Oil reserves – do they matter?

Attention has turned away from the early 2000s scare of peak oil production to talk of when peak oil demand will come

A sample of crude oil at the Yarakta oilfield in the Irkutsk region of Russia. Reuters

June, for energy aficionados, means the release of the annual Statistical Review of World Energy. Formerly compiled by BP and since last year by the Energy Institute, it is full of essential data.

But one set of facts, which used to be the energy industry’s lifeblood, hasn’t been updated since 2020 and doesn’t look likely to be – oil, gas and coal reserves.

Daniel Plainview, a wildcatter (who drills wells in areas not known to be oilfields) in the film There Will Be Blood, set a century ago, would kill for a few thousand barrels of oil reserves – but how much do we have now?

In 2020, BP reported that the world had 1,732 billion barrels of oil, 6,642 trillion cubic feet of natural gas and 1,074 billion tonnes of coal. Based on the production rates at that time, that equated to 54 years of oil, 49 years of gas and 139 years of coal.

Subtracting subsequent extraction, and assuming no additions, there should now be 1,630 billion barrels, 6,213 trillion cubic feet, and 1,048 billion tonnes, respectively.

In reality, there have been major discoveries in countries such as Guyana and Namibia since, as well as in the UAE. Improved recovery will have replaced some reserves even in countries that did not have significant new finds.

In February, Qatar announced it had enlarged estimates of its North Field by another 240 trillion cubic feet of gas, enough on its own to cover more than a year and a half of global production.

Since Mr Plainview and before, reserves life was a key measure of the health of an oil company or a major oil-producing country. The figure should not be interpreted literally – production falls off gradually rather than stopping suddenly after a fixed number of years.

But, as a guideline, if the reserves-to-production ratio were falling, the company or nation was liquidating its assets and might not continue in business if it did not turn things around.

Several of the mega-mergers around the early 2000s, tie-ups such as Exxon and Mobil, and BP, Amoco and Arco, were encouraged by the need to replenish reserves. In 2004, Shell found itself in crisis when it had to reveal it had heavily overstated its reserves – the then chief executive Phil Watts was forced to resign.

Companies still have to report their own reserves for regulatory reasons. But investors don’t find this important any more. Far from emulating Mr Watts, Shell now says that three-quarters of its reserves will be produced by 2030 – and portrays this as positive.

So, what has changed that means reserves estimates today aren’t even worth updating?

First, BP found it wasn’t worth the trouble. Some countries would complain when the company, trying to be a neutral arbiter, would report numbers they considered too low. Commercial consultants, government agencies such as the US’s Energy Information Administration, and the Oil and Gas Journal publish their own, varying figures.

Their numbers are based on a variety of often inconsistent public sources using different standards, and official national figures of sometimes questionable quality. Venezuela, for instance, claims the world’s biggest reserves, but most of this is the extra-heavy, sticky crude of the Orinoco belt – much of which may not be commercial, extractable at all, or unlikely to be developed because of the country’s drawn-out economic shambles.

Second, the emergence of shale oil and gas has changed the paradigm. Shale resources aren’t found in discrete accumulations like traditional fields – they extend across huge areas. The limitations on extracting them are how good the reservoir rock is, how intensively companies drill and fracture, and whether oil and gas prices are high enough to cover costs – not on the theoretical quantity the shale contains.

Third, though, and most importantly – do reserves even matter anymore? Attention has turned away from the early 2000s scare of “peak oil production”, when many worried incorrectly that oil output was about to go irreversibly into decline.

Instead, talk is now of when “peak oil demand” will come, the point at which factors such as rising fuel efficiency and more use of electric vehicles lead to global consumption dropping inexorably.

Coal, polluting and carbon-intensive, is even more exposed. It can be easily replaced by gas, renewable sources or nuclear power. Reserves are so colossal that it seems indeed likely that most will be left in the ground permanently.

To stay below the target of 1.5°C of global warming, the remaining carbon budget – the total amount of carbon dioxide we can emit – is about 200 billion tonnes. We are currently spewing about 40 billion tonnes into the atmosphere each year.

Just current oil and gas reserves exceed the carbon budget by more than five times. Coal surpasses it more than 10 times. No wonder there does not seem to be much point in carefully quantifying a few billion barrels of reserves here and there.

There are ways of using fossil fuels without emissions – for instance, with carbon capture and storage. Still, it’s clear that we are not going to dig up and burn every last barrel and tonne. The constraint on fossil fuel use is not the amount we can find, but the amount we can tolerate for a liveable climate.

It’s amazing that over about two decades, the mindset of an entire major industry has changed so completely. The search from Mr Plainview to Mr Watts, for what seemed a fundamentally scarce resource, is over. It can still be worth looking for new fields, but only if they are lower-carbon and lower-cost to produce than existing deposits, or if they bring some geopolitical or energy security advantage.

Environmental groups, though, haven’t caught up. On Thursday, they celebrated a British Supreme Court judgment blocking drilling of some wells in a small field near London because of the climate impact of the oil production when finally combusted.

This oil, if not extracted in the UK, will clearly be replaced by production from the US or Saudi Arabia or another country.

It’s time climate campaigners and judges woke up to what the energy industry has known for years. The future of our climate depends on what we do on the surface, not on exactly what quantity of carbon might be hiding in the rocks a few thousand metres below us.

Robin M Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis