Letters

Aug. 16, 2004
The basic facts on production and "proved" reserves quoted by Arlie M. Skov (OGJ, July 26, 2004, p. 10) cannot be disputed. What is disputable, however, are the conclusions he has reached.

Proved reserves

The basic facts on production and "proved" reserves quoted by Arlie M. Skov (OGJ, July 26, 2004, p. 10) cannot be disputed. What is disputable, however, are the conclusions he has reached. Using production data and proved reserves estimates for 1983 and 2003, Skov concludes, among others, that OPEC nations have not inflated (proved) reserves to boost production quotas.

The fallacy in this interpretation is to correlate production with proved reserves. There is no basis for such correlation. Much of the production, both in the US and the rest of the world, comes from the unproved, mostly "probable," component of reserves. This is a natural consequence of the trend whereby probable (and sometimes also the "possible") reserves migrate toward the proved category as development proceeds. This results in production exceeding proved reserves. Hence, it is a mistake to draw conclusions based on production and proved reserves alone. Revisions made to proved reserves due to technical, economic, and operational reasons further distort the relationship between production and proved reserves on a look-back basis.

Nothing that Skov says disproves the argument that a number of OPEC nations artificially inflated their proved oil reserves in the 1980s, probably "borrowing" from their unproved category. Inflated proved reserves exceeded 300 billion bbl. Likewise, Skov's conclusion that, "proved reserves in the US have grown much faster than demand," is tenuous at best. He could have said "reserves in general." The "devil" is in terminology!

All that can be said from the basic data is that proved reserves alone are a poor predictor of production potential—a point SEC would be well advised to heed.
Ferruh Demirmen
Houston