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Image: Sergiu Biris

How to mislead gullible fracking investors

Chris Matthews at Fortune repeats the somewhat incredible claim that:

“According to a new analysis from oil and gas consulting firm Rystad Energy, the United States is the country with the largest volume of oil reserves, with Russia and Saudi Arabia coming in second and third, respectively.”

Based on estimates of the amount of oil and gas under the ground, this may well be true – not least because the big Saudi Arabian and Caspian Basin oil fields are well past their peaks.  It is, however, thoroughly misleading.  As Matthews acknowledges:

“When Rystad applies more conservative estimates of proven oil reserves, the United States falls to fourth place, behind Saudi Arabia, Russia, and Iran with just 29 billion barrels of proved reserves.”

That still sounds like a lot of oil; but remember that the world economy consumes just short of 100 million barrels per day.  So US proven reserves would power the world economy for about 10 months.

So why the discrepancy between the “Saudi America” myth of centuries of oil and gas that has been sold to investors and politicians and the more sober 10 months of oil (and perhaps two years of gas) that are recorded as proven reserves?  The answer lies in the legal requirements placed on energy companies.

The myth is based on what is under the ground, and should really be referred to as a resource.  A proven reserve, by contrast is the amount of a resource that can be extracted given today’s technology, surplus energy and sale price.  To give an example of how this works, consider that there is more gold in the oceans than all of the gold that humans have ever extracted.  That is a resource.  But in practice it is too expensive and technically difficult to ever bother trying to extract it.  So if we were applying energy industry legal terms to gold in the sea, we would say that the ‘proven reserves’ of gold in the oceans amount to a big fat zero.

In US law, energy companies are required to accurately report their proven reserves.  Companies can be fined and managers jailed for misreporting.  So while the proven reserve figures may err on the optimistic side, they are about as accurate as is possible with self-reporting.  When it comes to informing potential investors, the only legal constraint is in common law – there is little to stop companies deliberately blurring the distinction between the resource and the proven reserves.

In the UK too, the entire shale industry and the government policies that frame it are based on a single British Geological Survey report that attempted to quantify the resource.  And even this has been challenged as overly optimistic.  When it comes to the UK’s proven reserves, nobody knows because nobody has carried out anywhere near the amount of test drilling that would be needed just to demonstrate that some – any – quantity of gas or oil can be recovered.  What we do know is that with oil trading at $50 per barrel, energy prices are so low that only Kuwait and Qatar are breaking even.

So, like the UK government, you could risk everything on the gamble that energy prices will rise high enough to make shale oil and gas profitable.  Alternatively, like me, you might note that every time the price of oil has risen above $100 per barrel for a sustained period it has triggered a recession and crushed energy demand.  In the current climate, you will probably do as well just putting your money under your mattress.

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