Doubts and certainties of reserves dilemma

Oil reserves are defined as the quantities of crude oil estimated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions. Reserves are further categorized by the level of certainty associated with the estimates. This is contrasted with contingent resources, which are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations, but the applied projects are not yet considered mature enough for commercial development because of one or more contingencies

The total estimated amount of oil in an oil reservoir, including both producible and non-producible, is called oil in place. However, because of reservoir characteristics and limitations in petroleum extraction technologies, only a fraction of this oil can be brought to the surface, and it is only this producible fraction that is considered to be reserves. The ratio of producible oil reserves to total oil in place for a given field is often referred to as the recovery factor. These factors vary greatly among oil fields and may change over time based on operating history and in response to changes in technology and economics.

Many oil-producing nations do not reveal their reservoir engineering field data and instead provide unaudited claims for their oil reserves. The numbers disclosed by some national governments are suspected of being manipulated for political reasons. Reserves are those quantities of petroleum claimed to be commercially recoverable by application of development projects to known accumulations under defined conditions. Reserves must satisfy four criteria: discovered through one or more exploratory well, recovered using existing technology, commercially viable and remained in the ground.

All reserve estimates involve uncertainty, depending on the amount of reliable geologic and engineering data available and the interpretation of those data. The relative degree of uncertainty can be expressed by dividing reserves into two principal classifications proved and unproved. Unproved reserves can further be divided into two subcategories probable and possible to indicate the relative degree of uncertainty about their existence.

Recent increases in oil reserves in Iraq, Iran and Venezuela are “good news,” but it remains unclear whether they will contribute to future supply. In one hand, holding more reserves is certainly good news, because it gives us a more precise prediction of costs and necessary investments. But, on the other hand, the issue is how much investments are needed to develop these reserves and how this will increase production capacity. Iraq dramatically increased the estimate of its proven oil reserves earlier in Oct. 2010.

Following the increase, Iran and Venezuela–both rivals for a share of total production within OPEC–said they were raising their own reserves estimates. Some experts, however, expressed skepticism that Iraq had undertaken sufficient exploration to justify the new estimate, which has not been independently reviewed. According to the IEA, “depending on the current numbers, if the economy growth comes back as robust as 4% to 5% globally to 2015, then we may have a tighter market, in the short term, we have a good supply, but in the midterm the market is getting tighter again, so we need more investments. But we haven’t seen it yet”.

Reserves: doubts and certainties
There are doubts about the reliability of official OPEC reserves estimates, which are not provided with any form of audit or verification that meet external reporting standards. Since a system of country production quotas was introduced in the 1980s, partly based on reserves levels, there have been exaggerated increases in reported reserves among OPEC producers. In 1983, Kuwait increased its proven reserves from 67 to 92 billion barrels. In 1985–86, the UAE almost tripled its reserves from 33 to 97 billion barrels. Saudi Arabia raised its reported reserve number in 1988 by 50%. In 2001–20002, Iran raised its proven reserves by some 30% to 130 billion barrel, which advanced it to second place in reserves and ahead of Iraq. Iran denied accusations of a political motive behind the readjustment, attributing the increase instead to a combination of new discoveries and improved recovery.

The sudden revisions in OPEC reserves, totaling nearly 300 billion barrels, have been much debated. Some of it is defended partly by the shift in ownership of reserves away from international oil companies, some of whom were obliged to report reserves under conservative U.S. Securities and Exchange Commission rules. The most prominent explanation of the revisions is prompted by a change in OPEC rules, which set production quotas (partly) on reserves. In any event, the revisions in official data had little to do with the actual discovery of new reserves.

Total reserves in many OPEC countries hardly changed in the 1990s. Official reserves in Kuwait, for example, were unchanged at 96.5 billion barrels (including its share of the Neutral Zone) from 1991 to 2002, even though the country produced more than 8 billion barrels and did not make any important new discoveries during that period. The case of Saudi Arabia is also striking, with proven reserves estimated at between 260 and 264 billion barrels in the past 18 years, a variation of less than 2%, while extracting approximately 60 billion barrels during this period.

O&G reserves rise and investment declines
According to the IHS Herold’s report 2010 “Global Upstream Performance Review”, the total global hydrocarbon reserves increased for the first time since 2005 despite a decline in worldwide upstream investment and development spending. Worldwide upstream investment declined by 23 % to $378 billion in 2009 among 224 oil and gas companies surveyed, but total global hydrocarbon reserves had a 3% growth rate. Production also increased 1%, driven by 2,2% increase in natural gas output. Development spending declined by nearly 20%, the first decline in a decade.

After a two-year decline, oil reserves rose 3% to 164 billion barrels, mostly due to extensions and discoveries in the Canadian oil sands that added 8.6 billion barrels in positive reserve additions. A record 7.9 billion barrels also was added in the South and Central American regions. Natural gas reserves climbed 3.7 % despite a record 11.4 Tcf in negative reserve revisions, as development of unconventional plays in North America and liquefied natural gas resources in Asia accelerated. The decline in capital spending resulted from a 40% reduction by exploration and production companies, while the integrated oil companies cut investment by just 9 %. Exploration spending was most resilient, dropping just 12 % to $62.7 billion. Unproved acquisition costs were down 71 %, and 2% down in proved acquisition outlays would have fallen 50 % were it not for the $20 billion Suncor/Petro-Canada merger.

Lower capital spending and higher reserves resulted in a near 50% decrease in reserve replacement costs to $11.41/barrel of oil equivalent (BOE) and lowered finding and development costs to $12.23/BOE. Strong natural gas reserve additions led reserve replacement rates to the highest levels in five years. Revenues declined 36% in 2009 to $122.3 billion and after-tax profits dropped 97% to $1.3 billion in 2009. The 36% revenue decline was price-driven, as combined oil and gas production rose 7% in 2009. Integrated oil and gas companies posted after-tax profits of $11.5 billion, while the large independents and independents had losses of $4.2 billion and $6.0 billion respectively. Revenues declined 36% in 2009 to $122.3 billion and after-tax profits dropped 97% to $1.3 billion in 2009. The 36% revenue decline was price-driven, as combined oil and gas production rose 7% in 2009. Integrated oil and gas companies posted after-tax profits of $11.5 billion, while the large independents and independents had losses of $4.2 billion and $6.0 billion respectively.

On the contrary, IMF surprisingly, attributes improved economic prospects in the Gulf Cooperation Council economies to the outstanding growth level of Qatari economy. The Qatari GDP is projected to grow by 18.5% in 2010 and 14.3% in 2011. Undoubtedly, this is an exceptional achievement, similar to performance of few economies like those of China and India. Amongst other things, the extraordinary development of Qatari economy is testimony of the sustained expansion of gas sector. In fact, Qatar continues to consolidate its position as the largest exporter of liquefied natural gas (LNG). Latest available statistics put output at 54 million tons, up from 38 million tons a year only three years ago. Yet, nonstop efforts are being exerted to reach the goal of producing 77 million tons a year of LNG by 2012.

The IHS Herold report found dividends rose modestly to another record level, which it noted “is remarkable” given the turmoil in the financial markets and the generally miserable results in the industry’s downstream operations. Dividends exceeded $100 billion, but common share repurchases were 23% lower, falling for the first time since 2004. Capital constraints brought about by reduced revenue and rising costs have almost completely eliminated share buybacks as a viable use of funds.

By Mostafa Mabrouk, Vice Chairman Assistant for Economic Affairs, Ganope


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