By: Ng Weng Hoong
First published: 12 May 04, TODAY

IS THE world running out of oil? Yes and no, and it depends. If the answer smacks of deliberate ambiguity, it is because the facts and data are fudged.
The issue is just about entering serious debate, thanks in large part to Royal/ Dutch Shell's shocking announcement on Jan 9 that it had 20 per cent less proven oil and gas reserves than it had declared.

Just as investors were digesting the fact that the company might not quite have
3.9 billion barrels of oil equivalent reserves of an earlier declared 19.5 billion barrels, Shell made a second downsizing in March followed by another last month.

At a conservative US$30 per barrel price, the first downgrade alone wiped out US$117 billion ($202 billion) worth of unproven assets. Now, the oil giant refuses to rule out more downgrades altogether while its senior executives face protracted questioning by the US Securities and Exchange Commission (SEC) and class action and personal lawsuits for having allegedly misled investors.

The issue of overstated oil reserves holds far greater significance for everyone than the regular corporate scandal. After Shell's confession, several other companies admitted that they too had overstated their oil and gas reserves.

The entire industry is now under scrutiny, with the implication that the world may be sitting on much less oil and gas reserves than previously thought.

This became amply clear with Shell's second downgrade related to the Ormen Lange field in Norway, which it exploits jointly with BP, Norsk Hydro, ExxonMobil and Statoil.

Shell sharply reduced its bookings in the field to 90 million barrels of oil equivalent (boe) from 256 million boe, but its partners stuck to their estimates. This pointed to the wide difference in expert opinion on how to count reserves.

"We remain convinced that reserves bookings are a sector-wide issue, albeit amplified at Shell," said Deutsche Bank in a research paper issued after the second Shell downgrade. As it is becoming obvious from the debate, estimating oil reserves is part science and part wishful thinking.

Oil prices hit US$40 per barrel in New York on Friday before closing lower. With the prices soaring, the world is once again focusing on energy issues and the possibility of another energy crisis. As oil companies strain to make new finds and to continue producing oil cheaply, some analysts conclude that world production is soon approaching peak levels.

At the same time, world oil demand continues to hit new highs each year, growing by an average of more than one million barrels per day. That is roughly the size of Indonesia's output - in other words, the world needs to find one "new" Indonesia each year to satisfy its growing oil appetite.
How much oil and gas does the world really have in the ground and how much of that is probable, possible and proven?

How will the idea of diminished oil reserves affect the forward thinking of politicians and planners? How will societies and economies adjust to higher energy costs? Was the US decision to invade Iraq motivated by oil, as widely alleged, given the realisation that the commodity is becoming scarcer?

The idea of oil prices rising to - and staying at - US$40 to US$50 a barrel is starting to dawn on planners.

The Middle East factor

Crucially, the debate has focused industry attention on the reserves of oil-producing countries, which unlike listed oil companies, are not obligated to disclose information about their operations. If a trusted listed company like Shell can get away with over-stating its reserves for so long, how much easier is it for national oil companies in countries with few checks and balances to report fictitious data?

In February, Aramco, Saudi Arabia's state oil company, was forced to disclose some details about its reserves and key fields at a public forum, after investment banker and oil analyst Matt Simmons said the kingdom had been exaggerating its production capability.

Mr Simmons said Saudi production could decline sharply in the next five to
10 years although Aramco claims that it can comfortably maintain production at
10 to 15 million barrels per day (bpd) for the next 50 years. While Aramco claims a spare capacity of two million bpd, the Paris-based International Energy Agency (IEA) has pegged it far lower at 1.3 million bpd. Aramco says the kingdom has 260 billion barrels of proven reserves of oil but this has never been verified independently.

The issue is gaining urgency as the world is increasingly dependent on the Middle East and the Organisation of Petroleum Exporting Countries (Opec) for its oil supply. If Saudi Arabia and other Opec countries do not have the reserves they claim, the stage could be set for an energy crisis far more devastating than the two oil shocks of the 1970s.

As Mr Simmons famously notes: "There is no Plan B" to the dependence on the Middle East oil, particularly on Saudi oil.

The end of cheap oil

Until Shell's January announcement, the issue of oil reserves and peak oil production was the pre-occupation of a small group of independent geologists and analysts. Their thesis that world oil reserves and production will soon peak, implying sharply rising prices in the future, sounded alarmist to mainstream economists and oil executives.

Critics have long dismissed the depletionist school as disciples of the discredited "Club of Rome" forecasters who, in 1973, had predicted - wrongly - a gloomy future of shortage with oil at over US$100 a barrel by the late 1990s. With Shell and other companies admitting to owning far less proved reserves, the depletionists are suddenly finding their views in demand.

Ng Weng Hoong is editor of EnergyAsia.com and EnergyAsia Report.