The Oil Drum takes on BP ... again

The folks over at The Oil Drum are a persistent bunch. As the years go by and it continues to look as though Steve Forbes' post-Katrina prediction of $35 oil will forever fail to materialize, the forecasts by the crew at TOD appear increasingly likely to prove more accurate than predictions from most Wall Street types and nearly every big oil company and energy agency.

The Oil Drum (and other sites like it) in 2007 may turn out to be kind of like the housing bubble blogs back in 2005 when they screamed to the rest of the world that there was a problem but no one wanted to listen. The screaming at TOD is markedly less shrill than many housing bubble blogs, but not heeding their warnings will likely be even more disastrous than ignoring the housing naysayers a couple years ago.

A case in point came early yesterday after Euan Mearns had a good look at the latest from BP - their Statistical Review of World Energy. Judging just by the sound of the title of his retort - Lies, damned lies and BP Statistics - he obviously didn't like what he read.

If you are unfamiliar with the Middle East OPEC reserves reporting scandal and the culpability of BP and OECD institutions in perpetuating myths about global oil reserves then this is explained below using Saudi Arabia as an example.

In its purest form, oil reserves accounting follows a simple convention:

Reserves at start of period
Less production
Plus new discoveries
Plus or minus revisions
Equals reserves at end of period

Oil reserves therefore, are a dynamic variable, relentlessly pulled down by production when the rate of new discoveries declines, as it inevitably does in every oil region.

Revisions are a wild card that allows companies or countries to correct for past mistakes or to take account of new technologies that may boost recovery or changes in oil price that may make recovery more or less economic.

Saudi Arabia is the second largest oil producer in the world (after Russia) and is the largest exporter with 2006 exports of roughly 8.9 million barrels of oil per day. This represents 20% of global oil exports and it is therefore vitally important for the World to know for how much longer Saudi Arabia can continue to produce oil at 10 million barrels per day - that equates to roughly 4 billon barrels of oil per year.

The chart shows two lines that provide very different pictures of Saudi oil reserves. Both lines are anchored on 1980 – the year that the Saudi government took 100% control of Aramco – the state run Saudi oil company.

The blue line shows the official Saudi reserves as reported by BP whilst the red line shows how Saudi reserves would have declined since 1980 as a result of the 77 billion barrels of oil that have been produced since then.

In a very well written piece, worth reading in its entirety along with the comments, Euan goes on to lodge two complaints with the "official" reserve estimates - huge upward adjustments were made in the 1980s without justification and ongoing annual production is not properly accounted for in the updated reserve estimates.

Ultimately the problem lies in major energy companies and energy agencies perpetuating the worldwide belief that peak oil is many decades away.

For so long as BP, the IEA and EIA go on reporting ME (Middle East) OPEC reserves without question then the leaders of the major OECD economies will continue to ignore the energy peril that they are confronted with.

Keep up the good work!