Oil shortage a myth, says industry insider

There is more than twice as much oil in the ground as major producers say, according to a former industry adviser who claims there is widespread misunderstanding of the way proven reserves are calculated. Although it is widely assumed that the world has reached a point where oil production has peaked and proven reserves have sunk to roughly half of original amounts, this idea is based on flawed thinking, said Richard Pike, a former oil industry man who is now chief executive of the Royal Society of Chemistry.

Current estimates suggest there are 1,200 billion barrels of proven global reserves, but the industry's internal figures suggest this amounts to less than half of what actually exists.The misconception has helped boost oil prices to an all-time high, sending jitters through the market and prompting calls for oil-producing nations to increase supply to push down costs.

Flying into Japan for a summit two days after prices reached a record $139 a barrel, energy ministers from the G8 countries yesterday discussed an action plan to ease the crisis.

Explaining why the published estimates of proven global reserves are less than half the true amount, Dr Pike said there was anecdotal evidence that big oil producers were glad to go along with under-reporting of proven reserves to help maintain oil's high price. "Part of the oil industry is perfectly familiar with the way oil reserves are underestimated, but the decision makers in both the companies and the countries are not exposed to the reasons why proven oil reserves are bigger than they are said to be," he said. Dr Pike's assessment does not include unexplored oilfields, those yet to be discovered or those deemed too uneconomic to exploit.

The environmental implications of his analysis, based on more than 30 years inside the industry, will alarm environmentalists who have exploited the concept of peak oil to press the urgency of the need to find greener alternatives. "The bad news is that by underestimating proven oil reserves we have been lulled into a false sense of security in terms of environmental issues, because it suggests we will have to find alternatives to fossil fuels in a few decades," said Dr Pike. "We should not be surprised if oil dominates well into the twenty-second century. It highlights a major error in energy and environmental planning – we are dramatically underestimating the challenge facing us," he said.

Proven oil reserves are likely to be far larger than reported because of the way the capacity of oilfields is estimated and how those estimates are added to form the proven reserves of a company or a country. Companies add the estimated capacity of oil fields in a simple arithmetic manner to get proven oil reserves. This gives a deliberately conservative total deemed suitable for shareholders who do not want proven reserves hyped, Dr Pike said.

However, mathematically it is more accurate to add the proven oil capacity of individual fields in a probabilistic manner based on the bell-shaped statistical curve used to estimate the proven, probable and possible reserves of each field. This way, the final capacity is typically more than twice that of simple, arithmetic addition, Dr Pike said. "The same also goes for natural gas because these fields are being estimated in much the same way. The world is understating the environmental challenge and appears unprepared for the difficult compromises that will have to be made."

Jeremy Leggett, author of Half Gone, a book on peak oil, is not convinced that Dr Pike is right. "The flow rates from the existing projects are the key. Capacity coming on stream falls fast beyond 2011," Dr Leggett said. "On top of that, if the big old fields begin collapsing, the descent in supply will hit the world very hard."

(By Steve Connor, The Independent, 09/06/2008)