What do proved reserves prove? The tally of how much oil each country has left underground has long been one of the first things people focus on in BP’s annual Statistical Review of World Energy. Yet the latest set demonstrates, if anything, how the figures have lost their meaning or even inverted it.
Proved oil reserves historically equaled power, longevity and wealth. It’s hard to imagine a certain desert kingdom in the Middle East being a top-20 economy and U.S. military priority absent the billions of barrels beneath that desert. The longer your reserves of this vital commodity last, the greater your chance of calling the shots (and prices) as others’ reserves dwindle.
This is intuitive, perhaps, but also divorced from reality. Consider: According to BP’s figures, the world has pumped just over 1 trillion barrels of oil since 1980. Proved reserves back then stood at only 684 billion barrels, so clearly we found some more in the meantime. Quite a lot more, in fact: Reserves at the end of 2018 were 1.73 trillion barrels. The ratio of reserves to production – how much oil is left at current rates of output – rose from less than 30 years to 50 years. And that’s despite production having jumped by half.
Despite that, it’s only been a decade or so since “peak oil” was a thing, coinciding with a drop in the global ratio of reserves-to-production – or R/P ratio – in the early 2000s. Even then, it remained higher than the levels that prevailed in the 1980s and 1990s.
What “peak oil” was really about was the fear that cheaper barrels beyond the grasp of OPEC, in such places as the U.S. and the North Sea, were in terminal decline. In a rerun of the 1970s, and with a dash of Mad Max millenarianism, we were once again destined to hand over any spare cash to our cartel overlords for the precious juice.
It is here that BP’s figures illustrate the most profound change.
This chart shows the R/P ratio over time for a few major producers – Saudi Arabia, the U.S., and Venezuela – along with OPEC as a whole:
See? Venezuela has enough oil to keep pumping through the year 2567! Except, of course, not really. We’re just looking at the collapse of a nation expressed via a slumping denominator. Proved reserves remain pegged at about 300 billion barrels – where they have been since 2010 – but production has slumped by roughly half. Far from signaling strength, Venezuela’s R/P ratio is a mathematical mayday.
At the other end of the spectrum, the 11-year R/P ratio for the U.S. also tells the opposite of what’s actually happening. Proved reserves have roughly doubled over the past decade, but so too has production. Indeed, in 2018, the U.S. achieved the largest annual increase in oil production ever made by any country, according to BP (the same goes for natural gas).
The nature of the shale boom is such that proved reserves belie the size of the ultimate resource base. As fracking has developed, and efficiencies have taken hold, so the potential of such areas as the Permian basin has expanded enormously, even if it doesn’t technically fit the definition of proved reserves in any given year. In an analysis published last summer, Rystad Energy, a research firm, estimated Texas alone holds more than 100 billion barrels recoverable using existing technology. BP’s current figure for proved reserves in the entire U.S. is 61.2 billion barrels. Clearly, the U.S., with its apparently short-lived oil reserves, is setting the pace in the market, not Venezuela.
If anything, the specter of peak oil demand (rooted in the urgent need to address climate change) means the idea of vast proved reserves constituting a rock-solid store of value has been turned on its head. BP’s own projections imply oil demand adding up to somewhere in the region of 750 billion barrels through 2040. That is less than half the world’s proved reserves today. In all likelihood, most of Venezuela’s oil wealth will remain underground and, thereby, enrich nobody.
The imperatives of an energy market defined more by abundance than scarcity – including an abundance of emissions – are showing up already in the industry. As my colleague David Fickling wrote recently, Royal Dutch Shell Plc seems remarkably sanguine about its single-digit reserves life. Chevron Corp. and Exxon Mobil Corp., meanwhile, have gone all-in on short-cycle shale.
As for the smaller frackers, investors are notably more interested in concurrent or backward-looking valuation metrics such as free cash flow yield, rather than the traditional, and horizon-gazing, net asset value. Even the Saudi Arabian Oil Co., or Saudi Aramco, initial public offering came unstuck in this regard. Riyadh’s touted valuation of $2 trillion owed much to a simplistic valuation of 60-odd years’ worth of oil reserves, without fully taking into account the diminishing value of those barrels the further we get into a carbon-constrained future.
The thing about those proved reserves numbers these days is that they can’t prove how many of the barrels will ultimately be produced or how much will be paid for them.
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Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal’s Heard on the Street column and wrote for the Financial Times’ Lex column. He was also an investment banker.
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