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How much oil do we really have?

By Adam Porter 
In Perpignan, France 
15 July, 2005 
Story from BBC NEWS:

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

As oil prices remain volatile the markets do their best to forecast future prices. Unfortunately this is not an easy task. While it may appear extraordinary to outsiders one of the main problems in the oil market is the reliability of basic statistics.

The oil industry calls the problem 'data transparency'.

As an example this week is a 'revision' to oil demand growth in the United States in 2004.

Previously the growth in oil demand was thought to be 2.4%, about 484,000 barrels per day. In fact it was 697,000 barrels per day or 3.5%.

That is in fact 46% more than was previously stated - a huge revision.

"Oil market data is generally a black art like using a set of chicken bones," says Paul Horsnell of Barclays Capital. "If Columbus had thought he'd hit India when in fact he was in the Caribbean, that's about the level of oil market data."

"The revisions to US demand growth are small in percentage terms, they are generally 99% accurate. But the change is huge in barrel terms, and this is from the USA who have the best oil data in the world."

"Suggestions that oil consumption will grow to up to 120m bpd by 2020 and that automobile and airline traffic will increase at extraordinary rates are futile and damaging." 
Dr Michael Smith, Energy Files

The barrel difference was in fact 213,000 per day. Added up that is 77.75 million extra barrels per year, about one day of global production.

"Oil data is like paint thrown across a canvas, you get the broad outline of the situation. But even then it's not just a Jackson Pollack painting, the paint actually moves of its own accord after it has been applied," says Mr Horsnell.

Phantom reserves

One of the major problems surrounding oil data is in reserves.


Kuwait: 92bn (64bn)

UAE : 92bn (34bn)

Iran : 93bn (64bn)

Iraq: 100bn (48bn)

Saudi Arabia: 258bn (170bn)

Claimed oil reserves, bn barrels 1990s/1970s

These are the basins of crude oil that lie underground.

They are either held by governments or the 'oil majors' like BP, ExxonMobil or Shell, or a combination of both.

Many countries simply do not allow outsiders to audit the size of these fields.

This is especially true of the major Middle East oil producers of OPEC and the countries of the former Soviet Union.

Some believe that reserves stated by OPEC countries such as Kuwait and Saudi Arabia are not accurate.

"There are a lot of questions to answer over OPEC reserves," says Bruce Evers of Investec Bank. "The quality of overall oil market data is poor, but with OPEC there remains considerable debate over the reliability of their reserve estimates."

Sudden revisions

One of the main reasons is that in the 1980s OPEC decided to switch to a quota production system based on the size of reserves.

The larger the reserves a country said it had the more it could pump.

The more it could pump the more money it could make.

As a result in 1985 Kuwait revised its reserve estimates by 50% overnight.

It was soon followed by United Arab Emirates, Iran, and Iraq. In 1988 Saudi Arabia became the last to join the revised reserve estimates party, adding a whopping 88bn barrels.

Unexplained changes

"Something needs to be done," says Mr Evers. "OPEC have never fully explained the reasons behind these changes, they have never issued any guidelines. The market needs to know."

Although previous estimates may have been conservative, what troubles some analysts is that twenty years later, these reserve estimates are unchanged, in fact some have increased.

Whilst it is obviously possible to add reserves by new field discoveries it can seem a perplexing situation to market makers.

Kuwait for example still claim exactly the same reserve level as they had in 1985 despite pumping millions of barrels every day since then.

Nor are company estimates any better, with Shell forced to make four revisions downwards of its official reserves since 2002, losing around 4.8bn barrels and damaging its share price.

Unclear figures

Even current figures for OPEC production are unclear.

OPEC say they are producing exactly 28 million barrels a day (mbpd).

This includes their latest 500,000 barrels per day increase announced at their last quarterly meeting by Kuwaiti oil minister Al-Sabbah.

But OPEC have also admitted that their members break their own quotas to take advantage of high prices.

So is it really 28mbpd?

The International Energy Agency says OPEC pumped 29.3 mbpd in May 2005.

The IEA say this is actually a fall from April 2005 of 55,000bpd.

Who is correct? "There is no official OPEC output data," says Mr Horsnell. "they just kind of pass on the data they are given by their member countries. It is really not that easy for OPEC, you can't blame them, it is down to their members."

Forecasting demand

"I don't rate IEA data either," says Mr Evers. "they have horrendously underestimated demand in the past, it is one of the reasons we are where we are now. They are little more than a data collection agency, and the data they are given is already tarnished."

