The Hindu Business Line : The reserves ultimatum

Though there are multiple reasons for the differing views on the timing of Peak Oil, the fundamental issue boils down to the estimate of ultimate recoverable reserves. While estimation of reserves is not an exact science, the range that could account for these subjective interpretations can be no more than a few years, says SHANMUGANATHAN N.

Readers of this series (Hubbertspeak) might wonder what is the reason for the differences of opinion between Hubbertians and Cornucopians on the timing of Peak Oil. Though there are multiple reasons, the fundamental issue boils down to the estimate of Ultimate Recoverable Reserves (URR). While estimation of reserves is not an exact science, the range that could account for these subjective interpretations could be no more than a few years. But while Hubbertians assert that Peak Oil will happen between 2005 and 2010, Cornucopians believe that it would be beyond 2020.

BP and ExxonMobil go beyond the claims of Cornucopians and say that the "Peak Oil theory is garbage". But asking oil companies to accept Peak Oil is like asking tobacco companies to accept that smoking leads to cancer. When Peak Oil becomes mainstream, the regulatory regime for these companies will become highly stringent and the chances/terms for accessing the untapped reserves very slim/difficult. So they would delay accepting the inevitable till the force of public opinion makes them change their stance.

In some sense, these Cornucopians and oil companies are the new "Flat Earth Society" (a term coined by Warren Buffett and Charlie Munger to refer to believers in the Efficient Market Hypothesis). Whether their misconceptions are based on a deliberate misrepresentation of facts or are just an incentive-caused-subconscious-bias is hard to decide. For the discussion here, though, we will confine ourselves to the very basic difference between Hubbertians and Cornucopians — the URR figure. A summary of their differences is given in the Table.

Many Cornucopians, while reaching conclusions on Peak Oil, use one or more of the three sources — the US Geological Survey (USGS), the Energy Information Administration (EIA) or BP. But a careful analysis of the EIA and BP reports shows that, internally, they use the USGS study for their estimates. BP's annual statistical review of World Energy, considered by many analysts as the bible of energy statistics, states in its footnotes that the data are obtained from third party sources and are not BP's own estimates. So, what appears to be three "independent" estimates is just one estimate — that of the USGS. It is a question of the leader making the calls and willing followers blindly adopting the same.

Why is USGS Wrong?

To start with, USGS gives three estimates — P95 per cent, P50 per cent and P5 per cent, corresponding to 2, 3 and 4 trillion barrels (tb). Therefore, the USGS can argue for any number between 2 and 4 tb. This classification of P95, P50 and P5 is also different from the US SEC standard of Proven, Probable and Possible reserves, adding another layer of complexity. What P95 per cent refers to is the minimum amount of oil that would be discovered from any field. Under such conditions, it is indeed prudent to use the P50 per cent definition, which is what most users of USGS data have done, leading to an estimate of 3tb. Besides, in the six years since the Report was released in 2000, the discovery rate of oilfields has been less than 50 per cent of what the Report predicts. However, the USGS qualifies this by making a distinction between "what is available for discovery" and "what would be discovered".

Though the USGS's is a field-by-field report, some of the geological assumptions used are not based on actual field conditions. For example, the area of the world's basins is calculated and also assumed that these basins would be as rich/prolific as Texas. Texas had one of the highest rates of recovery in the world and, hence, using this assumption grossly overstates the URR. What the 3 tb number indicates is that we are going to discover an entire West Asian region, and a North Sea on top of it. Given the falling rate of discoveries since the 1960s, this proposition seems downright laughable were it not so for the tragic consequences.

The track record of USGS has also been poor. It denied US Peaking till the early 1980s, when it had peaked by 1971, as Hubbert had predicted. Given the issues highlighted above, it is strange that organisations continue to quote the USGS data for their analysis.

The Hubbertian Estimates

Hubbert Linearisation: Of the many methods indicated in the Table, the most objective and the one that requires the least subjective estimates of data is Hubbert Linearisation.

In a simplified form, it is a plot between the ratio of Annual/Cumulative Production and Cumulative Production. The X-axis intersection of the best-fitting straight-line defines the URR (see Line Graph). This method, which has been used successfully in large fields, countries and even continents, indicates an URR of around 2.2tb.

Field-by-Field Estimates Methodology: The field-by-field estimates done by the USGS contain many errors, as indicated above.

Additionally, the reserves reported by OPEC members showed an abnormal increase in 1987 (the paper barrel phenomenon) and also stayed static for the last 20 years, despite most nations having produced 20-50 per cent of their reserves indicated in 1987. Correcting for these errors, Dr Colin Campbell reported that the world has 1.9 tb of conventional crude.

Basis for assumptions

The assumptions and data used by the Cornucopians are questionable. On the side of the Hubbertians, many independent and theoretically sound methodologies have been used to estimate the URR at around 2tb. The fact that we have consumed near 1tb till now implies that we are very now near to Peaking, if not already past it.

Even if, and that's a big if, we take the USGS estimate of 3tb at face value, it would postpone Peak Oil only by about 10 years, as shown in the graphic (peaking happens when we consume 1.5tb).

A study by Dr Robert Hirsh, Senior Programme Advisor to the US Department of Energy, indicates that we need to start on a crash programme, at least 20 years before Peak if we want to mitigate the adverse impacts. And yet, with proof as clear as it can get, all of us continue to live in a state of denial!

(The author is a Director at Benchmark Advisory Services and can be reached at shanmuganathan.sundaram@gmail.com. The previous articles of the HubbertSpeak series can be viewed at http://kinghubbert.blogspot.com)