The oil reserve fallacy 3

By Bill Kovarik, PhD
(First published in 2002).

Defining Oil Reserves

What is an unconventional oil reserve? “Unconventional” petroleum reserves include:

Heavy oils, which can be pumped and refined just like conventional petroleum except that they are thicker and have more sulfur and heavy metal contamination, necessitating more extensive refining. Venezuela’s Orinoco heavy oil belt is the best known example of this kind of unconventional reserve. Estimated reserves: 1.2 trillion barrels, recoverable; sometimes estimated at over 4 trillion barrels in place.
Tar Sands, which can be recovered via surface mining or in-situ collection techniques. Again, this is more expensive than lifting conventional petroleum but not prohibitively so. Canada’s Athabasca Tar Sands is the best known example of this kind of unconventional reserve. Estimated reserves: 1.8 trillion barrels.
Oil Shale requires extensive processing and consumes large amounts of water. Still, reserves far exceed supplies of conventional oil.

What makes a reserve conventional. How are reserves “proven” ?

As M.A. Adelman puts it:

Petroleum engineers estimate the cost of drilling and connecting new wells into a new or existing reservoir. A well can produce an initial daily amount, which will decline over time because of pressure loss, water encroachment and other factors… Because operating expenses per well are fairly constant, the cost per barrel must rise as output declines. When cost just equals the market value of the output, production stops at this “economic limit.” The estimated aggregate output of the new wells over time is known as the “proved reserves added” or “reserves booked.” In the United States, annual reserve estimates are accurate enough … But except for the United states and a very few other countries, published reserves are not well defined and estimation methods are not revealed. Year to year changes usually do not mean much of anything…

In other words, the economics of petroleum are as important as geology in coming up with reserve estimates since a proven reserve is one that can be developed economically. This is natural inside an industry. Investors need to know just how easy the oil will be to find and lift from the ground. They want to know how light and pure the oil is, how much it will cost to refine, how close the oil is to the marketplace. Oil reserves that fall below a standard index of affordability are not developed because no one wants to lose the money it takes to develop them. And undeveloped reserves are not listed as proven reserves.

Conventional wisdom has it that the oil companies make their investments and countries generally formulate their policies based on the world’s “proven” reserves. But it is probably more accurate to say that oil company investments and friendly country policies are what make reserves “proven.” Adelman notes that in 1944, a special expert mission estimated Persian Gulf reserves at 16 billion proved and 5 billion probable. By 1975, those same fields had produced 42 billion barrels and had 74 billion remaining. In 1984, geologists estimated a five percent probability of another 199 billion barrels remaining to be added in the Gulf region. In five years those reserves had already been added. (Adelman, 1993).

Another influence on reserve estimates is the Organization of Petroleum Exporting Countries production quotas, which have long been tied to OPEC-recognized proven reserves. For example Mexico, a non-OPEC country, claims to have at least 100 billion barrels of geologically known reserves even though it is only assigned 27 or 28 billion by the oil industry.

So, in the end, proven reserves are a useful index if you happen to be an investor or you want to know about your production quota. But for a long term view of resources, both proven and other estimates should be — and have traditionally been — included in reserve life projections. Standard Oil Co.’s Wallace B. Pratt, for example, made a point of noting that the USGS included both proven and probable reserves in its estimates published in 1920.

Daniel Yergin noted that there may come a point when unconventional reserves become proven:

… Although almost completely overlooked, something very important has just happened to supply. This past year saw the first major increase in world oil reserves since the mid-1980s, when all the major Persian Gulf countries, with a stroke of the pen, announced that they were increasing their proven reserves by more than 50%. The new increase is some 175 billion barrels. This is a lot of oil — 50% more than Iraq’s proven reserves and two-thirds that of Saudi Arabia’s. These new reserves, however, are not in the Middle East but in Canada. Advances in the technology for handling the oil sand deposits in the province of Alberta have, by cutting production costs almost in half, moved this enormous volume of potential supply into the economically recoverable “proven reserves” column. ( Iraq does not hold the key to world oil equation, syndicated April 6, 2003.)

(Note: This is a laudable but the phrase “just happened” is a bit of a stretch. It seems that Yergin is merely justifying the belated public acknowledgement of what petroleum geologists have known all along. And it raises questions about the basic premise of “The Prize” — Yergin’s history of the oil industry. Is the Middle East such an enormous prize after all? Or just one that we happened to invest in?)

