From Wikileaks or Saudi sheiks?

10 Feb 2011

Dear Citizens of OPEC countries,

Since you live in lands that are part of the Organization of Petroleum Exporting Countries, which together hold about two-thirds of the entire world’s oil reserves and produce about half the world’s oil, I’d say you owe your lifestyle — and maybe even your life itself — to oil. So if you don’t know much about the oil industry, you should find out more — and I’d like to recommend a book for you to read. Don’t worry — it’s not some dry textbook. The Garden of Betrayal is a thriller by Lee Vance, a retired former partner at the financial firm Goldman Sachs who led its energy trading for a number of years.

If you already know a lot about the oil production that supplies your country with much — possibly most — of its revenue, then Vance’s novel will just be a fun read. But if you don’t know much, then it’s a great starting point to think about where your country — and the world — may be headed in the coming decades.

In the book, energy analyst Mark Wallace, who works at a financial firm called Cobra, receives a mysterious phone call from a woman asking him to meet her at a cafe. When Wallace arrives at the meeting place, the caller turns out to be incredibly sexy — and even better, she has an iPod full of secret data:

“What am I going to find on this?” [the narrator asks].

“Reprocessed seismic, daily and life-to-date production figures by well, bottom-hole and wellhead pressures from drill date to present, saltwater injection volumes, current and historical produced mixture percentages, well rotation schedules, onsite GOSP capabilities, and some other stuff.”

“For Ghawar?” I asked, stunned.

“For every oil field in Saudi Arabia.”

Wallace knows what all this technical data means, and knows it’s the kind of information that he could get killed for having. He’s ecstatic. He rushes back to his office and plugs the field-by-field data into a depletion model — a computer program that tries to predict how fast a particular oil field’s production will decline. After his computer
grinds away for several hours, it finally spits out an answer that’s in line with what oil pessimists have been saying for the past several years: very soon, Saudi oil production will likely take a nosedive.

But should Wallace trust the numbers on the iPod? Who was the foxy woman who leaked the information? And if Saudi oil production begins to drop, then what kind of turmoil would this unleash on the world?

The reason why the woman was so shady, why Wallace was so keen to get his hands on that iPod and why he spends the rest of the book being followed by secret agents and hit men is that data like this — data that would give someone a clear idea of the state of Saudi oil reserves — is a huge secret. How much oil do the Saudis really have in the ground? How many barrels per year will they be able to produce in the next few decades? Those, you could say, are the 100-billion-barrel questions.

The Numbers Game

The same goes for other OPEC countries — in fact, most all oil-producing countries. “Proven plus probable reserves estimates are confidential in all countries except the U.K., Norway and U.S.,” says Jean Laherrère, former head of exploration and production for the French oil giant Total. “Russian oil reserve data is a state secret,” says Shamil Midkhatovich Yenikeyeff of Oxford University, an expert on the Russian oil industry. It is hard to make sense of whatever data they do publish. “The collection of this data considerably differs from international standards,” Yenikeyeff says. “This could prevent adequate and accurate analysis of the available data even if the Russian government agrees to release it.”

But, you might say, OPEC countries tell everyone how big their reserves are. To name just one source, the data is all published in British Petroleum’s annual Statistical Review of World Energy. According to that report, Saudi Arabia has 264.1 billion barrels of proved reserves. Iran has 137.6 billion barrels and Iraq has 115 billion. But these are reports the countries have submitted without explaining how they get these results, and without any independent verification. And these figures could change drastically at a moment’s notice.

The Magically Growing Reserves

In October, after a new evaluation, Iraq said its reserves were actually much bigger, at 143 billion barrels — a jump of 25 percent. With all the advances in technology over the past 30 years, and with outsiders now bringing in state-of-the-art equipment and techniques, it’s plausible that Iraq’s oil fields could be more productive than previously thought. The reserves boost moved Iraq up the ranks, to number two in the world, second only to Saudi Arabia. (By some accounts, Canada is number two, but that’s only if you include their sticky, dirty tar sands, that have to be mined rather than pumped out of the ground. Here, I’m just talking about regular
old oil.)

What’s strange, though, was that within a week of Iraq’s reported findings, Iran suddenly found more oil, too. Iran’s minister of petroleum, Masoud Mirkazemi, announced that the country did not have approximately 135 billion barrels, as it had been saying for the past few years, but rather 150.31 billion barrels of oil. That put Iran back in its comfortable position of second place. What’s more, its proven reserves would increase further by the year’s end, Mirkazemi said.

