Crude
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At the same time, investments in new oil, found in ever deeper, ever more hostile climes, are increasingly risky in and of themselves. New oil today requires billions of dollars and years of planning, making each investment increasingly precious, and even garden-variety sabotage ever more deadly. A mere two-year delay fighting with environmentalists, fending off lawsuits, or negotiating with upset locals can send a project tumbling into the red.9
In 1999, Goldman Sachs summed up the situation. The oil business, they said, is a “dying industry.”10
As the realities of depletion dawn on the world’s biggest oil companies, one by one they have readjusted their outlooks for the future, dumping their “growth” strategies in favor of “capital discipline” and the “delivery of superior financial returns,” according to analysts from International Petroleum Finance.11 As Susan Cunningham, a senior vice president of an independent oil company explained, “the reservoirs are getting smaller and smaller and it is more difficult to find that smaller reservoir.”12 In 2003, BP, Shell, and ChevronTexaco announced they planned to abandon their annual ritual of forecasting the next year’s oil production. They had missed growth targets for 2002 and apparently decided that the future was too uncertain to even attempt to predict.
“Their actions speak a lot more than their words,” comments petroleum geologist Colin Campbell, who has written extensively about world oil production. “If they had this great faith in growing production for years to come, why do they not invest in new refineries? There are very few new refineries being built. Why do they merge? They merge because there is not room for them all. It’s a contracting business.”13 The industry hasn’t built a new refinery in its biggest market, the United States, since 1976. Even when oil prices surge, companies aren’t pushing up their drilling activity; there just isn’t enough left to find so they aren’t bothering, as Cunningham admitted in an industry trade journal:The price is high and rig costs are pretty reasonable for the price so we should be drilling. It comes down to the shareholder because what is missing is the volume we are getting from the drill bit. . . . You can’t just keep on drilling for smaller things at higher costs. You are getting less per well because you have less pressure to support it. You do have to replace your reserves, but you can’t replace them at any cost and some companies have been doing that.14
And yet, despite all the signals that the earth had bled most of its best oil already, government officials and industry analysts continued to argue that there was no need to start planning a less oily future. In early 2005, with the price of a barrel of oil poised to top $50 a barrel and nearly every major magazine planning wildly speculative features on the end of the oil age, the Department of Energy issued its annual energy forecast, blithely stating that oil drillers would easily sate increasing demand over the next twenty years. By 2025, the agency reported, the world would be swimming in cheap oil: nearly 24 billion barrels snaking the planet in pipelines and tankers, costing just $30 each.15
It isn’t difficult to keep up the appearance of abundant oil. After all, nobody really knows how much oil is down in the rocky reservoirs until every last drop has been drained and the wells run dry. Whatever anyone says about the size of a reservoir of oil before that point is essentially just a guess.
The size of oil reserves is generally calculated by reservoir engineers employed by oil companies. It is an exercise equal parts hope and manipulation. After pinpointing a reserve, companies drill several “appraisal wells,” chasms opened up into the reserve to judge how rich and thick those oily rocks really are. Steel arms dive into the deep holes to pluck bits of rock for the geologists to mull over in the lab. Yet even with the most sensitive statistical tests and the most advanced petrochemistry, what the oily samples on the lab table reveal about the formations under the ground is limited. “The geology, which controls the amount of oil in the reservoir, is liable to change between our information points, our wells,” admitted Robert Stoneley, a Royal School of Mines petroleum geologist. “Until we have actually produced all of the oil that we ever shall, we are involved with a greater or less degree of uncertainty.”16
Essentially, the size of the reservoir is estimated using a formula that multiplies several different factors together, each of which is itself an educated guess. Different estimates for the variables render “wildly different answers” on the size of the reserve, according to Stoneley. To make statistical sense of it all, each factor used in estimating a reserve can be given a range of figures and the formula crunched through in all of the various combinations fifty to one hundred times. The result is a range of possible answers for the size of the reserve, within which, it is hoped the truthful one hides. This range, again, can be evaluated statistically, rendering a series of guesses, each with its own statistical probability of being true (their “P” factor) attached like a price tag. The reservoir engineer then chooses one, gracing it with a banner emblazoned “proven.” But which one?
Deffeyes put it this way:Shell was interviewing three potential employees: a geologist, a geophysicist, and a petroleum reservoir-estimation engineer. The test question asked was “What is two times two?” The geologist mumbles for a while and announces that it is probably more than three, maybe less than five. The geophysicist punches it into his calculator and announces 3.999. When the reservoir engineer is asked, he jumps up, locks the door, closes the shades, unplugs the phone, and whispers, “What do you want it to be?”17
To complicate matters further, industry’s estimates on the size of their oil assets change over time. For financial and regulatory reasons, oil companies sometimes prefer to low-ball their public estimate of reserves when they first find a new oil deposit.18 Then, the numbers are slowly refined as it becomes clearer just how much oil is really buried underfoot. The proclaimed size of the reserve depends, also, on how much money industry is willing to spend on extracting the oil.
