of all types will soar by 59 per cent by 2030... The IEA expects the Middle East Opec states to be pumping 52 million barrels a day by 2030, up from 20 million today. However, Sadad Husseini, a former vice-president in charge of production at Saudi Arabia’s state-owned Aramco oil group, told Channel 4 News that hopes of doubling Saudi production to 22 million barrels a day over two decades to help to meet demand were 'unrealistic' and a dangerous basis for policy."

"I think in total the [International Energy Agency] outlook is much too high for production and it’s unrealistic for the world to be expecting such high numbers from all of the producers, including Saudi Arabia. They’re not only overestimating the Middle East, but they overestimate non-Opec, they overestimate Russia, they overestimate the whole global resource base. And I think this is a rather dangerous situation for the US government policy to be based on."

"I suspect prices around $50 will be with us for a while," he says. And then he issues his own Saudi-related warning. "The excess capacity is no longer there. That will mean more of the volatility and price surges. And the financial markets have yet to wake up to that."

So according to Husseini, its an issue of both exaggerated reserve estimates and exaggerated reserve projections based on the fact we expect demand for oil supplies to go up, but not based in the reality that oil supplies may not be able to satisfy demand.