Rembrandt, expanding on your comments above, I find it astonishing that the USGS, or anyone else for that matter, would take the OPEC reserve estimates at face value. They are clearly political and have shown little or no change since the mid 80s. If we used OPEC's reserve figures and accepted their reported decline rate for the last 25 years as the norm, then OPEC's current production would last forever.

Reserve growth is another matter. As you say above, all reserve growth is due to errors in the original estimate of reserves. There is no guarantee that future reserves will continue to be underestimated as they have in the past. In fact, the exact opposite may be the case. We have already seen many instances of this, the most notorious was Shell's overestimate of Oman reserves. Shell overestimated its proven oil reserves in Oman by as much as 40 percent. And more recently we find dramatic overestimates of reserves in Australia. Woodside May Downgrade Oil Reserves at Neptune, JPMorgan Says Production from the Neptune field dropped almost 60 percent from the third quarter of last year.

Also, it must be admitted that the EIA's production estimates, based largely on the USGS's 2000 reserve estimates, have proven to be much higher than actual production levels in the last eight years. Not only that but new discoveries have not lived up to the USGS's estimate.

Bottom line, all estimates of production and reserves should be based on the very latest factual data, not wild guesses from almost a decade ago or political estimates of reserves made a quarter century ago that have remained unchanged despite continued production during the ensuing years.

Ron Patterson

Following is the section on reserve growth from my USGS petition of 2002 requesting that the report be withdrawn because it did not meet reporting standards:
4.10 Reserve Growth (Chapter RG) General Failings

4.10.1 Reserve Growth Causes

The un-stated assumptions of the RG projection are that RG is purely a function of geology and is uniformly time dependent. Neither assumption is valid. What are the real conditions?

- Reporting practices A)
In the USA, regulations require companies to report proven reserves. Proven reserves are defined as 90% probability10. If a company is quite capable of making an accurate 50% probability (most likely) initial estimate, but is constrained to report only the 90% probability estimate, (certainly the case in the USA for the last 30 years), their reported reserves will grow over time as more drilling is done and more reserves are proven, converging finally on the original 50% estimate. (Reserve growth being growth of “proved” reserves is clearly recognized on page RG-2).
In the rest of the world the tendency is to report proven plus probable – defined as 50% probability10. If the uncertainty of such estimates is similar over a large number of fields there will be a rough balance with shrinkage of some fields balancing growth of others, and near zero net growth as a result of development. Laherrere has illustrated such an actuality.11

- Reporting practices B)
Historically, especially in the years of corporate ownership and booming discovery, it was in the interest of the petroleum corporations to under-report reserves, even when not constrained to by regulations. Low discovery years could then be compensated by reporting some of the pocketed reserves, thus keeping shareholders happy. In the late 1960s under-reported reserves were probably very large. Subsequent nationalization and declining discovery rates, in all probability, have largely emptied the corporate reserve pockets. They can’t be emptied twice.

- Technology
Before about 1930 oil discovery was largely random and estimating reserves was a matter of guess work. Technology has progressed through gravimetrics, seismology, digital analysis, 2D and 3D imaging, data base development, computer correlation of well logs and seismology, enhanced well-logging and widespread computerization with PCs and supercomputers and sophisticated imaging software. Estimating reserves was associated with pretty high confidence levels by the 1970s and had become something approaching an exact science by the early 1990s.
In the early days it was logical to estimate conservatively and err on the side of caution.21 Technology has allowed updating of prior conservative estimates, providing reserve growth that will not be repeated.
Since 1980 or earlier, initial P50 non-USA reserve estimates would have been sufficiently accurate to allow for relatively little growth due to technology.

- Politics/Quotas
OPEC quotas are decided, to no small degree, relative to reserves. OPEC members who want to increase their quota are motivated to announce higher reserves. Whether OPEC reserve growth, which was very high in the 1980s, was a case of emptying pockets of unstated reserves left over from nationalization, of applying new technology to old estimates or to quota wars is unclear. However, there is real risk that present reported reserves are overstated, especially as they have grown moderately for a decade regardless of production. Future shrinkage is more likely than future growth.
Flash – The O&GJ just lowered their Middle-east reserves growth base estimate by 180 Gb.22

4.10.2 General Conclusions

- Reserve growth is much more an artifact of reporting than a function of geology.
-Due to technological progress and changing reporting motivation, reserve growth is not uniformly time dependent.21
-USA reserve growth history cannot be used to estimate reserve growth for the rest of the world.
-30 year reserve growth history (eg 1940-1970) of a group of fields discovered long ago (eg 1935-1940)cannot be applied to a group of fields discovered recently, (1980-1985). (If reserve growth really was valid, this factor alone causes the USGS to overestimate the growth by 200-300 Gb for all discoveries since 1980!)
-Most historic non-USA reserve growth will not be repeated.

These conclusions completely invalidate Chapter RG and the bulk of the 670 Gb of estimated reserve growth.