And so, despite the fact that the rate of discovery of new oil has been falling since the 1960S, every year the industry releases new, ever-larger estimates of their reserves, providing an illusion of growth. The bigger numbers do not result from discoveries of new oil, but from the fact that oilfields already found actually hold a bit more oil than the company had initially reported. Between 1946 and 1989, for example, the estimated number of barrels of oil in U.S. oilfields kept climbing, but it wasn’t because more oil was being found. Up to 80 percent of all of those added barrels came from improved estimates of old oilfields.19
“Companies and countries are often deliberately vague about the likelihood of the reserves they report,” notes Campbell, “preferring instead to publicize whichever figure . . . best suits them.” There is no standard, no audit by independent outsiders to temper whatever political or financial incentives companies may have in presenting a more or less optimistic spin on their numbers.
In the United States, the Securities and Exchange Commission requires that companies bestow their estimates with the moniker “proven” only when such numbers have at least a 90 percent chance of being true. But conservative estimates are not so common elsewhere. The former Soviet Union, for example, for years promoted “wildly optimistic figures” (those with less than a 20 percent chance of being true) as “proven” estimates of reserves, Campbell says.
When, in the late 1980s six OPEC countries reported that their oil reserves, even while being drained, had abruptly ballooned by 287 billion barrels, it was only the worst example of statistics-bending. In 1997, fifty-nine countries claimed that their oil reserves, despite being continually siphoned off, hadn’t changed in size one iota from the previous year. They were sucking as fast as they could but the glass stayed full.20 Iraq’s reported reserves magically remained an even 100 billion barrels for over a decade. In 2004, Shell announced that it had overestimated the size of its oil and gas reserves by 3.9 billion barrels. In 2006, word leaked out from Kuwait’s national oil company that its oil reserves amounted to just 48 billion barrels, not the whopping 99 billion
barrels as officially figures have it. According to the leaked information, reported by Petroleum Intelligence Weekly, of those 48 billion barrels, only 24 billion had been proven to exist.21 As Deffeyes puts it, “‘reserves’ exist in the eye of the beholder.”22
Nevertheless, these flawed reserves estimates are collected by trade journals such as Oil & Gas Journal, which publish them uncritically, passing them down to government agencies such as the Department of Energy and the International Energy Agency for their widely disseminated reports on the state of the oil market.23 With the imprimatur of government and international agencies behind them, the unadulterated oil-industry numbers float down into journals, newspapers, and books and the soft politicized estimates harden into brittle facts.
By this time, the probability figures, the “P” numbers, are long gone, even though it wouldn’t be particularly difficult to standardize their use. As Stoneley points out, even weather forecasters specify whether there’s a 10 or 50 percent chance of rain in the afternoon.
It isn’t just the corporate reservoir engineers and OPEC oil ministers who play the reserves number game. Even the esteemed U.S. Geological Survey (USGS) participates.
In 2000, the USGS released a 32,000-page report on the world’s petroleum assets,24 methodically assessing the “undiscovered potential” for the world’s petroleum basins. The intrepid USGS scientists assessed each basin for the range of volumes of “undiscovered” oil it might hold. The usual way to affix a number to this intrinsically unknowable amount is to consider how probable the formation of an oil trap was in a given area. Several conditions had to be met and each can be assigned a likelihood, all of which can be multiplied together to give an overall probability of a certain amount of oil patiently waiting to be discovered. “This figure is extremely imprecise and may be not much more than a guess,”25 Stoneley points out, but the USGS pushed forward, ranking its results in terms of probability. The average of the not-very-probable amounts (those with a 5 percent chance of being accurate) and the quite-probable amounts (those with a 95 percent chance of being accurate) render a mean value, the average probability of finding a certain amount of oil. These amounts of undiscovered oil, each having an average probability of existing, were then added together.
The USGS’s presentation was authoritative but the numbers were at least as speculative as those of Shell’s managers and Iraqi oil ministers. In the case of Greenland, for instance, the government geologists had determined there was a 95 percent chance of finding just a single barrel of oil. Given the lack of industry interest in the region, such a tepid assessment could be considered a fair reflection of conventional wisdom. But, ever-optimistic, the USGS noted that there was, indeed, in the farthest reaches of probability, a 5 percent chance of finding vast amounts of oil. The precise amount they predicted could be discovered was no less than 111.8 billion barrels, just 2 million barrels short of Iraq’s 112 billion barrels of proven reserves.26
“You might as well say that there is a 5 percent chance that I am a frog,” Campbell retorted.27 Yet the USGS used their fanciful 5 percent figure, averaged with the 95 percent figure, to suggest that 47.1 billion barrels of oil could be found in Greenland. “Can we really give much credence to the suggestion that this remote place, that has so far failed to attract the interest of the industry, holds almost as much, or more, than the North Sea, the largest new province to be found since the Second World War?” Campbell asked. “Could this be pseudo-science at its best?”28
Worse, Greenland’s chimerical 47 billion barrels were summed together with other such whimsical figures to render a startling conclusion. The USGS had pinpointed 649 billion barrels of undiscovered oil,29 20 percent more than their previous estimate for non-U.S. reserves. USGS representatives were ordered off to international conferences to spread the word.30 It made an impression. Never mind the skyrocketing rate of consumption of oil and the increasingly fruitless search for new oilfields. The world was awash in oil. Reviewing the USGS report, Scientific American concluded: “There’s gobs of oil out there.”31
When government agencies, such as the Energy Information Administration (EIA), the Department of Energy’s number-crunching department, are tasked with making public predictions of future oil demand, they use the USGS report, along with the flawed numbers from the Oil & Gas Journal to report that there will be plenty of oil to go around. According to the EIA, by 2025 the oil industry would find another 76 billion barrels in the United States alone. In other words, the EIA is betting that an oil reserve the size of Venezuela’s is hiding somewhere in the most explored country in the world. Ample graphs and charts, using the numbers from the USGS assessment and the Oil & Gas Journal estimates, provide a commanding illustration of just how.32
When confronted with such absurdities, Campbell professes exasperation. “Really it is a huge job to track all of these moves and counter moves which would test the skills of Sherlock Holmes,” he says.33 “Probably the most rewarding tactic,” Deffeyes suggested, “would be to locate the EIA’s drug dealers. They seem to be selling some really potent stuff.”34
The obscurity of the world’s oil supply slowed the impetus for change and masked the governments’ ugly grabs for the increasingly limited resource. These were obviously policy objectives dear to the heart of any sitting government. Yet without lead time to prepare, it would be the blissfully ignorant, oil-sated public that would suffer when their plush carpet of oil was rudely pulled out from underneath them.
