The Daily Star: Shell scandal points to exaggerated estimates of oil reserves

Saturday, April 17, 2004

By Ed Blanche

Special to The Daily Star

BEIRUT: The 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 possible.

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.

Campbell believes 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 Star

Copyright (c) 2004 The Daily Star

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