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Why don’t we run out of oil reserves?

Understand why oil reserves change each year

Last year, Uncle Sam read in a newspaper article that Oil and Gas reserves will last for 56.33 years. Today, he read that Oil and Gas reserves will last for 61 years. He was confused about this and reached out to his nephew, who is a Petroleum Engineer at a large Oil and Gas company.

So, why does the figure keep on changing each year?

E & P activity

The Upstream Sector of Oil and Gas industry includes searching for hydrocarbons i.e, Exploration and extraction of hydrocarbons i.e, Production. In the year 2016, E&P companies around the world extracted 33.47 billion barrels of oil and at the same time spent billions of dollars in exploration activities. Exploration for oil is a very risky business. A company may spend hundreds of millions of dollars and may not find oil in that particular region, while it can witness exploration success in other regions. In these regions, the E&P operator drills additional wells to assess the extent of deposits of hydrocarbons in that particular region and estimates the total quantities in known and yet-to-be discovered accumulations. The operator now estimates the amount of resources that can be recovered with a reasonable degree of certainty, called “PROVEN RESERVES”, which change with time and depend upon a lot of other factors such as oil price, technological advancement etc. So, each year proven reserves around the world change with exploration and production activities and we divide these reserves by demand for oil per day to estimate the number of years these reserves will last.

Screen Shot 2017-06-23 at 12.31.45 AMSource: BP Statistical review of World Energy 2017

The above doughnut chart clearly shows that in the past two decades,Proved Oil Reserves around the world increased from 123.5 trillion cubic meters in 1996 to 186.6 trillion cubic meters in 2016.Reserve-Replacement-Ratio(RRR) measures the amount of proved reserves added to a company’s reserve base during the year relative to the amount of hydrocarbons produced.This metric is used by investors to judge the operating performance of an oil and gas company. Hence, each year E&P companies add reserves to their reserve base while producing hydrocarbons.

Now, Uncle Sam got his confusion cleared!

 

Why can’t oil rich nations pump all the oil and become rich?

There are many nations around the world with huge reserves of hydrocarbons.At current production rates, for some countries, it may even take more than a century to extract these reserves. But, why don’t nations ramp up their production rates, pump all the oil and then become rich?

A cartel was formed in the year 1960 , named Organization of the Petroleum Exporting Countries(OPEC), by five oil rich nations. As on date, OPEC is an intergovernmental organization of 14 petroleum exporting countries (Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia,United Arab Emirates, Venezuela) , all of them rich with oil reserves, and according to current estimates, 81.5% of the world’s proven oil reserves are located in OPEC member nations, with remaining 19.5% of the proven reserves in non-OPEC nations. Some non-OPEC nations rich in oil reserves include Canada, Russia,United States etc.

Reserves by country

Fig.1.List of Top 20 Countries with Proved Oil Reserves in barrels

3P reserves

Fig.2.Recoverable Resources & Reserves by Region

From Fig.1 and Fig.2, it is clear that North America has more recoverable resources, but has considerably less Proved Oil Reserves, compared to Middle East. One factor on which proved oil reserves depends is “Oil Prices”.

Screen Shot 2017-06-28 at 1.29.49 AM

Fig.3.Crude Oil Prices

There is a sharp decline in oil prices from mid-2014 and oil prices have been hovering around $45-$55/bbl in the recent past. But, why did oil prices decline?

Because Supply > Demand (Refer Fig.4)

Supply Demand

Fig.4. World Oil Demand & Supply

Now, let’s look at the cost of producing a barrel of oil by country.

Screen Shot 2017-06-27 at 11.50.00 PM

 

Fig.5. Cost of producing a barrel of oil and gas

Clearly, Some countries earn higher profits on a barrel of oil exported than other countries.Economy of countries such as Venezuela, Libya, Russia, Saudi Arabia etc. relies significantly on the export of crude oil. So, lets say country “X” now starts aggressive drilling with a hope to extract as much amount of oil as it can or starts pumping excess oil from existing wells. This will eventually lead to oversupply and the crude oil prices will further go down, trimming profit margins and leading to loss of income to the country.Hence, Oil and Gas Companies (National Oil Companies, International Oil companies, Domestic Players etc.) very strategically extract oil and gas reserves so as to increase profits. Also, in the current scenario, where OPEC is vying to retain its market share, OPEC nations have agreed to put a cap on the oil production from member nations to restrict supply and raise oil prices.

Therefore, nations around the world maintain their oil and gas production rates in a hope to maximise their longterm gains.