That is not to say that more reliable information isn’t available. Campbell had seen the real numbers. He spent three decades exploring for oil in Trinidad, Colombia, Papua, Ecuador, and Norway for major oil companies including Texaco, BP, and Amoco, and over a decade consulting for governments and major oil companies.
“The information could be provided without particular technical challenge,” Campbell says.35 Instead, inside information on the true size of the reserves is classified, proprietary data. “The ‘technical’ values . . . are confidential for most countries,” noted oil-industry analyst Jean Laherrere, and there is a “huge discrepancy” between those internal numbers and the “‘political’ values of the reserves” that Oil & Gas Journal and other official outlets hawk.36
Private firms buy the “technical,” more realistic data for their corporate and governmental clients. Petroconsultants, a private firm in Geneva that later merged into IHS Energy Group, is widely believed to own one of the largest, most accurate, private databases on the size of the world’s oil reserves. They don’t publish their figures in journals or databases, of course. Access comes at a prohibitive price, sold to intelligence agencies and industry insiders.37
Using Petroconsultants’ and other technical data, industry insiders such as Campbell, Deffeyes, and other petroleum geologists have analyzed the rate at which we are eating into the global oil supply. According to their analyses, the oil industry will produce less than 80 million barrels a day in 2010, falling to 70 million barrels a day by 2020.38 Deffeyes predicted the peak in world oil production had already passed, in the year 2000. Only time would tell whether he was correct. Campbell predicted the peak would come in 2010. Either way, they say, it is coming—not in twenty years or thirty years or more—but within the next decade.
It would be reasonable to expect that along with higher-ups at oil companies, savvy government leaders are conversant in the “technical” reserves data provided by outfits such as IHS Energy. After all, in the United States, many government leaders have deep roots in the oil industry. (According to a long-standing rumor, Deffeyes notes, the U.S. Central Intelligence Agency is IHS Energy’s biggest customer.39)
And yet, there’s little evident attempt to rein in profligate fuel use, perhaps most notably in the U.S. Defense Department, that instrument of U.S. global might. The U.S. military consumes about 85 million barrels of oil a year, making it the biggest single consumer of fuel in the country and perhaps the world.40 According to an interdisciplinary panel convened by
the Defense Science Board (DSB), cheap oil has distorted the American military into a handful of super-killing steel monsters, with the majority of the forces devoted to the logistics of simply feeding and fueling them. The Army employed sixty thousand soldiers solely for the purpose of providing petroleum, oil, and lubricants to its war machines, which have themselves become increasingly fuel-heavy. The sixty-eight-ton Abrams tank, for instance, burns through a gallon of fuel for every half mile. With its inefficient, 1960s-era engine, the Abrams tank burns twelve gallons of fuel an hour just idling.41
So much time and money is spent fueling the American fighting machines that, according to the head of the Army Materiel Command, a gallon of fuel delivered to the U.S. military in action can ultimately cost up to $400 a gallon. Indeed, 70 percent of the weight of all the soldiers, vehicles, and weapons of the entire U.S. Army is pure fuel.42
When given a choice between a gas-guzzling, high-maintenance machine and a lighter, more efficient one, the military generally chooses the former, analysts have found. The B-52 bomber is a good example. These fighter planes guzzle more than three thousand gallons of fuel an hour, using engines designed in the 1960s. New engine models could improve the B-52’s fuel efficiency by 33 percent, propelling them so far that they wouldn’t require expensive mid-air refueling, making possible the scrapping of fifty-five tanker platforms. Taking all that into account, the new engines could save the military over $1 billion. Yet the Air Force refuses to do it. According to its calculations, in which fuel costs less than a buck a gallon and delivery is free, the new engine isn’t worth the investment.43