Where did Iran’s new-found oil come from? The numbers are so precise that it would seem that the Iranians knew exactly what was in the ground. But you can’t find more oil overnight — it takes time to do the seismic studies, drill test wells and analyze all the data. Did they know previously how much more oil they had but weren’t telling anyone? Or, did they change the rules for how they compute their reserves?

A week after Iran’s oil report was released, Kuwait announced that it, too, had more oil. Rather than 100 billion barrels, it had at least 12 billion more.

Despite the apparent precision of all these numbers, there’s actually a lot of estimation and guesswork that goes into coming up with a figure for oil reserves. People can tweak the assumptions and get higher or lower numbers. In 2004, Shell Oil admitted to have been fudging the numbers on its oil reserves, counting oil that it thought the company was likely to produce, and saying that it was very likely it’d be able to produce that amount. Publicly traded companies are supposed to follow specific rules for estimating reserves, and such tweaking is a serious offense. Shell’s stock took a beating and it had to pay a $30 million (£17 million) fine by Britain’s Financial Services Authority and more than $350 million to settle a lawsuit from shareholders.

What do all these jumps and revisions mean? The reserves estimates in BP’s Statistical Review and similar reports are based on the data supplied by OPEC countries and other oil producers, and which governments around the world rely on when officials discuss future oil reserves. But these estimates are suspect. If the jump in Iran’s reserves was an isolated case, that would be one thing. But it’s just one example in a long string of fishy data.

In the 1980s, for example, OPEC countries’ reserves suddenly jumped to a whole new level. In 1983, Kuwait’s oil reserves suddenly grew about 50 percent. Two years later, Iran’s reserves also grew about 50 percent. More amazingly, that same year, the UAE’s reserves tripled. Starting in 1985, Iraq’s reserves also grew 50 percent — although unlike the others, it took two years to achieve this increase. Saudi Arabia was slightly behind the curve, but in 1988, it managed to nearly double its reserves. In barrels, this was the biggest leap of them all because the country was already the largest oil holder. Its reserves jumped from 170 billion barrels to 255 billion barrels.

Many outsiders attribute these jumps to the advent of an OPEC rule stipulating that each member country is allowed to produce a certain amount of oil each year, depending on the size of its reserves. The larger the reserves, the more the country is allowed to produce. Maybe when these jumps occurred, the countries knew they had more oil than they’d been reporting, but with the start of the new rule, they suddenly had a good reason to declare those reserves. We’ll give them the benefit of the doubt and say that their rationale was something like this. But for all we can tell, from the official numbers, they were just pulled out of the air as part of a sort of race in which each country was trying to keep its production high.

After these jumps in the 1980s, another strange thing happened: OPEC countries’ reserves became … well, magical. Despite extracting billions and billions of barrels over the past two decades, the reserves didn’t shrink any appreciable amount. But most countries’ reserves hadn’t grown much either. In some countries, they stayed exactly the same for decades. The United Arab Emirates reported that its oil reserves have stayed nearly flat – at around 98 billion barrels—since 1988. Since that time, they’ve pumped about 25 billion barrels out of the ground. Similarly, the Saudis’ oil reserves have stayed within a narrow band since 1990, of about 257 to 266 billion barrels, while they pumped up more than 60 billion barrels during that time.

“Saudi Arabia has a preference for downplaying its reserves for tactical reasons, such as containing outside pressure to increase production beyond the level that the Kingdom is comfortable with,” says Giacomo Luciani, director of the Gulf Research Center in Geneva. “It has, therefore, followed a practice of announcing, year after year, reserve increments that almost exactly equal the amount of oil that was extracted during the year, leaving reserves unchanged,” he adds. “This is a transparent fabrication and is meant as such. The message, nevertheless, is clear.”

The Low Down On Future Reserves

If the reserves data is a fabrication, how much oil can the world expect OPEC countries to produce over the coming decades? OPEC’s 2009 annual report seeks to reassure a shaky world. “As always, OPEC will be there to ensure that the world is adequately supplied with the oil it needs to aid the [global economic] recovery,” writes OPEC Secretary-General Abdalla Salem El-Badri. “That is what we have always done, and we shall continue to do this long into the future.”

But is this, too, a fabrication? “To its great credit, Saudi Arabia has always made good on its commitments to provide the oil needed to prevent supply shortages in the marketplace,” writes Matthew Simmons, a Texan investment banker, in his 2005 book Twilight in the Desert. “Based on past behavior, there would seem to be good reason to believe Saudi assurances about the future availability of its oil.”

