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OPEC's shocking oil reserve
boondoggle
By Bill Powers
When I was in Calgary, Alberta, last year
visiting several oil and gas companies, the chief
executive officer of one of Canada's best-run junior oil
and gas companies looked across the conference table and
said something that stuck in my mind: "Get ready for $50
oil!" Such a bold prediction, made when nearly every
Wall Street and Bay Street analyst was lowering his 2004
oil price prediction, underscores the massive divide in
opinion on the future price of oil.
There is a
growing belief among the geologists who study world oil
supply that world oil production is soon headed into an
irreversible decline. The geologist who has most
eloquently laid out the argument for higher oil prices
is Dr Colin J Campbell. Author of the book The Coming
Oil Crisis, Campbell holds a doctorate from Oxford
University and spent decades working as an international
exploration geologist for major oil companies. After a
long career in the oil industry, Campbell worked for
Petroconsultants, based in Geneva. At Petroconsultants,
he was instrumental in assembling what has become widely
recognized as the world's leading hydrocarbon database.
Campbell is now a trustee of the Oil Depletion Analysis
Center (ODAC), a charitable organization in London that
is dedicated to researching the date and impact of the
peak and decline of world oil production due to resource
constraints, and raising awareness of the serious
consequences.
I found Campbell's thesis on the
future of world oil production in a speech he gave to a
German university in 2000 titled "Peak Oil: A Turning
Point for Mankind". (To watch a replay of this speech click here and click on the
RealVideo presentation. The beginning of the lecture
might be a little blurry.) Below is a summary of his
findings.
Campbell believes worldwide production
of conventional oil will head into permanent and
irreversible decline in the 2005-10 timeframe.
The term "conventional oil" is used to refer to
oil that is produced from conventional reservoirs and
does not include oil from tar sands, polar areas, or
deepwater areas, or oil from coal or shale. Conventional
oil accounts for 95 percent of all oil produced today
and will remain the determining factor in world oil
production for the foreseeable future. According to
Campbell, world oil discovery peaked in the 1960s and
has declined steadily since. We are now to a point where
we produce four barrels for every one we discover.
Clearly, this is an unsustainable situation, since
long-term discovery and production must mirror each
other to some degree.
Campbell is also far from
sanguine about the current state of world oil reserves.
He provides significant evidence that oil reserves are
being grossly overstated by the Organization of
Petroleum Exporting Countries (OPEC). Campbell notes
that the two most used estimates of world oil reserves,
which are prepared by the Oil and Gas Journal and
the BP Statistical Review, are flawed. Both
publications rely on reserve estimates provided to them
by governments, and industry and make no effort to
verify accuracy. The below table (data from the Oil
and Gas Journal) supports Campbell's view that
OPEC's reserve figures are not based on any reliable
estimate of total recoverable reserves. Notice how
several countries report the same reserve figures for
several consecutive years. Constant reserves figures are
very unlikely considering that production and discovery
would have to match each other exactly.
Campbell
contends that OPEC reserve estimates are politically
motivated. Kuwait is an excellent example of what is
wrong with the way OPEC countries report reserves. The
country reported a gradual decline in its reserve base
from 1980-84. This should be expected from a mature
producing country. However, in 1985 the country reported
a 50 percent increase in reserves with no corresponding
discovery. The Kuwaiti government increased its reserve
estimate because of the implementation of an OPEC
production quota system that based country production
levels on country reserves. Kuwait was not alone in
increasing its reserve estimates for political reasons.
In 1988, Abu Dubai, Dubai, Iran and Iraq all
significantly increased their reported reserves for
political reasons. Even OPEC heavyweight Saudi Arabia
reported a massive increase in reserve estimates in 1990
for similar reasons.
While OPEC has consistently
overstated its reserves, Campbell contends that industry
has understated its reserves. The pressure on companies
to understate reserves by the analyst community has
created a gross misunderstanding of how much oil is
actually being discovered. Campbell argues that most
company estimates create the illusion of growing
reserves when in fact, previously discovered oil is
merely being reclassified into the proven category for
reporting purposes.
(At least one major oil
company is not understating reserves. Royal Dutch/Shell
reported a whopper of a reserve writedown in January.
The company reported that its reserves were overstated
by an amazing 20 percent. The company contends that it
acted "in good faith" when preparing its reserve
estimates. Such a large writedown has attracted the
attention of US Securities and Exchange commissioner
Roel Campos, who is considering launching an
investigation into the matter.)
According to
Campbell, we are likely to face a sea change in the
world's oil production capacity. Campbell maintains that
peak production comes close to the midpoint of
depletion. According to Campbell's estimate of the
world's oil endowment, we are right at the halfway mark.
How might this crisis unfold? Campbell makes it
clear that the crisis will not look anything like the
oil price shocks of the 1970s. Instead, Campbell refers
to those politically motivated disruptions in supply as
mere "tremors" compared with the "earthquake" that is
about to hit the oil-consuming world. The first phase of
the crisis, which has already arrived, will bring about
price shocks. In the nearly three years since Campbell
made this prediction, the world has witnessed several
rounds of high oil prices. However, the onset of chronic
shortages will begin around 2010, when the Middle East
will be required to supply 50 percent of total worldwide
oil production. More important, it is at this time that
the Middle East will have reached its production
midpoint and will head into decline also.
Clearly the scenario laid out by Campbell is not
a pretty one. However, in every crisis lies opportunity.
Astute investors should recognize the implications of
declining worldwide oil production and adjust their
portfolios accordingly.
Bill Powers
is editor of Canadian Energy
Viewpoint.
(Posted with
permission from KWR International Inc, a consulting
firm specializing in the delivery of research,
communications and advisory services.)
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