Jockeying seems to have resumed in the Organization of Petroleum Exporting Countries over reserves estimates, reviving questions about what these numbers mean—and what they do not.
When it apportions production restraint, OPEC often calibrates country quotas to reserves. The practice encourages members to inflate reserves estimates.
Quotas didn’t matter much during 2002-08, when the market needed nearly all the crude oil OPEC countries could produce. Then recession socked oil demand, and OPEC responded with unprecedented production restraint. Although quota discipline has relaxed, prices of $70-80/bbl keep members happy.
But OPEC now has spare production capacity of 5-6 million b/d, most of it in Saudi Arabia, and a slug of new supply is in view.
The source happens to be an OPEC member with no quota: Iraq. Unless the country lapses back into widespread violence, Iraq’s production will zoom in the next few years as projects under development by international companies begin coming on stream.
Other OPEC members then will want the country to resubmit to a quota. And they’ll have to make room.
Iraq this month lifted its reserves estimate to 143 billion bbl from 115 billion bbl. Within days, Iran raised its estimate to 150 billion bbl from 138 billion bbl. Now there are reports that Kuwait will hike its estimate by 12 billion bbl to more than 113 billion bbl.
But the increases start from estimates that, based on recent production rates, reflect very large reserves lives: Kuwait 168 years, Iraq 136 years, and Iran 99 years. Reserves lives indicate development relative to potential.
So what if, as some say, 30% of the OPEC reserves total is “political” and therefore suspect?
With reserves estimates, before the latest increases, discounted by that factor, reserves lives become Kuwait 117 years, Iraq 95 years, and Iran 69 years—more than double or triple normal investment planning horizons.
That means the main constraint on future supply from these countries still isn’t geology. It’s the capacity and will to invest.
(Online Oct. 22, 2010; author’s e-mail: email@example.com)