However, Simmons started to grow suspicious of the Saudis’ assurances during a visit to the kingdom, when he realized they were developing some of the world’s most sophisticated computer models to simulate where the oil is and how to produce it, while employing expensive, state-of-the-art drilling. If oil exploration and production was like the old days when you could shove a straw into the sand and oil would come shooting out, then they wouldn’t need all this extra effort, Simmons argues.

He started digging through technical papers that employees of the Saudi oil company, Aramco, had published over more than 40 years. None flat out stated how much oil existed in any particular field, or how much each field was producing. That’s all secret information, the kind of stuff that shows up on an iPod from a sexy, mysterious lady.

Nonetheless, Simmons dug through these papers to piece together what he could about the state of Saudi oil fields. What he found worried him. In his 2005 book, he concluded, “Saudi Arabian production is at or very near its peak sustainable volume, and is likely to go into decline in the very foreseeable future.”

This would be a watershed, since Saudi Arabia has long been the world’s largest producer. If its oil production began to wane, the world would have a hard time compensating for these losses. Oil from the rest of the world — particularly from non-OPEC countries — is set to take a nosedive, according to the International Energy Agency (IEA ). In 2009, the IEA forecasted that “non-OPEC conventional oil production peaks around 2010,” and then declines.

In the IEA ’s scenario for the future, in which the world consumes more and more oil, “most of the increase in output comes from OPEC countries.” That would continue a trend, which started with the first oil fields in the 1850s, of ever-increasing oil production (except for a blip in the 1970s when OPEC countries closed many of their spigots and the U.S. finally had to admit just how dependent it was on the Middle East’s oil).

But can that trend continue? Can Saudi Arabia and other OPEC countries pump more and more oil, raising yearly production above what it is now? Simmons would say they can’t. And what happened after he published his book seems to be strong evidence in his favor. Oil prices quadrupled in five years, from 2003 to 2008, hitting a peak of about $150 a barrel. Meanwhile world production — and OPEC ’s — stayed nearly flat. Normally higher prices would lead to more production, if countries had any ‘spare capacity’ that they could use to raise their production level quickly. But during the run-up in prices, the normal laws of supply and demand didn’t seem to be working. The reason, many oil watchers said, was that the world had entered a new era in which the price was set not by how much countries were willing to produce, but by how much they were able to produce.

The Future of Oil Production

In The Garden of Betrayal, after poring through the secret data on the iPod, Mark Wallace says, “I found myself wondering what the world would look like in fifty years. It’s not just global warming — everyone in the energy business knows there isn’t anywhere near enough oil and gas in the world to meet long-term demand under any realistic economic scenario. It’s a strangely obvious issue that doesn’t get much play.”

It is starting to get more play. Militaries are now taking a close look at oil forecasts to see whether the fuel for their war machine will be affordable in the future. The U.S. military’s Joint Operating Environment, a bi-annual report, has raised concerns about oil in the past few years. The 2010 report doesn’t talk about an all-time peak in oil production and subsequent decline, but it does say that “the central problem for the coming decade will not be a lack of petroleum reserves, but rather a shortage of drilling platforms, engineers and refining capacity. Even were a concerted effort begun today to repair that shortage, it would be ten years before production could catch up with expected demand.” Another report in 2010, by the German military’s Center for Transformation, was more pessimistic, saying there is “some probability that peak oil will occur around the year 2010.” After the peak, it warns, “shortages of vital goods could arise” in the short term, and after a decade or two, “the global economic system and every market-oriented national economy would collapse.”

While no one has a perfectly clear crystal ball that will allow sight into the future, having the kind of data that Wallace received would give us a much better idea of things to come. “Countries will not lose their ownership by releasing the production [history] of every [oil] field,” says Jean Laherrère, the retired Total scientist. “I do not see any reason to hide field production except that most countries lie on their oil production, like OPEC countries, because of quotas,” he says. They “prefer to keep their production secret,” because that way they can sell extra oil, and make more money.

But this could be a dangerous gambit. Instead, “Right now, the EIA (U.S. Energy Information Administration) and IEA ” — that is, the groups making the most widely read oil forecasts — are “placing a lot of hope on future production capabilities of OPEC,” says Mikael Höök, an energy resources expert at the University of Uppsala in Sweden. Meanwhile, he adds, “OPEC just says that people should trust them without allowing anyone to verify or double-check their claims on reserves and production capacities.

