By John Kemp
LONDON, June 28 For all that Malthusians worry
about oil running out, and analysts cite the rising costs of
exploration and production, the oil industry has been adding
reserves faster than they are being consumed since 2005, as high
prices spur an investment boom across the industry.
Contrary to the alarming predictions made a few years ago,
and still periodically revived by peak oilers, there is no sense
in which oil is running out.
Price spikes may still be needed from time to time to
restrain consumption and match it with the uneven development of
new supplies and periodic interruptions. But these are
There is good reason to think the long-term uptrend in
(real) oil prices is over for now and the market has found a
level at which adequate future supplies can be guaranteed.
After a long period of low prices and stagnating exploration
and production growth during the 1990s and early 2000s, real oil
prices appear to have risen high enough in recent years to
ensure future supplies remain adequate.
MORE OIL THAN EVER
By the end of 2011, the world's proved oil reserves stood at
1.65 trillion barrels, enough to last another 54 years at
present rates of consumption, according to the "BP Statistical
Review of World Energy" published earlier this month. The world
consumed around 30.5 billion barrels last year, according to BP
Proved reserves have risen 20 percent, from 1.36 trillion
barrels (45.7 years worth of production) in 2005, even though
180 billion barrels have been produced in last six years.
Since 1980, the oil industry has produced more than 800
billion barrels of oil. But proved remaining reserves have
roughly doubled in both absolute terms (from less than 700
billion barrels to more than 1.6 trillion) and in years worth of
remaining production (from 29 years to 54 years).
The reserves figures cited by BP are conservative. The BP
Statistical Review defines proved reserves as "those quantities
(of oil) that geological and engineering information indicates
with reasonable certainty can be recovered in future from known
reservoirs under existing economic and operating conditions."
Proved reserves do not include more speculative categories
of probable and possible reserves or the ultimate technically
recoverable resource, which have also grown rapidly, or
increased recovery from shales and other tight rock formations
as a result of advances in horizontal drilling and fracturing.
Nor do they take into account the possibility of extending
oil supplies by mobilising the wider hydrocarbon base --
including gas, coal, thermally immature oil shale (kerogen), and
methane hydrates -- all of which are abundant and could extend
supplies for hundreds more years.
EVEN MORE IN FUTURE
Using the broader definition of "technically recoverable
resources", the United States Geological Survey (USGS) estimates
565 billion barrels of conventional oil resources are still
waiting to be discovered in new fields, while another 665
billion barrels have the potential to be added to reserves in
large fields that have already been discovered.
USGS defines reserve growth as "estimated increases in the
quantities of crude (or natural gas and natural gas liquids)
that have the potential to be added to existing reserves in
discovered accumulations through extension, revision, improved
recovery efficiency and additions of new pools or reservoirs
under proven technology currently in practice within the trend
or play, or which can reasonably be extrapolated from
geologically similar trends or plays."
USGS estimates come from the agency's world assessment
programme and are based on a detailed analysis of geology and
They do not include undiscovered resources and potential
reserve growth within the United States itself, or so-called
unconventional or continuous formations like the Bakken and
Eagle Ford shales, where oil remains widely distributed in
source rock rather than migrating and becoming trapped in a
discrete reservoir, so the ultimate increment in resources and
reserves is likely to be much larger.
As the USGS estimates illustrate, reserve growth within
existing fields and basins can be as important as the discovery
of entirely new fields. In relatively well-explored regions of
the world, more volumes of oil are added to reserves by reserve
growth than by new-field discoveries.
The main reason is that oilfields are not well-defined.
Estimated reserves are often revised upwards during the lifetime
of a field when new oil pools are discovered, the producing area
is found to extend beyond its originally predicted boundaries,
or new wells and completions are made into layers of rock
by-passed during previous drilling.
However, reserve growth commonly requires substantial
investment, for example in infill drilling, well stimulation and
improved recovery operations. Decisions on whether or not to
invest depend on economic conditions, technology, and the
regulatory and political environment.
As a result "the amount of reserve growth fluctuates through
time with prevailing economic and technological conditions,"
according to USGS. ("Reserve Growth During Financial Volatility
in a Technologically Challenging World" 2010).
Investments can be justified by higher oil and gas prices,
desire to maintain cash flow and the need to maintain production
levels, and improvements in recovery from well-established
fields. The relationship between oil prices and investment costs
is obviously critical.
Price levels and risk appetite have a big impact on oil
companies' choice of adding volumes via additional development
at existing fields versus exploration in new areas.
"Exploration requires significant capital and the economic
and technological risks could be great. Development is more cost
effective than exploration and has lower associated risks, which
are desirable when prices are low," according to USGS.
Between 1981 and 1996, when prices were relatively high, the
average annual addition to reserves was 11 billion barrels from
reserve growth and 12 billion from new field discoveries. But in
the low price period 1997 to 2003, the pattern was reversed,
with reserve growth (12 billion barrels per year) adding more
than field discoveries (10 billion barrels per year).
PRICES BOOST RESERVES
Soaring oil prices since 2003 have resulted in a massive
increase in expenditure on both exploration and development.
In 2008, analysts were still worried about the relatively
small size of newly discovered fields compared with the super
giants discovered between 1940 and 1970, leading some to worry
the industry was having to run faster simply to replace the
steady run down of existing fields.
In fact, in recent years, discoveries have not been getting
smaller, as consultants Wood Mackenzie showed in a recent study
on exploration trends reviewed by my colleague Dmitry
Volumes per exploration well have risen by more than a third
since 2005, and the frequency of large finds (over 100 million
barrels) has been increasing, as oil companies have ventured
into "high impact" environments such as ultra-deepwater,
offshore Arctic and previously unexplored zones, according to
During the past decade, total global reserves discoveries
averaged 20 billion barrels of oil equivalent per year with
Brazil being the main driver of growth, and the Arctic and
Africa also big new exploration targets.
Many analysts still predict that oil prices must eventually
move even higher because of the rising costs of finding and
producing oil, the growing revenue requirements of producing
countries (both inside and outside OPEC), and demand from
But the accelerating additions to reserves as a result of
both exploration and development suggest that prices are already
at a level sufficient to ensure adequate long-term supplies.
Given short-term capacity constraints, for example on
seismic crews and drilling rigs, higher prices are unlikely to
bring forth extra barrels in the short term (though they could
restrain demand if necessary). And in the long term current
prices appear adequate to encourage exploration and development
on the required scale.
For that reason, many analysts and investors may indeed be
justified in concluding the "super-cycle" has run its course.