THE CRUDE TRUTH ABOUT OIL RESERVES / THE WALL STREET JOURNAL OP EDITORIAL ( RECOMMENDED READING )

The Wall Street Journal

OPINION EUROPE

NOVEMBER 5, 2009

The Crude Truth About Oil Reserves

By LEONARDO MAUGERI

It offends conventional wisdom. It will also seem nasty to the doom-sayers, who for decades have predicted an oil scarcity that never came. But the 21st century is very likely to overflow with oil. There are at least three main reasons for this.

First, oil reserves are finite. This is incontrovertible. But even so, no one knows how finite they are. And since we don't know the total amount of oil resources existing underground, it's impossible to calculate the curve of future supply.

The inadequate data we rely on today are from the U.S. Geological Survey, and put the stock of conventional oil resources at least seven to eight trillion barrels. More than two trillion of these are currently deemed to be recoverable, while "proven" reserves are around 1.2 trillion barrels. (The world consumes around 30 billion barrels of oil per year.)

Unconventional oil resources (including ultra-heavy oils, tar sands, shale oils, etc.) may equal the amount of conventional ones, thus doubling the overall figure.

Yet, the concept of resources and reserves is dynamic. Throughout history, new exploration and the development of new technologies have allowed to discover new oil frontiers and to develop them. What's more, the U.S. Geological Survey's figures may well be underestimated. In spite of the one trillion barrels of oil that we have already consumed, the total available reserves continues to grow.

Second, new technologies allow us to extract much more oil than initially assumed. Today, we recover on average less than 35% of the oil contained in known fields, up from 20% in 1980. Even the most mature oil country, the United States, still holds huge volumes of unexploited oil underground. Although the country's proven oil reserves are now only 29 billion barrels, the National Petroleum Council (NPC) estimates that 1.124 trillion barrels are still left underground, of which 374 billion would be recoverable with current technologies.

Actually, there already are technologies that allow to recover much more oil from the ground. Generally known as enhanced oil recovery (EOR) technologies, they entail injecting an oil reservoir with chemicals, heat, steam, heavy gases such as carbon dioxide and nitrogen, and more. Studies and pilot projects are under way using microbes and magnetic forces as well.

The problem with EOR is that it's not cheap. And because for most of the 20th century, oil has been cheap, EOR technologies were considered uneconomical—so they have been rarely used. But where they have been used, the results have been astonishing, leading to the revival of many oil fields that had been considered exhausted. One of the most famous cases is the Kern River field in California. Discovered in 1899, it had produced around 40 million barrels of oil as of 1942. At that time, it was thought that it only had 20 million barrels of additional oil left. Yet, revived through steam injection, the Kern River field had produced two billion barrels as of 2007, and still holds more than 600 million barrels.

Third, only one third of our planet has been sufficiently explored for discovery of new oil deposits. Once again, this is because it was not economical or technically feasible to undertake big and sophisticated exploration campaigns when oil was abundant and cheap, as it was for most of the past century.

What's more, oil exploration has been mainly a North American phenomenon, with the U.S. and Canada accounting for around 90% of all oil-exploration wells ever drilled on the planet. This fact is startling but not well-known. In Saudi Arabia, for example, only about 300 exploration wells have been drilled since the beginning of the oil age in the Kingdom, compared to several hundred thousand in the United States. The contrast is even more striking with respect to Iran, Iraq, and many other large oil countries. Blessed with big oil discoveries in the first half of the 20th century, most big producers simply didn't need to take on extensive exploration or develop sophisticated technologies.

But when new exploration technologies do take root, the results are remarkable. In the past few years, the industry has succeeded in striking oil at depths below 10,000 feet of water and 20,000 feet below the seabed—as in the Gulf of Mexico and the Brazilian offshore. Moreover, new technologies have enabled geologists to see what lies beneath layers of underground salt, which are unevenly distributed beneath the seabed and sometimes thicker than 15,000 feet. The removal of this obstacle is leading to several major ultra-deep offshore discoveries. Fifteen years ago, all this was simply unthinkable.

Technology, thus, is key to discovering and recovering oil from underground. To better grasp this notion, the reader must recall one thing: Contrary to common belief, oil is not held in great underground lakes or caves. Unfortunately, it's imprisoned in a rocky structure, in which there seems to be no room for oil. But beyond the reach of the human eye, a world of often-invisible pores and micro-fractures entrap minuscule droplets of oil, like pumice entraps water. All this makes oil exploration and production so complex, challenging, and often highly expensive.

But a new era is coming, and not only because oil prices are historically high (at $50 per barrel, most EOR technologies become profitable). Other more important factors are at work as well.

To start with, many of the largest oil basins in the world are approaching what I call technological maturity—they are reaching their production limits using conventional technology. This is true of fields from the Persian Gulf countries to Mexico, Venezuela and Russia. In order to maintain their production in the future, new technologies will be required in these fields.

The second factor is the limited access to oil resources for Western oil companies. Today, more than 90% of the world's oil is under the direct control of producing countries through their national oil companies. The current wave of resource nationalism can only worsen this situation, because several important producers are already able to manage the development of their "easy" oil on their own. Recovering more oil from mature oil fields and discovering it in new, daunting frontiers is the only way to open up new growth opportunities in an otherwise shrinking world for Western oil companies.

Critics may argue that there may actually be plenty of oil left underground, but "easy" and cheap oil is gone forever. This view is partially true. But it is also true that today's difficult oil will turn into tomorrow's easy oil, thanks to cost reductions due to large-scale application of currently expensive technologies. In the 1970s, North Sea oil was considered among the most difficult and expensive oil on our planet. But a decade after initial production had begun, the cost of extracting it had been cut in half.

For these reasons, I dare to make a prediction. By 2030, more than 50% of the known oil will be recoverable. At the same time, the amount of known oil will have significantly grown by then, and a larger portion of unconventional oils will be commonly produced, bringing the total amount of recoverable oil reserves to something between 4.5-5 trillion barrels. What's more, a significant part of "new" reserves will come from the ability to better exploit what we already have.

By 2030 we will have consumed another 650-700 billion of our reserves. Added to the oil burned so far, this implies a reduction of around 1.6 trillion barrels from the 4.5-5 trillion figure. Yet, if my estimates are correct, we will have plenty of oil for the 21st century.

—Mr. Maugeri is the author of the book "The Age of Oil" ( 2006) and of the upcoming book "Beyond the Age of Oil: The Myths and Realities of Fossil Fuels and their Alternatives" (2010). He is senior executive vice president of the Italian oil company Eni, and a visiting scholar at the Massachusetts Institute of Technology (MIT).

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