What the hell are oil reserves anyhow?

When Exxon or Chevron report their proved reserves as X and Saudi Arabia and Nigeria report their proved reserves as Y what does that mean?

It is important to understand that publicly-traded companies and other entities have different meanings and different standards that they adhere to when they report their "reserves".  

In general, countries have no legal standards to abide by when reporting reserves.  For example, when Saudi Arabia says they have 260 billion barrels in "proved reserves", this statement is akin to the North Korean government saying that their citizens have an average life expectancy of 104 years.  You and I might be skeptical of this, but there is no way to independently verify the claim.

We can take informal surveys, query the populace on an ad hoc basis, or relate this number to other populations that we have hard data about.  In the end, however, the North Korean government will claim that 1) their population is special, 2) they have data that you don't, 3) they don't want to share this data with the world, and 4) no you can't come in and collect your own data.  So in the end you have to decide based upon your belief in their credibility.  

If you personally know five Korean individuals who are over 100 years old, you might be much more believing in the argument that the average life expectancy is 104 years.  I, on the other hand, having read numerous books on statistics, am a strong believer in statistical analysis, hard data, and verification.  

The point here is that when the Saudi's claim that they have 260 billion barrels in proved reserves you need to take both words "proved" and "reserves" with a grain of salt.

Now let's compare this to what are claimed by pubicly-traded companies as their proved reserves.

Any company that trades securities (stock, bonds, ADRs, etc.) in the US is subject to the rules laid down by the Securities and Exchange Commission (SEC) (Federal Securities Laws and the Energy Policy and Conservation Act of 1975 Reg. ยง 210.4-10). The SEC has very specific rules as to what can be claimed as proved reserves of hydrocarbons. Those rules, as discovered by Shell, and by El Paso Energy in 2004, are very specific and quite conservative. They have only a tenuous relationship to what a scientist might estimate to be the recoverable volume from a particular accumulation. Not only that, but straying from these rules can result in incurring real and painful penalties to a company concerned primarily with making money.

When I say the rules are conservative, I mean that they do not allow any extrapolation of the data, they do not allow any use of probabilistic modeling methods, and they do not, for the most part, allow for the use of any modern seismic or petrophysical techniques, or well test information, or numerical modeling techniques to help estabish the boundaries of an accumulation or how much of the accumulation might be recoverable.

Even more important, for a company to report discovered volumes in the ground as proved reserves, they must be able to demonstrate that these volumes are economically recoverable AND they must have taken a corporate decision to invest in the development of the resource. This last requirement is partly what got Shell into trouble when they booked a large reserve volume from the Gorgon gas field, offshore western Australia, as part of their proved reserve base before any of the companies involved had taken corporate actions to fund development of the resource. Shell had to write down the reserves, not because the resource did not exist or ultimately wouldn't be developed, but the demonstrated volume did not meet the SEC's definition of proved reserves. Ultimately, some or all of those reserves will be rebooked.

The last thing I want to say here is that the SEC allows companies to publicly disclose proved reserves only. They specifically prohibit the disclosure of unproved reserves (some of which are commonly referred to as "probable" and "possible" reserves). Consequently, the reserves quoted by most companies each year, I would argue, almost certainly underestimates the total volume of hydrocarbons that at company is likely to ultimately produce from its equity leasehold at any particular snapshot in time.

Now I know that many people who read the above statement will scoff at it and claim that companies have a strong financial incentive to overstate their reserves. I will not deny that this is so. However, even if their proved reserves are overstated, the sum of proved plus (undisclosed) probable reserves is, in most cases, significantly greater than most company's proved reserve base (even if inflated). This is certainly true for most of the majors who have discovered very large volumes throughout the world (especially in deep water), but have not taken corporate decisions to finance their development yet.