4.11.3 Robustness/Reproducibility

It would be appropriate to test the applicability of the growth factors. Consider that large fields discovered long ago, under conditions of high uncertainty and high motivation to understate, show substantially higher growth than small fields discovered recently under conditions of initial estimation accuracy, motivation to overstate and requiring few wells to be proven.21 A good test would be to divide the total population of oil fields into large field, medium and small field groups. The large field group will have most of the oil, and the small field group most of the fields. Now divide each group into young, middle-aged and old subgroups. In the young group include fields less than 30 years old but for which known growth is now zero.

Without having done this exercise, but inferring from Morehouse21, one can confidently predict that the zeroth year large-old growth factor will be not less than 6x the corresponding small-young growth factor. If the resulting 9 growth factors are then applied to the subject population by size and age the USGS results will not be reproduced. Using a single growth for all fields overstates potential growth substantially.

Example: Prudhoe Bay had “proven” P90 reserves of 9 Gb and P50 reserves of 12.5 Gb in 197712. Production peaked in 1988 and by 1997 “known” oil could be confidently projected as 12- 12.5 Gb. Secondary recovery (infill drilling and re-pressurization) had been extensively applied13 so expected growth was already zero. If 1977 is taken as the zeroth year the USGS factor would have estimated growth of 45 Gb vs an actual of less than 3.5 Gb or more than 12 times too high. (If the initial P50 reserves estimate had been used, real growth would probably be slightly negative). Prudhoe Bay is a large young field. Imagine the error multiple on a small young field outside the USA reporting an initial P50 estimate.

The reserve growth estimation fails the test of robust reproducibility.
4.11.5 Historic growth

Chapter RV notes that world reserves grew by 379 Gb from 1981 to 1993, “despite declining exploration” (a tacit acknowledgment of declining NFWs – see 4.4.2 above) and 254 Gb of production. (Total additions to reserves of 633 Gb in 12 years). The interpretation is that “future reserve growth of discovered fields has been under assessed”.

The USGS completely fails to note that 329 Gb of this growth took place in OPEC15 in 1983 through 1990, and that OPEC reported reserves then remained unchanged through 1993 despite production. Nearly 400 Gb of the 633 Gb noted was quota motivated, (see 4.10.1 above) and is no indication at all of future reserve growth.22 Most of the rest was discovery, not reserve growth.

Similarly, upward revisions of past reserve estimates as a result of applying new assessment technology, (common in the 1980s), is no indication of future reserve growth.

The interpretation stated is both naïve and misleading.

The chapter goes on to state that estimates of the total resources limits in general have regularly increased, with reference to Adelman and Lynch. This statement is clearly false. Forty plus estimates done from 1959 to 1999 show no trend for forty years and they include prior USGS estimates16. Adelman and Lynch are not hydrocarbon experts, and as noted cornucopians are not appropriate references, unless there is an intent to mislead.

4.11.6 Reserve Growth Assumptions
“Reserve growth is the major component of remaining US oil resources. Projections of reserve growth of known fields have therefore become necessary elements of US petroleum resource assessments.” (Page RG-1)
This assumption fails to recognize:
- The inapplicability of large-old growth factors to small young fields.
- Small young fields are proven relatively quickly with relatively few wells and therefore will hit zero growth long before 30 years.
- Seismic 3D, enhanced well logging and improved computer analysis move the initial P90 estimate much closer to P50 and reduce growth potential. (See Prudhoe Bay example above)
-
“Patterns of past reserve growth are assumed to form a rationale for modelling patterns of future reserve growth”. (Page RG-2)
This assumption would only be valid for USA P90 to P50 growth with a valid pattern. Other causes of reserve growth (see 4.10 above) do not form such a rationale. Even for the USA, the pattern used, not adjusting for field size and age, is invalid.

“Age of fields is assumed as a surrogate for enhanced recovery practices”.
This assumption is not clear, is not explained, and therefore is not useful to the user.

“Age of fields since discovery is a predictive variable”.
A factor derived from early growth of large-old fields is not predictive of early growth of small-new fields. (See 4.11.3 above).

“The O&GJ in 1996 noted 1990s’ additions of large volume through other than new field exploration” (Page RG-4), assumed by the USGS to be reserve growth.
Most of such growth was simply no changes in numbers reported from year to year by many countries, but especially by OPEC. These additions are much more an artifact of reporting practices than proven growth and should be treated as very suspect.22 The failure of the USGS to do so is, at best, unhelpful.

“The same reserve growth function was applied to all fields”. (Page RG-4). “Reserve growth function intended to represent world potential to be added to the remaining reserves of known fields”. (Page RG-5).
This in spite of the fact that there was an earlier observation that all fields do not exhibit similar growth. Note - no mention is made of fields that show negative growth11.

“Applying USA reserve growth to world reserves would give smaller error than not considering reserve growth”. “USA reserve growth experience ……… giving insight for rest of world potential”.
These assumptions are both unsupported and unsupportable, and are misleading for the user. The error is vastly larger than a no growth assumption, and is conducive to potentially hazardous complacency. USA experience provides no useful world insight.