What's Coming Down The Pike?
By Jeff Berg
21 June,
2008
Countercurrents.org
New Scientist: "Have we underestimated total
oil reserves?" : http://tinyurl.com/5256t5
The
Independent: "Oil shortage a myth says industry insider":
http://tinyurl.com/5p6xez
Ah the famed wisdom of the
"oil industry insider". Such a coyly engaging title. What
this insider is also very coy about is naming a single instance where
his alleged theory has been proven. There is on other hand a litany
of counterexamples that debunk Mr. Pike's assertions. But first let
us give Mr. Pike his due he is correct about one thing. Because of
SEC regulations dating back to the inception of oil stocks on capital
markets the West's major oil companies were forced to be quite conservative
in estimating the size of their finds. The essence of these rules
was that these oil companies could only report the first of the "Three
P's": P<1> Proven, P<2> Probable, P<3> Possible.
What Mr. Pike does not mention is however even more important to the
reserve picture. The oil companies bound by these rules today account
for only 10% to 15% of the world's reserves. The second thing he fails
to mention, something any industry insider should know, is that advances
in geology over the last century of the oil business has greatly expanded
the size of the P<1> category. (I.e. The percentage it represents
of the Ultimately Recoverable Resource.) The result of this being
that reserve growth subsequent to original finds is orders of magnitude
smaller today than it used to be.
The remaining 85% of the world's finite oil supply is held by nationalized
oil enterprises not bound by the rules to which Mr. Pike refers. The
Russians for example have always reported the P<1> and P<2>
estimates for their finds. Middle Eastern oil reserves on the other
hand are shrouded by secrecy. (Two-thirds of the world's remaining
oil.) Reserves which have magically remained at the exact same number
for the last two decades irrespective of production or finds.
The reason for this magic is easily explained. In the mid-eighties
OPEC changed its production quota rules to a percentage of stated
reserves. Over the next few years, unsurprisingly, country after country
claimed greater reserves as this allowed them to sell more oil. That
this was a purely political phenomenon, and a brazen one at that,
is further substantiated by the lack of reporting by these same countries
of major new finds. The Saudis held off the longest from playing this
game but finally use their power and influence to bring an end to
these political shenanigans in the process almost doubling their reserves
to 260 billion barrels. (No doubt threatening to go much higher if
this practice did not stop.) These figures remained static until recently
when the Kuwaitis were forced to revise their estimates of their reserves
downwards when their greatest field Burgan, the world's second greatest,
began to fail.
Yet another very telling point contradicting Mr. Pike's blithe musings
is the meaning and significance of RLI. The Reserve Life Index of
an oil company is certainly not something that one would want to "over-hype".
Shell oil's stock for example was hammered as a result of five downward
restatements since 2004, and top people loss the job of a lifetime.
With that said it is also the single most important factor for an
extractive company's stock price. (And why Shell was hiding its true
position)
Now while it is certainly easy for any of us to see the temptation
for those within such companies to fudge the numbers in an upward
direction, what incentive would there be to hide genuine good news?
The incentives all run the other way. I.e. If company executives could
legitimately substantiate a significantly higher RLI they, and their
company's stock, would be handsomely rewarded. Not to mention that
such information signals are supposed to be the greatest strengths
of open markets. To imagine that oil executives are knowingly depressing
their company's price, not to mention their personal remuneration,
demands a very heavy burden of proof. A burden that Mr. Pike comes
nowhere near meeting.
One final point. Flow rates and not reserves are what determine the
price of oil and what determine whether or not supply and demand can
be reasonably balanced. The very simple truth is that what matters
is not how much fossil fuels there is but at what rate we can access
them. The quintessential example of this is the 2 trillion barrels
of oil equivalent "reserve" in the oil shale of North America.
Putting aside the very important energy returned on energy invested
aspect to this story, the fact of the matter is that the test cases
of oil from shale show that the flow rates from this process are measured
in the hundreds to thousands of barrels of day range. Given the tens
of millions of barrels of oil per day consumption of N.A. it is obvious
that despite the estimated size of this reserve its impact on prices
will be negligible.
The Alberta tarsands represent a similar issue with its 172 billion
barrel reserve likely to be revised upwards considerably. The flow
rates from this resource will nonetheless never match the Saudi oil
extraction rates of today. In fact the best estimates so far indicate
that this reserve's flow rate will never rise to even half of what
the Saudis managed in their heyday. And if the water and natural gas
issues are not resolved by technology they will in fact never meet
the 3 million barrel a day level that so many now seem to take as
a given.
J.F. Berg
www.postcarbontoronto.org
www.pledgeTOgreen.ca
