USGS Finds New Saudi Arabia! Oh, wait...

The BBC over the weekend had the headline: Venezuela oil 'may double Saudi Arabia'.  The headline was based on the just released assessment of Venezuela’s hydrocarbon deposits by the US Geological Survey (USGS).  Venezuelan oil is described as: "the largest accumulation ever assessed by the USGS".  The USGS mean estimate of recoverable Venezuelan oil is 513 billion barrels.

The USGS number is over five times 'Oil and Gas Journal's' estimate of 99 billion barrels for Venezuelan proven oil reserves.

To put all these billion barrel numbers in perspective, global consumption is currently around 30 billion barrels per year.  Saudi Arabia's oddly static (see Oil 101, Chpt.14) stated proven reserves are around 260 billion barrels. One could almost drive two Saudi Arabias between the 513 billion and 99 billion barrel estimates for Venezuela.  Which number is closer to the truth?

It comes down to the types of reserves being defined.  The USGS number refers to hydrocarbons technically recoverable if one completely ignores costs.  The 'Oil and Gas Journal' number factors in technical feasibility just like the USGS but additionally the economic cost of extracting heavy Venezuelan oil using similar processes to Canadian oil sands production.

The USGS has no mention of the fact that the costs to extract much of the hydrocarbons from the Venezuelan accumulation could be over US$200, US$300 or even US$1000 per barrel and would thus be unlikely to ever be produced.

Only in the very last paragraph (pdf) of the USGS report is there any attempt to put some perspective on their headline grabbing number: "No attempt was made in this study to estimate either economically recoverable resources or reserves within the Orinoco Oil Belt AU. Most important, these results do not imply anything about rates of heavy oil production or about the likelihood of heavy oil recovery. Also, no time frame is implied other than the use of reasonably foreseeable recovery technology." 

This sort of key disclaimer would be more appropriate in an opening paragraph.
 
The USGS say that their report is "critical to our understanding of the global petroleum potential and informing policy and decision makers."  How many policy and decision makers will read past the headline and opening paragraphs to understand that economics played no part in the analysis?

(HT/Terry G. for sending related link)

Oil Discoveries Up...Still Not Enough

Although new oilfields are discovered every year, it is unfortunately a fact that the number of large oilfield discoveries has been in a multi-decades long decline (see Oil 101 for a fuller description of discoveries and reserves).

The few larger discoveries over the past ten years with potentially economically recoverable oil of 3 to 10 billion barrels (Gb) have been warmly greeted, but are insufficient in the grander picture.

To put everything in perspective with these large numbers, bear in mind that there are around 30 Gb of oil consumed each year worldwide and this number grows by 1-2% per year. So, in order to stand still, oil companies around the world have to discover at least 30 Gb of oil each year.

Discoveries of approximately 3-5 Gb of potentially economically recoverable oil off the US Gulf Coast in 2008, 5-10 Gb off Brazil in 2006, 9 Gb in the Caspian Sea off Kazakhstan in 2000, and 6-8 Gb in Iran in 1999 and 2003 were among the largest over the past ten years. There were of course other smaller discoveries in addition to revisions to the sizes of fields previously discovered. 

Two newspapers are giving somewhat different perspectives on the long term decline in discovery rates.

The New York Times today states that despite insufficient new oilfield discoveries, one oil industry consulting group believes that higher prices are making up the difference by allowing for reserve expansion in oilfields which are already in production:

"New oil discoveries have totaled about 10 billion barrels in the first half of the year, according to IHS Cambridge Energy Research Associates. If discoveries continue at that pace through year-end, they are likely to reach the highest level since 2000....oil companies have found more oil than they produced for the last two years through a combination of exploration and field expansions." (NYTimes)

Meanwhile, the Financial Times (FT table of some major recent discoveries here) states that while the ability to workover fields as a result of higher oil prices has improved recovery rates, it doesn't change the growing deficit between the lack of discoveries and demand:

"Game-changers locally, the finds do not alter things globally. They are much smaller than the supergiants of the last century, still producing at dwindling rates today ....while the industry is getting better at finding and producing oil – seismic surveys are more accurate and recovery rates higher – these are often incremental improvements rather than technological leaps. The world is still heading for an oil crunch.." (Financial Times)

Reserves: an Educated Guess or Maybe Not

Resources are an estimate of the total amount of a mineral underground which can technically be removed. Reserves, a subset of resources, are an estimate of what can be removed economically at today's prices. The key word to remember is "estimate."

As you know from Oil 101, there are major issues with commonly stated global oil reserves. Some reserves estimates are no more than wild guesses.

As an example of how mineral reserves estimates can be subject to significant readjustment, the U.S. Geological Survey (USGS) has just completed a survey of an area in which one third of US coal is sourced. As a result of the survey, the USGS is now saying that its estimate of US coal reserves may be significantly overstated.

Sometimes reserves remain unquestioned because the answer may be frightening. Sometimes reserves remain unquestioned because the method used to generate the estimate may be even more frightening. For example, if someone asked, "how does the USGS calculate US coal reserves?":

"Every year, federal employee.....calculates America's vast coal reserves the same way his predecessors have for decades: He looks up the prior year's coal-reserve estimate, subtracts the year's nationwide production and arrives at a new official tally." (Wall Street Journal)

Oil is typically more expensive than coal on a BTU (energy content) basis. As oil is a liquid which can release energy quickly, it is primarily a transport fuel. Oil is only used to generate 7% of global electricity. Coal is an electricity generating fuel used to produce around 40% of global electricity.