LONDON: For all that Malthusians worry about oil running out, and analysts cite the rising costs of exploration and production, the oil industry has been adding reserves faster than they are being consumed since 2005, as high prices spur an investment boom across the industry.
Contrary to the alarming predictions made a few years ago, and still periodically revived by peak oilers, there is no sense in which oil is running out.
Price spikes may still be needed from time to time to restrain consumption and match it with the uneven development of new supplies and periodic interruptions. But these are short-term phenomena.
There is good reason to think the long-term uptrend in (real) oil prices is over for now and the market has found a level at which adequate future supplies can be guaranteed.
After a long period of low prices and stagnating exploration and production growth during the 1990s and early 2000s, real oil prices appear to have risen high enough in recent years to ensure future supplies remain adequate.
MORE OIL THAN EVER
By the end of 2011, the world's proved oil reserves stood at 1.65 trillion barrels, enough to last another 54 years at present rates of consumption, according to the "BP Statistical Review of World Energy" published earlier this month. The world consumed around 30.5 billion barrels last year, according to BP.
Proved reserves have risen 20 percent, from 1.36 trillion barrels (45.7 years worth of production) in 2005, even though 180 billion barrels have been produced in last six years.
Since 1980, the oil industry has produced more than 800 billion barrels of oil. But proved remaining reserves have roughly doubled in both absolute terms (from less than 700 billion barrels to more than 1.6 trillion) and in years worth of remaining production (from 29 years to 54 years).
The reserves figures cited by BP are conservative. The BP Statistical Review defines proved reserves as "those quantities (of oil) that geological and engineering information indicates with reasonable certainty can be recovered in future from known reservoirs under existing economic and operating conditions."
Proved reserves do not include more speculative categories of probable and possible reserves or the ultimate technically recoverable resource, which have also grown rapidly, or increased recovery from shales and other tight rock formations as a result of advances in horizontal drilling and fracturing.
Nor do they take into account the possibility of extending oil supplies by mobilizing the wider hydrocarbon base — including gas, coal, thermally immature oil shale (kerogen), and methane hydrates — all of which are abundant and could extend supplies for hundreds more years.
EVEN MORE IN FUTURE
Using the broader definition of "technically recoverable resources", the United States Geological Survey (USGS) estimates 565 billion barrels of conventional oil resources are still waiting to be discovered in new fields, while another 665 billion barrels have the potential to be added to reserves in large fields that have already been discovered.
USGS defines reserve growth as "estimated increases in the quantities of crude (or natural gas and natural gas liquids) that have the potential to be added to existing reserves in discovered accumulations through extension, revision, improved recovery efficiency and additions of new pools or reservoirs under proven technology currently in practice within the trend or play, or which can reasonably be extrapolated from geologically similar trends or plays."
USGS estimates come from the agency's world assessment program and are based on a detailed analysis of geology and engineering practices.
They do not include undiscovered resources and potential reserve growth within the United States itself, or so-called unconventional or continuous formations like the Bakken and Eagle Ford shales, where oil remains widely distributed in source rock rather than migrating and becoming trapped in a discrete reservoir, so the ultimate increment in resources and reserves is likely to be much larger.
EXPLORATION, DEVELOPMENT
As the USGS estimates illustrate, reserve growth within existing fields and basins can be as important as the discovery of entirely new fields. In relatively well-explored regions of the world, more volumes of oil are added to reserves by reserve growth than by new-field discoveries.
The main reason is that oilfields are not well-defined. Estimated reserves are often revised upwards during the lifetime of a field when new oil pools are discovered, the producing area is found to extend beyond its originally predicted boundaries, or new wells and completions are made into layers of rock by-passed during previous drilling.
However, reserve growth commonly requires substantial investment, for example in infill drilling, well stimulation and improved recovery operations. Decisions on whether or not to invest depend on economic conditions, technology, and the regulatory and political environment.
As a result "the amount of reserve growth fluctuates through time with prevailing economic and technological conditions," according to USGS.
Investments can be justified by higher oil and gas prices, desire to maintain cash flow and the need to maintain production levels, and improvements in recovery from well-established fields. The relationship between oil prices and investment costs is obviously critical.
Price levels and risk appetite have a big impact on oil companies' choice of adding volumes via additional development at existing fields versus exploration in new areas.
"Exploration requires significant capital and the economic and technological risks could be great. Development is more cost effective than exploration and has lower associated risks, which are desirable when prices are low," according to USGS.
Between 1981 and 1996, when prices were relatively high, the average annual addition to reserves was 11 billion barrels from reserve growth and 12 billion from new field discoveries. But in the low price period 1997 to 2003, the pattern was reversed, with reserve growth (12 billion barrels per year) adding more than field discoveries (10 billion barrels per year).
PRICES BOOST RESERVES
Soaring oil prices since 2003 have resulted in a massive increase in expenditure on both exploration and development.
In 2008, analysts were still worried about the relatively small size of newly discovered fields compared with the super giants discovered between 1940 and 1970, leading some to worry the industry was having to run faster simply to replace the steady run down of existing fields.
In fact, in recent years, discoveries have not been getting smaller, as consultants Wood Mackenzie showed in a recent study on exploration trends reviewed by my colleague Dmitry Zhdannikov.
Volumes per exploration well have risen by more than a third since 2005, and the frequency of large finds (over 100 million barrels) has been increasing, as oil companies have ventured into "high impact" environments such as ultra-deepwater, offshore Arctic and previously unexplored zones, according to Wood Mackenzie.
During the past decade, total global reserves discoveries averaged 20 billion barrels of oil equivalent per year with Brazil being the main driver of growth, and the Arctic and Africa also big new exploration targets.
Many analysts still predict that oil prices must eventually move even higher because of the rising costs of finding and producing oil, the growing revenue requirements of producing countries (both inside and outside OPEC), and demand from emerging markets.
But the accelerating additions to reserves as a result of both exploration and development suggest that prices are already at a level sufficient to ensure adequate long-term supplies.
Given short-term capacity constraints, for example on seismic crews and drilling rigs, higher prices are unlikely to bring forth extra barrels in the short term (though they could restrain demand if necessary). And in the long term current prices appear adequate to encourage exploration and development on the required scale.
For that reason, many analysts and investors may indeed be justified in concluding the "super-cycle" has run its course.
- John Kemp is a Reuters market analyst. The views expressed are his own.
