4. Resource Development Trends

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SPECIAL TOPIC

Almost since oil was discovered in Pennsylvania in 1859, geologists, energy economists, and corporate and government officials have debated whether the supply of oil would be able to keep up with demand. For example, in 1922 the U.S. Geological Survey (USGS) warned that America was going to run out of oil within 20 years.a  In 1956, M. King Hubbert, at the time a geophysicist with Shell Oil, predicted that U.S. oil production would peak by 1970.b  While the USGS’s 1922 prediction was not realized, crude oil production in the United States did peak in 1970 at 9.6 million barrels per day (mmb/d). In 2003, U.S. oil (crude oil plus natural gas liquids) production stood at 7.4 mmb/d, 34 percent below its 1970 peak.c  In addition, conditions in the world oil market at the end of 2004 were exacerbated by renewed arguments that worldwide oil production would soon reach its peak.d  The concern has even been extended to natural gas production. 

One factor contributing to the current concern about the adequacy of the supply of oil and gas was the January 2004 announcement by Royal Dutch/Shell that it had overstated its reserves and reserve additions. Although this case is an extreme example, several smaller reductions in oil and gas reserves have since occurred at other companies, most notably El Paso. But substantial companywide reserve reductions are the exception. An oil or gas field’s initial proved reserves estimate typically understates its ultimate production capacity, and reserve revisions are more frequently positive than negative. This article provides an overview of how well FRS and other companies have replaced production with reserve additions.

Replacing Production

Reserve reductions attract attention because one of the most closely watched indicators of future production potential is the replacement of production by reserve additions. As long as reserve additions exceed production, continued production would seem to be assured, because reserves (the capacity to produce oil or gas in the future) will continue to increase. When production exceeds reserve additions, the stock of reserves available for future production declines. If this outcome persists over a long enough period of time, production of oil or gas will eventually have to decline.

The replacement of worldwide oil production by reserve additions for the Financial Reporting System (FRS) companies during the period 1981 through 2003 appears encouraging in this regard (Figure 37). The replacement of oil production by reserve additions has improved in the most recent decade, with reserve additions exceeding production in 7 of the 10 years ending in 2003. In the decade before that, reserve additions exceeded production only in 1 year. For natural gas, the replacement of worldwide production by the FRS companies appears even more heartening (Figure 38). Natural gas reserve additions exceeded production in every year for the decade ending in 2003; in the previous decade, gas production exceeded reserve additions only five times.

 Two limitations of the FRS data are that companies in the FRS group change over time and the data do not include worldwide production by the entire oil and gas industry. These problems can be avoided by examining worldwide data on oil and gas replacement, which present even stronger evidence for adequate production replacement than the FRS data. Figure 39 depicts these data for oil, excluding the Organization of Petroleum Exporting Countries (OPEC).e  Only twice in the decade ending in 2003 did worldwide production exceed reserve additions. In 1997 the gap between production and reserve additions was particularly large. That year, Mexico released its first independently audited petroleum reserve estimates, and its oil reserves fell by 20 billion barrels, almost completely offsetting the reserve gains in the rest of the non-OPEC world. In the previous decade, non-OPEC oil reserve additions failed to replace production five times. The situation with gas reserves is very clear: worldwide non-OPEC reserve additions have more than replaced production, by up to a factor of eight, in every year from 1981 through 2003 (Figure 40).

However, the North American gas market, important in and of itself because currently it is partially insulated from the rest of the world by gas transportation limitations, presents a different picture than the rest of the world regarding the replacement of oil and gas production (Figure 41).f  For the FRS companies, gas reserve additions in North America often fell short of production in the years from 1981 through 2003, with an average replacement rate of 85 percent during the period. For the entire oil and gas industry in North America, gas reserve additions have exceeded production more often than for the FRS companies, but when they fell short, reserve additions sometimes lagged production by large amounts, resulting in an average reserve replacement ratio of 83 percent from 1981 through 2003 (Figure 42). This evidence supports continued tightness in the North American gas market.

Reserve Additions and Production

The historical record on replacement of worldwide production by reserve additions suggests that, until now, enough reserves have been added to sustain production. However, a reserve replacement rate in excess of 100 percent does not guarantee that production levels will continue to increase. Production could decline even with reserve replacement greater than 100 percent, when, for example, the reserves being added have a low extraction rate, as in the case of unconventional gas, or the reserves being added are not producing because of infrastructure limitations or because the reserves are located in a zone different from the one that currently is being produced.g In this case, at some point, the oil or gas supply will not be able to keep up with growing demand. Observers have argued that this situation is now occurring at some major investor-owned oil and gas producers and that it “… paint[s] a picture of an industry that has depleted nearly all of the world’s easily exploited reserves outside the Middle East and that is now struggling to sustain production, much less increase it.”h

Figures 4-1 through 4-4 do not support the assertion that the world petroleum industry is struggling to sustain production and indicate the analytical danger in projecting the entire industry from just a few of the largest oil and gas producers. For the FRS companies combined and for the world as a whole, the production of oil and gas has not been falling. The worldwide production of gas by the FRS companies and the production of oil and gas by the entire industry have been increasing since the mid-1980s.i  During the past 25 years, companies have found more reserves than they have produced, indicating that the potential to maintain, and probably increase, oil and gas production has not diminished.

Endnotes

a www.energyquest.ca.gov/time_machine/1920ce-1930ce.html (November 15, 2004).

b M.K. Hubbert, “Nuclear Energy and the Fossil Fuels,” Drilling and Production Practice, American Petroleum Institute, Proceedings of the Spring 1956 Meetings (San Antonio, Texas, 1956), pp. 7–25.

c Natural gas liquids are combined with crude oil to be consistent with FRS definitions. Energy Information Administration, Monthly Energy Review, DOE/EIA-0035(2004/10) (Washington, D.C., October 26, 2004), Table 3.1a.

d Kenneth S. Deffeyes, Hubbert’s Peak: The Impending World Oil Shortage (Princeton University Press, Princeton, New Jersey, 2001).

e OPEC is excluded because it regulates the production of crude oil by its members, which may distort production-to-reserves ratios.

f This isolation is expected to weaken as more facilities for the regasification of liquefied natural gas are built in North America.

g Another reason colud be that the cost of production is greater than the market price.

h Alex Berenson, “An Oil Enigma: Production Falls Even as Reserves Rise,” The New York Times (June 12, 2004), p. A1.

i Worldwide oil production by the FRS companies has been essentially flat since the early 1990s. But this stagnant production level has masked differing trends among the individual companies. While worldwide oil production by several of the largest FRS companies (and a few of the smaller ones) has declined, it has been offset by increased production by several other of the largest FRS companies and by most of the smaller ones.

Contact:

Larry Spancake

larry.spancake@eia.doe.gov

Phone: 202-586-8597

Fax: 202-586-9753