07-04-04

A regulatory vacuum over how oil producing countries measure their reserves has stoked debate on how much oil and gas the energy industry really has left. International scrutiny has intensified over reserve assessments since super major Shell's two downgrades to its proved reserves this year sent shockwaves through the investment community.

Companies are subject to examination by regulatory bodies such as the US Securities and Exchange Commission, but a country's own estimate of how much oil it holds is virtually unchecked.

Uncertainty is greatest among members of OPEC, for whom size of reserves may soon play a part in determining all-important quota distribution.

"Without question, reserves reported for OPEC members don't fit the strict definitions of those reported by the US or most European countries," said Bob Tippee, editor of the Oil and Gas Journal, which reports country-level reserves.

Saudi Arabia, which with 260 bn barrels holds easily the world's largest oil reserves, was thrust into the spotlight on the issue when analyst Matthew Simmons questioned whether the kingdom's reserves were really as big as it said. The charges stung state oil company Saudi Aramco into a vigorous defence with a rare public rundown of its resource base, saying it expected to add at least 150 bn barrels to the company's proven oil reserves by 2025.

"We have plenty of oil. We have the potential to add more than anyone else," said Mahmoud Abdul Baqi, vice president of exploration at state oil firm Saudi Aramco. Even so, Simmons still questions whether Saudi Arabia has enough capacity to plug any supply gap. "No third-party inspector has examined the world's most important insurance policy for years," he said.

The information on reserves held by other OPEC producers -- who together own around 80 % of the world's proven oil reserves -- has been just as patchy, say some analysts.

"If you look at the record of reserves reported by these countries since the late 1980s, they have barely changed," said analyst and geologist Colin Campbell, who has long been concerned that oil supplies are close to their peak. The issue is becoming a hot as reserve assessments look likely to become part of a new formula being developed to assess how OPEC should allocate production quotas.

As members such as Algeria, Nigeria and Libya vie for a bigger share of overall group output limits to reflect growth in capacity, countries are considered keener than ever to emphasise the scale of their resources. Second biggest OPEC producer Iran last year raised its estimate of oil reserves by 35 % to 131 bn barrels from 97 bn.

"The truth is that we just do not know, but are entitled to ask some serious questions," said Campbell, a trustee of the London-based Oil Depletion Analysis Centre and chairman of the Association for the Study of Peak Oil and Gas.

"It seems (OPEC members) may have been reporting total found, not the amount remaining.... and may have made sense from an OPEC quota standpoint because it avoids the need for perpetual renegotiation as production changed the relationships," Campbell said.

Those pessimistic about the extent of world supplies said revelations by Shell and other companies that they had overestimated their oil and gas reserves could be symptomatic of a much bigger miscalculation.

"The real problem is that the driver was that they were finding less," said Chris Skrebowski of Britain's Energy Institute. He has mapped new projects coming on stream and concludes they are inadequate to meet the world's growing demand, fuelled by booming economies such as China.
"You find there is a pretty chunky amount of stuff coming on stream in the next two-to-three years. After that, there's really not enough," said Skrebowski.

More optimistic analysts, however, cite new technology and production growth in areas like West Africa and Russia.

"It (the rate of decline) is very much slower because we know more, we have more infrastructure in place," said Oystein Noreng, professor of petroleum economics and management at the Norwegian School of Management.

But some argue that in the face of reasonable doubt, a cautious investor should assume that the pessimists are correct. That could imply devastatingly high oil prices and a loss of faith in oil companies' shares.

"We will only realise the precise timing of peak oil production after the event," said analyst Richard Webb, founder of RAW Capital, a company providing investment and trading research. "But conservative risk management requires investors to reappraise the outlook for asset valuations before it occurs."

Source: Khaleej Times