Worldwide Oil Reserves: Running the Numbers

IN MY PREVIOUS article, “Things Just Got Worse,” from on Jan. 25, 2006, I wrote about a recent report in the authoritative industry newsletter Petroleum Intelligence Weekly . The substance of the PIW report was that internal Kuwaiti records reveal that the nation’s oil reserves are far below the officially stated amount of about 99 billion barrels.

The PIW report claimed that Kuwait’s remaining oil reserves total about 48 billion barrels, or 51 billion fewer barrels than previously advertised. These Kuwaiti reserves include about 24 billion barrels of “proven” reserves, which are known to a high degree of engineering certainty to be in the ground. And the remaining 24 billion barrels of Kuwaiti oil reserves are in the category of “unproven,” meaning that they await further drilling and actual estimation under standard engineering practices.

Kuwait’s previously reported 99 billion barrels of reserves would, if they were really there in the ground, make up about 10% of the world’s reported oil reserves. Reducing the estimate of reserves by 51 billion barrels, as the PIW report served to do, is the functional equivalent of lowering the amount of estimated world oil reserves by 5%.
One reader wrote in and said, “The world just ended. Did you miss it?” OK. Very funny. No, the world did not just end. We are all still here. And you can go back to watching professional golf and Desperate Housewives on television.

I never said, and I never meant to imply, that there would be any less oil available to the world markets next week or next month because of the change in the amount of Kuwait’s reported reserves. The oil that you will use to run your car, or that Farmer Jones will use to grow the food you will be eating, has already been pumped. It is in the pipelines and tanker fleets of the world. Truth be told, the change in amount of Kuwait’s oil reserves may not even determine whether or not there will be any less oil available next year. There will be other amounts of oil, from other places on this Earth, with which to turn the world’s gears.

Kuwait’s oil reserves may be one big number, or another smaller number. But the point to take away from this article is that a reduction in 5% of world oil reserves, even if it is only a bookkeeping entry, dramatically changes the planning assumptions for world energy use into the medium and long terms.

A 5% reduction in world reserves is the equivalent of the global economy losing almost 20 months worth of its eventual total cumulative worldwide oil production and consumption. This is based on the current world oil use of about 84 million barrels per day. As I said in my previous article, “From the standpoint of the world reaching the absolute Peak Oil point, we now live in August 2007, not January 2006.” Welcome to the future.

The PIW report claimed that its conclusion was based upon data circulating within the top echelons of the Kuwait Oil Co. (KOC). KOC is the upstream arm of state-owned Kuwait Petroleum Corp., and has primary responsibility for conducting exploration, drilling and production from Kuwait’s oil fields.

Worldwide Oil Reserves: The Empire Strikes Back

Within a few days of the release of the PIW report, however, there was a news article in the Jan. 24, 2006, issue of the Gulf Daily News . The dateline was Kuwait City. The report stated:

“A senior Kuwaiti oil official has cast doubt on the accuracy of a report by industry newsletter Petroleum Intelligence Weekly that the OPEC producer’s oil reserves are only half those officially stated.

“‘I have no idea where they got this figure from… I don’t think it’s accurate,’ Farouk Al Zanki, the chairman of state-run Kuwait Oil Co., said in Kuwait City…

“‘We are always evaluating our reserves,’ Zanki said. ‘Up to now, they are set at 95 [billion barrels]… I don’t know who gave them [PIW] those figures, I have no idea, but I don’t think it’s 100% accurate.'”

Not “100% accurate”? That is certainly an interesting way to phrase the comment. In addition, the Gulf Daily News report quoted the KOC chief as saying:

“The Kuwaiti reserves figure changes every year due to explorations.

“One year we add [reserves], another year we don’t, and in the one after that we add more…The additions of reserves are not fixed, and each year we are adding reserves.”

So there you have it. The authoritative PIW claimed that it examined internal KOC data and came up with an estimate of 48 billion barrels of oil reserves. And the KOC chief promptly came back and said that the correct number is 95 billion barrels of oil reserves. Somebody appears to be off by a significant amount. To illustrate the difference, 47 billion barrels is not quite three times the oil reserves of the North Sea (about 17 billion barrels), or a bit more than twice the total oil reserves of the United States (about 22 billion barrels). Or if it makes you feel any better, you can think of 47 billion barrels of oil as only slightly more than one-third of the oil reserves of the world’s favorite nuclear wannabe nation, Iran (with about 132 billion barrels).

Worldwide Oil Reserves: How Do You Lose 47 Billion Barrels of Anything?

So how much oil is there in Kuwait? How can the reserve estimates for a country like Kuwait differ by such staggeringly large amounts, namely 47 billion barrels one way or the other? After all, Kuwait is not such a big place. At its most distant points, Kuwait is about 135 miles (217 kilometers) north to south and 115 miles (185 kilometers) east to west. That is, Kuwait is a little smaller than the state of West Virginia. How can you be off by 47 billion barrels? Could you just “lose” 47 billion barrels of anything in West Virginia, let alone in Kuwait? And Kuwait is fairly flat, far flatter than the aforementioned New Jersey. Kuwait has no remarkable surface geology in the nature of mountains and other geologic fold belts. What is going on here?