So getting back to the first question comparing Exxon's proved reserves to Saudi Arabia's "proved" "reserves" I hope that you can see that, whether or not you find Exxon to be a corporation to be admired or villified, the volumes that support the financial basis for their company are not going to disappear overnight into the ether. On the other hand, as Matt Simmons has been trying to point out for years, no one really knows what the Saudi's reserves are, proved or unproved. However, what they report as proved reserves is something very different than what Exxon reports.

For all those interested, a great resource to see how all of the different reporting entities describe reserves can be found here.

Bubba: Just a note that I edited "I mean that they do allow any extrapolation of the data" to "I mean that they do not allow any extrapolation of the data", which I think is what you meant. If not, please edit it back.
Great piece btw!
Everybody needs an editor. Thanks for having my back in that regard.
Great piece and thanks for the last reserve accounting comparison piece from the SPE! I also didn't know the stuff from El Paso.
Sorry, I just hit the wrong button and made an empty comment. Perhaps that can be removed.

So, the obvious problem concerning the National Oil Companies (NOCs) is that they can say anything they want to-- sometimes with the aid of the USGS :) -- about their reserves but the IOC's like ExxonMobil or Beyond Petroleum, who are responsible to their shareholders, must stay within what we might call reasonable "limits of reality" vis-a-vis their recoverable reserve numbers. Yes?

Now, what makes this a problem as we go forward in time is that after the non-OPEC peak in 2010 and including Russia, I think an increasingly large percentage of the world's oil supplies will be in the hands of people who are less accountable about what recoverable reserves they've got (even more so than they are right now!). The IOC's will be winding down since almost all the important big oil will be state-controlled in the Middle East/OPEC nations like Saudi Arabia and otherwise Russia, etc. Deepwater places like West Africa or Brazil will be at peak production as will the GOM or any other place where we might get realistic URR numbers. Wow, looks good.
In principle the SEC requirements should give a probability near 90% or 1P for claimed reserves, but by analyzing claimed positive and negative reserve growth over time Jean Laherrere has estimated that the actual reporting is close to 60% probability, or close to 2P. Murray
Were do you get this data from? I've never seen such an alalysis done by J. Lahherrerre

Anybody catch this story??

Kuwait's biggest field starts to run out of oil

It was an incredible revelation last week that the second largest oil field in the world is exhausted and past its peak output. Yet that is what the Kuwait Oil Company revealed about its Burgan field.

Yeah I saw that and was shocked also. Let's see - Burgan, Cantarell, Prudhoe Bay, all of the major North Sea fields - they all are past peak.  Ghawar we don't know about but anecdotal evidence suggests it is near its peak.  What fields that have 5 billion barrels or more "reserves" have not reached their peak?  
I can't tell if this is really news or not.  The EIA has the Burgan field rated at 1.6 mbpd.


This is news because it was projected to increase to 2 million b/d. Instead it will decline (possibly rapidly) which will make a big difference in supply/peak projections over the next few years.
Is there a difference between prove"N" reserves and prove"D" reserves?

Maybe I'm suffering another of those reality-distorting brain strokes, but I recall the term prove"N" reserves as the one more often tossed about by Yergin (who BTW was just on NBC with Squawk Chick Bartolova) and company.


The SEC uses the term "proved".  I don't know if Yergin et. al. is trying to make some subtle distinction between what the SEC definitions are and what other entities consider to be "proven".
According to one dictionary, proven and proved are basicaly equivalent:


The Economist mentions Simmons but comes down in favor of the IEA.  (Current issue, 11/10/05, behind subscription wall.)  They conclude: "All is not good news, however. Aramco's oil could indeed keep gas-guzzlers humming for many years yet. But if energy demand continues to soar at the current scorching pace, especially in America and China, the only place those extra barrels of oil can come from is the Middle East. That, warns the IEA, means a sharp rise in the market share and pricing power of Aramco and its neighbours in the Persian Gulf--and with it, the prospects for a future oil shock."
Also, this issue has an extensive and very interesting article on the recycling of petrodollars.