Unconventional Reserves

The distinction between the conventional oil reserves which are fairly well known and unconventional reserves is not cut and dried. As Charles Masters of USGS said:

“Unconventional resources, such as extra heavy oils, tar sands, gas in tight sands, and coal bed methane are not considered [in the USGS 2000 assessment] but they must, nonetheless, be recognized as being present in very large quantities…. The two major sources of unconventional oil … are the extra heavy oil in the Orinoco province of Venezuela and the … tar sands in the Western Canada Basin. Taken together, these resource occurrences, in the Western Hemisphere, are approximately equal to the Identified Reserves of conventional crude oil accredited to the Middle East.”

Masters was probably conservative here. Venezuela alone claims to have quite a bit more oil in the Orinoco than all of the Middle East combined, and the technical definition of petroleum seems to be the only thing standing in the way of world recognition of the fact.

As a member of OPEC, Venezuela already has a prominent position on the proven reserve charts, with 47 to 76 billion barrels of proven reserves, according to oil industry / DOE estimates.The USGS puts Venezuelan reserves around the same level, at 48 identified and 110 ultimately recoverable. And yet Venezuela itself claims 1.2 trillion (trillion, with a T) barrels of unconventional oil reserves in the supergiant heavy oil field stretching from the mouth of the Orinoco River near Trinidad down the east side of the Andes mountains. (Arcaya, 2001) The oil is located in a geosynclinal trough that some geologists belive may be continuous along the entire continent through the Falkland Islands off the coast of Argentina. Only parts of the heavy oil field have been fully explored, but those parts have been estimated at some three to four trillion barrels of heavy oil in place, with perhaps one third recoverable using current technology. Heavy oil is pumped, transported and refined with the same equipment used in conventional oil. It is “unconventional” only because the cost of refining is significantly higher — from $10 to $20 per barrel higher than “sweet light” Saudi crude oil. It could translate into anywhere from 25 to 50 cents more at the pump for consumers.

All of Latin America’s oil resources have been under-estimated, accoding to Dutch Geologists Peter Odell and Keneth Rosing. Oil reserve estimates have followed the expectations of opportunities and conditions for exploiting oil. (Odell, 1980)

	Oil Industry view	Grossling (USGS)	Russia (then-USSR) Min. of Geology
Latin America	150-230	490-1225	620
Africa	120-170	470-1200	730
South and SE Asia	55-80	150-325	660
Totals	325-480	1090-2750	2010

“The (oil) companies have largely discounted the Latin American potential for hydrocarbons. This appears to be the result of a more than 50 year history of general hostility to the companies by most countries of the continent. Over this period the companies have generally been viewed as prime agents of US imperialism … [Thus} Latin America’s ultimate resource base has become unenthusiastic and outdated.” — Peter Odell

In their book, The Future of Oil, Odell and Rosing note that estimates of the world oil resource base ranged from two trillion to 11 trillion, with three trillion barrels of oil being “the more realistic figure” for conventional oil, while another two trillion could be added as a conservative estimate for unconventional oil. This total of five trillion should be compared to total world oil reserve estimates around one trillion (oil industry proven and USGS identified reserves) and 2.2 trillion (USGS ultimately recoverable reserves). (2)

“To these estimated quantities of conventional oil must also be added the potential for oil resources from unconventional habitats. These are geographically extensive and include the tar sands of the Province of Alberta in Canada, the heavy oil belt of the Orinoco region of Venezuela and the oil shales of the United States, Brazil, India and Malagasy etc. High production costs and low oil prices have hitherto inhibited the inclusion of unconventional oil resources in the world oil resource figures. Now, developing production technologies, coupled with the very much higher market value of oil, convert large quantites of unconventional oil into an effective resource. The volume of this addition to the ultimate oil resource base is a minium of two trillion (2 x 10 to the 12th) barrels (see WEC-CCR) and a maximum of unknown dimensions, given that, to date, there has been no formal search for unconventional oil and no systematic evaluation of its occurrence on a world wide basis.”

In a 1999 Greenpeace report on Climate Change, Odell noted that “a modest 3,000 billion barrels reserve of non-conventional oil (out of an ultimate resource base more than an order of magnitude bigger) could then sustain a continued increase in world oil use beyond the middle of the 21st century on the basis of an assumption of a 2% per annum growth in demand. Under this scenario the world oil industry in the mid-21st century would be approximately three times its present size.” **

(** It’s worth noting that some experts disagree with this view. Predicting that oil production will peak around 2015 – 2020, Geologist C.J. Campbell, disagrees with Adelman’s thesis of a theoretically elastic resource base and says resource based approach to forecasting is more accurate. Campbell does not estimate unconventional oil resources but he does estimate production from them in Canada and Venezuela peaking at only 1.5 million barrels per day. )