Not only is Kuwait smaller and flatter than West Virginia, it is mostly all dry land (very dry), unlike the bedrock geology of, say, the North Sea. There are just a few offshore islands in Kuwait, separated from the mainland by the shallow waters of the Gulf, but the rest of Kuwait is pretty flat and dry. The surface features of Kuwait were formed in relatively recent geologic time, during a regional uplift of what is called the ancient Tethys basin. Starting from the south of Kuwait, the bedrock geology is a massive limestone formation that trends to the north, and which lies just beneath the surface soils. Within and below this limestone are the principal oil fields of Kuwait, with the super-giant Burgan oil field being the most important natural resource of the country. Not to offend the Kuwaiti people, who are mostly very nice folks, but the rest of the geology of Kuwait is just plain unremarkable. And except that there is one heck of a lot of oil.

Worldwide Oil Reserves: Guesses and Estimates

It is not hard to believe that there is, and that there always will be, some ambiguity as to the amount of oil reserves in a given oil field, oil-producing province, or even a nation. Lifting oil out of the ground is a tricky business, and it has been so ever since Col. Drake drove down that oil well at Titusville, Penn., in 1859, and inaugurated the world’s age of oil. (At least for a while.)

The best of petroleum engineers will have different opinions about the volumes of oil reserves, even based on looking at identical data sets from the same oil wells. Most reserve estimates for oil in the ground are given in terms of “probabilities.” There is a 10% probability (P10) of a big number. There is a 50% probability (P50) of a lower number. And there is a 90% probability (P90) of a relatively modest number of barrels of reserves in the ground. It might, and probably will, take many years to figure it all out.

At root, your reserves are controlled by your geology. What is the nature of the source rocks in which the oil originated? What is the fundamental chemistry of the oil itself? What is the nature of the rock formations that presently hold the oil? Are the formations composed of sandstone? Are they limestone? Are they something else? What is the porosity of the oil-bearing formation? What is the permeability of the oil-bearing formation? What is the pressure and temperature regime down in the hole, whence the oil is flowing (you hope) to the well bore? And what is the source of reservoir energy that drives the oil to a well bore? (Is it a natural gas cap? Dissolved gas? Water drive? Gravity? Some combination of these?)

Are there other important factors that control things deep down in the ground? Are there geologic faults that cut the formation rocks and form barriers to continuous flow? (Or do the fault lines act as channels?) Are there permeability “pinch-outs,” where the rock matrix changes such that the reservoir energy is just insufficient to push the oil through the microscopic pores of the rock and toward the well bore? Are there certain “sweet spots” or “channels” or zones of “super permeability” in the oil-bearing formation that enable the oil to drain faster at one level than at other levels, or in one direction as opposed to another?

And what happens when you start to produce the oil from a well? Production changes the dynamic relationships of the environment down the hole. How does producing the first barrel of oil affect the production of the remaining barrels? (Hint, you are lowering your reservoir pressure.) What are the dynamic variables? When you remove the oil and associated water and gas, will the formation rock and surrounding rocks begin to subside? Will subsidence affect, and most likely lower, the porosity and permeability? (Whoops, there is a problem.) Do you have to supplement the reservoir energy by injecting natural gas, or pumping water down another well? These are just the first sets of many complex questions you have to ask, and you have to ask them about pretty much every oil well you will ever drill. It gets kind of complicated, huh?

So if you are in the oil business, you ask the questions. And you get some answers. And you and your engineers do that magic engineering stuff, with the slide rules (I am dating myself here), if not with the fancy software programs. And you make a lot of assumptions about things that are just plain out of sight, beneath thousands of feet of solid rock, down where even Superman’s X-ray vision cannot penetrate. And you make your estimates, based on best engineering practices. And how much oil is there? you must want to ask. And how can Kuwait have a discrepancy of 47 billion barrels?

Worldwide Oil Reserves: Can You Handle the Truth?

Do you want to know the truth? Let me paraphrase the famous line that Jack Nicholson’s character, a colonel of the U.S. Marines, spoke in the movie A Few Good Men . “You want answers…You can’t handle the truth..” OK, I will tell you the truth.

When it comes to estimating oil reserves, you do the best engineering that you can. You look at all of your samples from down in the hole. You gather all the data available. You spend as much money as you can afford to do things right. You crank all the numbers. You fit all the numbers to the very best curves that you can draw. And then you take a guess.

A guess? OK, an educated guess. Because there is a lot of educated guesswork involved. And remember that when it comes to estimating oil reserves, first and foremost you have to be educated. Estimating oil reserves is not for amateurs, so do not try this at home.
When you estimate oil reserves, you are making a lot of assumptions about things that you do not know, and cannot know, and probably will never know. Some educated people are very conservative and careful, and hence reluctant to overstate what they think the numbers show. And some educated people are ambitious, and tend to err on the side of what is known as “thinking big.” There is a lot of science involved. But at the end of the day, estimating the volume of oil reserves in a rock formation is not really a science so much as an art. And within that art form, some people are Rembrandts. And some people are just throwing stuff against the wall, to see if it sticks. Hey, it worked for Pablo Picasso and Mark Rothko.