It is no easier to forecast the future demand for oil, and analysts are growing increasingly sceptical of oil company attempts to do so.

Energy Files director Dr Michael Smith said "it is no longer appropriate to accept glib demand forecasts from oil companies, financial institutions and governments¿suggestions that oil consumption will grow to up to 120 million barrels per day by 2020 and that automobile and airline traffic will increase at extraordinary rates are futile and damaging."

But Paul Horsnell says that gaps between data-sets can in fact show up areas of the oil market that need careful study.

"Take Russian production as an example," he says. "There are all kinds of rosy forecasts and then there are people like me who think it's all rather bad news. But there are many reasons about why it is impossible to measure oil, it's a liquid for a start.

"There are huge margins of error with oil data and it has to be treated as such. It's the nature of the product. Thinking you can measure it to the eighth decimal point, well, it's just a waste of time."

As oil prices continue to soar, the lack of accurate data could make it harder for the oil market to predict its future direction.

Japan grants test-drilling rights in gas field disputed with China

Thursday July 14, 7:46 PM

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

Japan gave a company permission to test-drill a potentially lucrative gas field in the East China Sea contested with Beijing, after talks on the dispute broke down amid deteriorating ties.

China immediately protested the decision to let Teikoku Oil be the first Japanese company to explore the waters in the East China Sea, which Beijing began drilling unilaterally in 2003.

"In response to an application from Teikoku Oil, we have authorized the company to be granted test drilling rights," Minister of Economy, Trade and Industry Shoichi Nakagawa told a news conference on Thursday.

Japan said in April that it would accept bids to drill in the region, ending decades of hesitation over upsetting China.

Relations between the two countries have seriously deteriorated this year over how they remember World War II.

Teikoku Oil said it was notified it could explore three areas covering a total of 400 square kilometers (155 square miles). The sites are east of the border set by Tokyo but not recognized by Beijing.

Chinese foreign ministry spokesman Liu Jianchao expressed "serious concern" over the move.

"If Japan deliberately authorizes private enterprises the right to drill, this will constitute a serious infringement of China's sovereignty and will complicate the East China Sea situation," Liu told a press briefing.

"We strongly advise Japan not to take any actions that are unfavorable for the stability of the East China Sea and would damage China-Japan's overall relations," he added.

Teikoku Oil said the actual drilling could take more time, as it looks into safety concerns about working on the sea at the center of the international dispute.

"We would like to conduct test-drilling in the future," the Tokyo-based company said in a statement.

"However, there are many issues regarding the water area such as safety so we want to make a decision on when actual work will take place after consulting with the government agencies concerned," it said.

Japan and China have held a series of high-level meetings to address their growing disputes but they have reached little agreement on the gas fields other than to keep talking.

The two nations are among the world's biggest energy importers as they try to keep their huge economies running. A Japanese survey in 1999 estimated the disputed fields had a massive 200 billion cubic meters (seven trillion cubic feet) of gas.

Japan has previously protested that China may be drilling beyond what Tokyo considers the median line. China has insisted its exploration is not in the disputed portion of the waters and has instead called for joint exploration of the gas fields.

The dispute comes at a time of tense relations between the Asian nations with China accusing Japan of failing to atone for its bloody occupation of parts of the mainland that ended in 1945.

The Mainichi Shimbun reported last month that Japan was considering putting any company that drills in the East China Sea under government contract to show Tokyo's commitment and help shoulder the costs.

Beijing braces for power crunch

Jul. 19, 2005 at 7:42AM

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

Officials from the Beijing municipality said Tuesday almost 4,700 businesses will stagger weeklong shutdowns over the next month to ease an electricity crunch.

The State Electricity Dispatch Center predicted China will suffer its worst energy shortfall in 20 years this summer. Many cities have restricted power use by large consumers and ordered factories to stop work or introduce night shifts to cut electricity demand, Xinhua reported.

A spokesman with the Beijing municipal government told state-run media that workers from 962 Beijing-based industrial enterprises had started paid leave this week as the region enters the hottest time of the year.

Beijing Electric Power Corp says it has 58,817 industrial users in the Beijing municipality. The company says staggered shutdowns will ease power demand by 280,000 kilowatts. It also raised prices on July 1 in a bid to curb consumption.

Altogether 4,689 businesses will have "weeklong summer vacations for their employees" over the next month. The Beijing government issued a document saying affected businesses are allowed to adopt a temporary six-day week schedule to offset shutdowns and "catch up with their original production plans" this fall.

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