Scandal Points To Exaggerated Estimates Of Oil Reserves
By Ed Blanche
17 April, 2004
oil industry has been gripped by scandal since Royal Dutch/Shell, one
of the giants, twice this year downgraded its proven oil reserves by
20 percent, or nearly 4 billion barrels. There is considerable concern
that Shell may not be alone and that other companies and even governments
have hyped up their estimates of how much oil they have, a vital factor
in gauging their economic health. If that proves to be the case, it
would have an immense impact on the Middle East, whose economic weight
is almost totally dependent on oil and natural gas.
A growing number
of geologists and analysts in the energy industry have been saying for
some time that global oil reserves may be dangerously exaggerated. With
oil prices currently at around $37 a barrel, the highest for nearly
15 years, and the threat of diminishing supply or terrorist attacks
on the energy industry, the question of reserves has assumed a greater
importance than ever.
The March 31 decision
by the Organization of Petroleum Exporting Countries (OPEC) to cut oil
production by 1 million barrels per day (mbpd) signals a new era of
higher oil prices, particularly as demand has increased sharply, especially
in Asia. This threatens to heighten strained relations between the US
and Saudi Arabia at a time of rising hostility toward the Americans
in the region.
Earlier this month,
The New York Times reported that internal Shell documents and other
data indicated that Shell had overestimated its proven oil reserves
in Oman by as much as 40 percent. But that seems to have been done because
the expectation was that technological advances in drilling techniques
could extract more crude from mature fields than had previously been
The Oman estimates
were based on assessments made in May 2000 by Philip Watts, then Shell's
head of exploration and development. Watts was sacked in March over
the reserves scandal after it became known that he and other senior
executives had known in 2002 that the company's reserves were too high,
but did nothing to correct that.
The Oman episode
is important because if the advanced techniques, including what is known
as "horizontal drilling" - drilling outward at an angle, rather
than simply boring down vertically - are not as effective as they have
been made out to be, then the amount of oil that is deemed recoverable
will have to be lowered. That's bad news for Oman, which is heavily
dependent on oil and gas exports. But it's also bad news for the world
as a whole.
With the end of
the Cold War, during which divisions were created and alliances formed
along ideological lines, economic competition now determines international
relations. And as the world's natural resources - oil, water, timber,
minerals - disappear and global warming drastically alters the environment,
competition for ownership or access to such important economic assets
has intensified. About four-fifths of the world's known oil reserves
lie in politically unstable or contested regions.
According to international
security expert Michael T. Klare, professor of peace and security at
Hampshire College, Massachusetts: "We are entering an era of resource
war." Klare, author of Resource Wars: The New Landscape of Global
Conflict, writes: "The pressure on global petroleum supplies is
likely to prove especially severe. The production of petroleum products
is not likely to keep pace with soaring demand; periodic shortages will
occur more and more often."
Oil companies and
the governments of oil-producing states have every incentive to boost
their reserves; the more oil they can claim, the more influence they
have on the energy market. In the mid-1980s, OPEC decided to factor
in member states' reserves when determining their market share.
The figures for
global oil reserves soared. As cartel members such as Algeria, Libya
and Nigeria compete for bigger production quotas within OPEC's overall
output ceilings to reflect growth in capacity, countries are keener
than ever to emphasize the scale of their resources. But the methods
used to determine the size of their reserves are a closely guarded secret,
and while companies are subject to some degree of examination by regulatory
bodies such as the US Securities and Exchange Commission, a country's
estimates of how much oil it holds is virtually unchecked.
Saudi Arabia, one
of the most secretive countries in the world, recently defended its
resource base when it was challenged by Matthew Simmons, a US investment
banker who specializes in energy. He questioned whether Saudi Arabia's
stated oil reserves of 261 billion barrels, the world's largest, were
as big as Riyadh claimed. Aramco, the kingdom's state-owned oil giant,
insisted that it had enough oil to double its output to 15 mbpd and
sustain that for 50 years.
But energy analysts
have long questioned the reserves claimed by other OPEC producers. Veteran
British geologist Colin Campbell, chairman of the Association for the
Study of Peak Oil and Gas and a trustee of the Oil Depletion Analysis
Center in London, believes that Gulf producers' known reserves are really
considerably lower than they claim - 210 billion barrels for Saudi Arabia,
not the official tally of 261 billion; 90 billion for Iraq rather than
112 billion; Kuwait, 55 billion instead of 94 billion; the United Arab
Emirates, 60 billion instead of 98 billion.
According to Alejandro
Eggers Moreno of the Strategic Assessments Institute, a Los Angeles-based
consultancy: "All major players in the oil business - private and
public - insist that there will be enough oil to last well through the
21st century. But given their incentive to inflate reserve totals, it
would be irresponsible not to question their estimates. The official
figures - that is, those cited by oil companies to prove their product
is secure - are notoriously unreliable."
The result of all
this is that there may be considerably less oil left in the world than
the producers and the energy corporations would have us believe. Skeptics
like Campbell believe there are few major oil deposits left to discover.
"There's only so much crude in the world and 90 percent of it has
been found," he told The Daily Star.
that with the demand for oil currently rising at more than 2 percent
a year, global production will peak by 2010. What that means is that
oil will cease to be abundant and that prices will stay high. Skeptics
like Campbell may be wrong, of course, and the world may develop alternative
energy sources before any severe shortage occurs. But since those responsible
for estimating oil reserves have a vested interest in keeping them high,
their figures should not be taken for granted.
All this makes control
of oil and natural gas a strategic objective for major powers. The US-led
war against terrorism and the pressing need for America, the world's
most profligate oil consumer, to secure oil supplies as its own production
shrinks while demand increases, are likely to become heavily interconnected,
more than they are already.
US foreign policy
has been proceeding along these lines for some time, and has been accelerated
by the administration of George W. Bush. But others, such as China,
desperate for oil and gas to fuel its burgeoning economy, Japan and
the major European powers, will need the same natural resources the
Americans are seeking to ensure for themselves. There may not be enough
to go around.
Ed Blanche, a member of the International Institute for Strategic Studies
in London, is a Beirut-based journalist who has covered Middle East
affairs for three decades. He is a regular contributor to The Daily
Peak Oil News