Sarah Barmak, Toronto Star
Jun 21, 2008 04:30 AM
An English industry insider says we’ve grossly underestimated our reserves. Could he be right?
Ask him about oil, and Dr. Richard Pike has a rather sunny outlook. Oil and gas, he says confidently, will be around well into the next century.
Pike can maintain his optimism because he knows something no one else knows. He believes that a simple mathematical error — the sort made by first-year university statistics students — is causing much of our panic over a worldwide oil shortage.
It’s an error that oil companies, riding high on skyrocketing crude prices, may want you to believe.
“This might be hard for some of your readers to take,” he warns. With oil at $132 a barrel yesterday, tensions over gas prices are at a boiling point. But listen, he says: at 1.2 trillion barrels, we have grossly underestimated the world’s proven oil reserves. If he’s right, we likely have double the amount of recoverable oil that we think we have in the ground, or perhaps even more.
The argument is attracting attention at a time when many governments are looking for new sources of oil; U.S. President George W. Bush reversed his long-held position against offshore drilling this week.
Skeptics say Pike is just recycling an old argument: that companies underreport reserves on purpose to keep prices up. He claims the problem is more systemic than a few corporations playing with the stats, however.
Pike is an oil industry insider, an engineer by training. An employee of British Petroleum for 25 years, he is now the chief executive of England’s Royal Society of Chemistry.
He explains the world’s most epic math mistake patiently, like a vaguely bemused schoolteacher going over a problem with a dull student.
He first realized there was a problem two years ago, when he saw alarming discrepancies between figures the oil industry uses to estimate the world’s crude and those used by everyone else. Calculating the amount of oil in a field is notoriously difficult, so companies issue a probability figure, called their proven reserves, to shareholders and outside bodies. It represents the amount of oil that has a 90 per cent chance of being met or exceeded by the field’s actual production (giving it its name, P90).
Apparently, no one bothered to let us know that oil companies have long been generating an entirely different number for their own internal use. Not content with the hard certainty of P90, which in practice is almost always exceeded by a field’s output, oil companies use more sophisticated measurements to yield numbers often two or even three times as high, helping them decide things like how many wells they drill. Very often, those higher estimates are more accurate.
Too bad they don’t make it into the public domain. Instead, in order to get a picture of how much oil we have left, international organizations often simply add up the conservative, proven reserve estimates for every field in the world.
That’s when the real headaches begin.