“If those expectations are unfulfilled or impossible to fulfill, the West may very well blame the situation and impending oil shortage on OPEC, if it turns out that OPEC have been exaggerating their future production capacity,” Höök says. “My fear is that future economic troubles caused by oil shortages could further be used to blame Muslims and stir up additional mistrust against Islamic countries, since they are the most important oil exporters.”

While OPEC countries stand to make a lot of money if the world faces peak oil and prices skyrocket, this scenario may not be in everyone’s best interests. The Saudis have tried to stabilize prices by ramping up production when needed — as when Iraq’s production went offline at the start of the 2003 war — or by shutting some spigots when the market was flooded with oil. If the world really does end up facing peak oil soon, and countries can’t pump out fast enough to meet world demand, then it seems Saudi Arabia and the rest of OPEC may need to exercise a different kind of management, not just of oil fields, but of the world’s expectations and desires.

“Releasing data and making everything available for painting a truly reasonable picture is essential for making people trust each other,” Höök argues. It is “vital for making a nice and ordered shift away from the present oil-dependent society to something more sustainable.”

So how might the world — including you, the citizens of OPEC countries — get more information about the true state of OPEC oil fields? It seems to me a definite possibility that someone might leak the data — for example, through the website Wikileaks. This would be illegal and fraught with danger for the leaker. How journalists and researchers handle the data, and whether to trust it, would be tough issues to grapple with.

When hundreds of thousands of documents were leaked from the U.S. military about the Iraq war through Wikileaks, some people debated whether it was ethical for journalists to mine this information. When Al-Jazeera wrote about these leaks, though, they argued that it “is clear that releasing the Iraq files — despite their secret nature — is vital to the public interest.”

In my opinion, it’s even more vital to the public interest to know how much oil the world might expect to produce in the coming decades. Perhaps someday soon, instead of some mystifying woman handing over data on an iPod, or the production data showing up on Wikileaks, a Saudi sheik will announce that his country will be putting all the data online, for everyone to see. If so, I’ll be one of the first to download this information and see what it can tell us.


Mason Inman

Further reading (besides The Garden of Betrayal):

“Uncertainty of data and forecasts for fossil fuels,” slides for a lecture by Jean Laherrère at Universidad de Castilla-La Mancha, Spain, April 24, 2007. Link to pdf (5.6 MB)

Shamil Midkhatovich Yenikeyeff, “The G8 and Russia: Security of Supply vs. Security of Demand?” Oxford Energy Comment, August 2006. Link to pdf

“Iraq hikes oil reserves estimate to 143 billion bbl,” Oil & Gas Journal, October 4, 2010. link

“Iran claims to top Iraq with 150 billion bbl of oil reserves,” Oil & Gas Journal, October 12, 2010. link

“Kuwait Oil Study Reveals Higher Reserves at Burgan Field, Al-Jarida Says,” Bloomberg News, October 21, 2010. link

“Royal Dutch Shell to compensate shareholders for reserves scandal,” The Guardian, May 31, 2009. link

Howard Banks, “Cheap oil: enjoy it while it lasts,” Forbes, June 15, 1998. link

Data from the U.S. Energy Information Agency; “International Energy Statistics.” link

Giacomo Luciani, “Oil Reserves and Transparency in the Gulf,” Carnegie Middle East Center, August 2008. link

Stefan Schultz, “Military Study Warns of a Potentially Drastic Oil Crisis,” Der Spiegel, September 1, 2010. link

Tony Rogers, “Wikileaks, the Afghanistan War Documents and Journalism Ethics,” link

Gregg Carlstrom, “WikiLeaks releases secret Iraq file,” Al-Jazeera, October 24, 2010. link


books I've read on failure & grace

The World Without Us
The Last Oil Shock: A Survival Guide to the Imminent Extinction of Petroleum Man
A Paradise Built in Hell: The Extraordinary Communities That Arise in Disaster
Hell and High Water: Global Warming--the Solution and the Politics--and What We Should Do
The Worst Hard Time: The Untold Story of Those Who Survived the Great American Dust Bowl
The Tipping Point
Three Cups of Tea: One Man's Mission to Promote Peace... One School at a Time
The Upside of Down: Catastrophe, Creativity and the Renewal of Civilization
Out of Poverty: What Works When Traditional Approaches Fail
The Little Ice Age: How Climate Made History, 1300-1850
Confessions of an Eco-Sinner: Tracking Down the Sources of My Stuff
Deep Economy: The Wealth of Communities and the Durable Future
The Geography of Bliss: One Grump's Search for the Happiest Places in the World

Mason's favorite books »