That disagreement over oil reserves
QualEnergia, mar 3 2011

The problem of methodology for evaluating oil reserves is open, especially for unproved and undeveloped reserves. It lacks a uniform system of reporting and sharing, especially for the hostility of states and industry. Too many implications on the geopolitical balance.
Translated in english; original article in italian by Fabio Catino.

Take inspiration from the recent revelations of Wikileaks on oil resources of Saudi Arabia (QualEnergia.it, Wikileaks, gonfiate le riserve di petrolio saudite). The resulting publicity in the media did not produce spikes in oil prices, as happens in these days to counter the political turmoil going on in Libya, but it offers the opportunity to return to consider a long-standing problem: the evaluation of hydrocarbon reserves, the procedures under which such estimates are created and posted, and their degree of homogeneity.
The former executive vice president of Aramco's exploration and production, Dr. Al-Husseini, has proposed a detailed speech on the state of Saudi oil production and resources that has been generally reduced to a criticism of the overvaluation of the estimated quantities of crude oil in the availability of Saudi state company. Confidential documents of the U.S. Embassy, however, seem to bring out other aspects.
Certainly they make explicit reference to the limited capacity of Saudi Arabia to increase its daily production in the medium term and this observation has significant geopolitical scope since it relies on a stabilized condition of equilibrium between supply and demand of crude oil worldwide. However, the documents put in evidence particularly a problem of methodology on the evaluation of reserves that has always invested the oil industry and the economy.
Compared to the data supplied by Aramco, the Al-Husseini disagreement is primarily methodological and concerns the categories examined. Aramco will consider two: total resources and , in particular 716 Gbbl current total, of which 51% recoverable (365 Gbbl), which should be 900 Gbbl with new discoveries of the next 20 years, recovered to 70% (630 Gbbl ) thanks to developments in extraction technologies.
Al-Husseini instead adheres to the proven reserves (360 Gbbl), keeping in accordance with assessments of the major international analysts (Oil & Gas Journal, ASPO, IEA) and not far from current recoverable resources as of Aramco. Maybe that explains the minimal effect of the WikiLeaks revelations on the oil market: a lot of noise in non-specialized press, little new for insiders.
Turning to the merits of the dispatches information, the divergence on data, i.e. essentially on the estimation of the unproven resources that Al-Husseini calls 'speculative' for about 300 Gbbl, stems from the non-unique assignment of meaning to this category. Although it is a problem widely and variously debated, the harmonization of the classification of oil resources have not yet found a shared composition. This perspective is influenced by the consequences of the choice of a classificatory structure in place of another, involving selective economic and financial effects with important implications for industrial planning and the geopolitical balance, so that they could accommodate both a boost in search of a shared solution if the general interests prevail, and a slowdown in that direction if other interests prevail.
An apparent dilemma, perhaps not irresolvable. There is an excellent opportunity to achieve a homogeneous, univocal and universal reporting system of oil resources. This is offered by the United Nation Framework Classification for Fossil Energy and Mineral Resources and Reseserve and produced by the UNECE Committee on Sustainable Energy. Leaving aside the technical details, it is significant that the work of harmonization of reporting systems conducted jointly by authoritative institutions such as the SPE, WPC, AAPG, which inspires a lot of oil companies and organizations worldwide, is moving towards such a classification.
However, there remain serious doubts about the clear statement of a shared system, cumbersome as it is wide variety of interests underlying the publication of the data. To confirm these doubts are once again starting points for analysis that come from the U.S. market, traditionally the most advanced and liberalized in the field of hydrocarbons. In particular, we can highlight the difficulties faced by the SEC, the federal control of the U.S. market, in revising the rules for disclosure of data on mineral reserves of oil Public Companies. Having started this journey in 2008, for the first time in the last 30 years, said the aim to modernize and make more transparent the old rules, the SEC has had to deal with the reactions and sometimes overt hostility of industries: first observations on the lack of clarity in the rules, which in 2009 forced the SEC to propose additions of merit, then the failure to correct application of updated rules as is clear from a preliminary final of 2010.
It should be noted that the new SEC rules relate primarily to how to define proved undeveloped reserves (PUD) included in the portfolio company, also following parameters are not only restrictive. Three requirements in order to: use of reliable technologies; development plan within 5 years; economic evaluation of the project based on the average annual price of the resource. The first requirement is less restrictive than the old rules. However, in light of the disappointing response to the oil industry, as demonstrated from the incongruous application of new requirements, the advantage of not having to depend on flow tests for evaluation of resources is offset by the negative binding declaration on the technology of extraction applied, in an even heavier in the case of proprietary technology, and the time limit imposed on the cultivation of the resource estimate. Regarding the effects of the annual average price new parameter, the resulting changes in PUD - although significant compared to the amount calculated under the old method of the end-of-the-year spot price - did not raise many concerns.
The fact remains that the complexity and severity of the terms of comparison led the SEC to plan a new disclosure rule integration of proven resources. If this happens for the regulation of the smooth functioning of a domestic market, you can expect even greater obstacles in a broader context which involved the interests of different national economies and the multinational oil companies.