So the conservative, educated PIW people say that Kuwait has about 48 billion barrels of reserves. (Is that a P-85 or a P-95?) And the KOC director, who is well educated but who also serves at the pleasure of another master, says that Kuwait has 95 billion barrels of reserves. (Is that a P-05, or maybe a P-01, or maybe a P-0.01?) And how will we ever know?

Worldwide Oil Reserves: It is All about Barrels

In the end, it is all about the number of barrels that you can lift out of the ground. It was all about barrels when Col. Drake lifted 25 of them out of the ground on Aug. 27, 1859. And it is all about barrels today, when the entire world oil industry collectively lifts about 84 million barrels per day out of the ground. At the end of each day, you know what you have if you can run the numbers. But how much oil is left? There is no escaping the fact of nature that there are fewer barrels in the ground today than there were yesterday, and there will be fewer barrels tomorrow than there are today. If you want an exact number, you take an educated guess. Meanwhile, you pump your well, and while the motor is running, you get down on your rug and pray.

There are many hundreds of working oil wells near Titusville, Penn., birthplace of the world’s oil industry. Not a few of these oil wells were drilled over 100 years ago. These Titusville wells are still producing oil, just not very much. The operators might run the pumps for an hour or so each day, or just run the pumps every few days. This drains the hole of water and oil. Then the downtime, when the pumps are shut off, allows the hole to replenish with more water and oil from the surrounding rock formations. These old wells strip out a few barrels of oil per day, week, or month. Again, welcome to the future.

The world’s oldest continuously operated oil well, located south of Titusville and known as the McClintock No. 1, was drilled in 1861. When the original operators kicked it down, the records are that this well produced about 50 barrels of oil per day. That was not a lot of oil by comparison even back then, when some Titusville wells produced upward of 5,000 barrels in a day. But after 145 years, the McClintock No. 1 still produces a small amount of light green, Pennsylvania-grade crude oil, in the range of about one valuable barrel per day. (When it comes out of the well, it feels soft and smooth like hand lotion. Don’t try this with the high-sulfur gunk that comes from a lot of other oil wells, however. That stuff will burn the skin off your bones.)

Back in 1861, and even assuming that anyone understood anything about petroleum engineering (which nobody did back then), who could have predicted the ultimate recovery of oil from the McClintock No. 1? But engineering or no, the old well has benefited seven generations of mankind, with the current proceeds going to the Drake Well Museum in Titusville.

Worldwide Oil Reserves: Hubbert Linearization

In my previous article, I mentioned the method called Hubbert linearization, used for predicting the amount of ultimate recoverable reserves. This is a method that is designed to look forward into the future, but at root involves looking backward at historical production data and fitting that production data to a decline curve.

The idea behind this kind of mathematical modeling is that total oil production tends to follow what is known in mathematics as a logistic curve. The logistic curve is a well-regarded means to model for exponential growth or decline in finite systems. This kind of technique had been used widely in the fields of modeling human populations, ecological systems, epidemiology, economics and econometrics, and no doubt many other fields.

This method of modeling for ultimate recoverable reserves is of little use in regions where oil development and production is immature. But it seems to work well in areas that have long histories and good statistics on oil production. It works just great for showing U.S. oil production numbers over the past few decades. And it appears that the numbers in most oil-producing nations of the Middle East are starting to fit the Hubbert logistic curve as well. As I noted in my previous article, Hubbert linearization gives Kuwait a volume of oil reserves in the range of 40-48 billion barrels, far below the figures offered by the director of the KOC.

I do have to wonder, however, what will happen to oil production on the backside of Hubbert’s Peak. Will political instability interfere with the relatively free, commercially driven operations of the world’s oil markets? After all, the oil age has occurred during a relatively stable time in global trade, and was not even severely disrupted by such epochal events as World Wars I and II or the Cold War.

But when the world begins to encounter an absolute decline in oil supplies, will what we consider today the “normal” state of political and commercial affairs transition into regional empires? Will we be dealing with military blocs and tightly controlled economic spheres, each with some manner of internal self-sufficiency? Will the strategic calculus of the future be to deny strategic resources like oil to one’s competitors? If so, even the best of resource estimates will lose the advantage of being cross-checked with reliable production data.

Sure, dear readers, in oil wells as in cards, or in love and life itself, you take your good luck as it comes your way. You live with your probabilities and you play the hand you are dealt. But then again, as your father may have told you, you really need to go out and make your own good luck as well. And as we never tire of pointing out in Whiskey & Gunpowder, over the long haul, things in this world tend to regress to the mean. And often as not, you have to work very hard just to get what you deserve.

Until we meet again…
Byron W. King
February 3, 2006

The Daily Reckoning