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How Reliable Are OPEC Estimates?

By Dave Cohen

26 October, 2010
Decline of the Empire

Through an accident of plate tectonics and other developments over geological time, most of the world's remaining recoverable oil is situated around the Persian Gulf. This is unfortunate for us because we will thus never have a reasonable, universally agreed-upon estimate of the amount of oil left to produce. Let me explain.

Why talk about oil reserves at this point? Well, it seems that some Persian Gulf nations are now in a pissing contest over who has the most recoverable oil. Let's start with Kuwait—


KUWAIT CITY (AFP) – Kuwait has added at least 12 billion barrels of crude oil to its reserves, which are estimated at over 100 billion barrels, following a comprehensive study, a newspaper reported on Thursday.

Citing well-informed oil sources, Al-Jarida daily said the new oil was found in Greater Burgan, the world's second largest oilfield after Ghawar in Saudi Arabia, with reserves estimated at close to 70 billion barrels.

The sources told the paper that more reserves have been discovered at a number of other reservoirs following a comprehensive study, which will boost the Gulf state's reserves - the credibility of which has been questioned in the past.

I'll get to Kuwait's "credibility" in a moment. Calculating oil reserves is a very complicated business. There is always a great deal of uncertainty. I'm going to give you a grossly simplified "everything you need to know" explanation. First, there is an estimate of the original oil in place (OOIP). And then there is how much of that oil you expect to recover—this is called the recovery factor R. If we multiply these two terms, we get a number, usually measured in billion of barrels, representing a country's "proved" reserves. (I am really oversimplifying here, but it doesn't matter.) Let's call this number PR.

The PR term can be calcuated over time t by the following formula:

PRt = ( new discoveriest ) plus ( reserves additionst ) minus ( oil producedt )

Kuwaits say they have discovered some new oil "pools" in Greater Burgan. Reserves additions come from the application of new technology which allows the producer country to increase its recovery factor R.

OK, now let's look at recent developments—


According to OPEC data, Kuwait holds the world's fifth largest crude reserves at 101.5 billion barrels after Saudi Arabia, Venezuela, Iran and Iraq [without the 12 billion to be added]

On October 4, neighboring Iraq announced a sharp rise of its crude reserves from 115 billion barrels to 143.1 billion barrels, overtaking Iran, OPEC's third largest member, in terms of reserves.

But a week later, Tehran also boosted its crude reserves, citing new discoveries, to 150.3 billion barrels from 138 billion barrels, reclaiming third place.

What's this? Are they just making this stuff up? And the answer is yes, they are. These reserves increases are called "political" in the sense that OPEC production quotas are based on a member's reserve base. But here's the kicker: OPEC reserves never go down, they either go up or stay the same.

From the EIA AEO 2006 edition. In 2006, OPEC claimed between 700 and 800 billion barrels.

For example, Saudi Arabia's proved reserves have been about 265 billion barrels (give or take a few billion) for years and years now. Miraculously, the amount of oil the Saudis discover or add as now technically recoverable just about equals the amount they produce year in and year out. No matter how much oil they produce, there's always at least that much left to produce! They accomplish this sleight-of-hand by raising their general recovery factor R. That number now stands at 70%, whereas the worldwide average is about 35%.

Thus we might reasonably conclude from the "official" numbers that the amount of oil left to produce in the Persian Gulf is effectively infinite. With these latest "additions" by Kuwait, Iraq and Iran, OPEC now has over 1,000,000,000,000 (trillion) barrels left to produce according to Ali Al-Naimi, Saudi Arabia's oil minister—


OPEC member countries now hold over 1 trillion barrels of crude oil reserves, having already produced 400 billion barrels since the Organization of the Petroleum Exporting Countries was founded 50 years ago, Saudi Arabian oil minister Ali Naimi said Tuesday.

"When it was founded, the members of the organization had around 300 billion barrels of oil reserves and in the last 50 years, has produced over 400 billion barrels," Naimi told a symposium marking the group's 50th anniversary.

"[OPEC] still has more than 1 trillion barrels, which places it in a unique position in terms of reserves to continue supplying petroleum to the world for several long years and to exploit these reserves for the benefit of future generations," he added.

It's quite amazing—Ali al-Naimi is bragging about OPEC's fraudulent reserves accounting! Seriously, Homo sapiens is about 200,000 years old in the fossil record. Is this the best we can do?

And what about those suspect Kuwaiti additions? Remember, the official OPEC data says they have 101.5 billion barrels left to produce plus another 12 billion more coming from new oil pools discovered at Greater Burgan—


Industry newsletter Petroleum Intelligence Weekly (PIW) however said in January 2006 that Kuwait's oil reserves stood at 48 billion barrels only, based on internal records seen by the newsletter.

The PIW report also claimed that Kuwait's fully proven reserves amounted to only 24.2 billion barrels.

At the time, Kuwaiti oil officials said the report was inaccurate and that it failed to take into account undeveloped reservoirs.

Who are you going to believe? Now, we could laugh all this off as a bad joke if it weren't for one niggling detail. These new bogus reserves from Iraq, Iran and Kuwait will very likely be added to the official totals used by the U.S. Energy Information Administration (EIA), the Paris-based International Energy Agency (IEA), and the semi-official numbers compiled yearly by British Petroleum and the Oil & Gas Journal. WTF! Yes, it's true—each of these sources simply adds to their global proved reserves tallies whatever numbers OPEC gives them. And the numbers OPEC gives them are not subject to independent audit. OPEC is free to use any estimate they want for each member nation.

So the next time these Persian Gulf countries don't answer the IEA's call on OPEC to produce more oil to prevent the price from getting into the stratosphere, as it did in mid-2008, you should remember that it's not for lack of oil—they've got over a trillion barrels now! And I'm sure there's more to come. OPEC will never run out of oil.

And you thought the global economy was screwed up.

Courtesy: Energy Bulletin