The discussion of Israel’s oil reserves gives me a reason to discuss the rules that exist for reporting of resources and reserves of conventional oil. It is this oil that still dominates world production, and it is the production of this oil that has now reached peak oil and has slowly begun to decline. A bright future for increased production requires that we address the production of unconventional oil and for those, there are not yet any firm rules about how resources and reserves should be reported. As an example, I can point to how the kerogen oil in Israel was compared to Saudi Arabia’s conventional oil without mentioning that the “tap” (flow) of kerogen oil could only be opened to a far lesser extent.
Oil & Gas Journal is an industry news journal on oil that I keep an eye on and on 18 July they published an article with the title, “Resource estimate hiked for Israel nearshore license.” Let’s look at the test of the short article by O&G’s editors:
“Modi’in Energy LP has published a resource report that revises the best estimates of gross recoverable prospective oil and gas resources on the Yam Hadera license in the Mediterranean offshore Israel upwards. Adira Energy Ltd., Toronto, has an option to purchase as much as a 15% participating interest in Yam Hadera until 14 business days before the signing of a rig contract for the license.
Modi’in, in a public disclosure on July 17, said consultants Netherland, Sewell & Associates Inc. estimated the prospective resources at 208 million bbl of oil, revised upward from 133 million bbl, and 3.4 tcf of gas, revised upward from 1.4 tcf. Geologic probabilities of success are 17-29% for different horizons.
The report is based on a reinterpretation of seismic data relating to the northern closure of the license, but there is no certainty that any resources will be discovered or commercially produced, Adira noted.
Yam Hadera lies 30 km off Israel between Hadera and Haifa contiguous and directly northwest of Adira’s Gabriella and Yitzhak licenses.”
Typically, a nation sells the rights to explore for oil in an area to a company or a consortium of companies. Seismic tests underpin the estimate of what they term “Total Petroleum Initially-In-Place, PIIP,” i.e. that has lain there for millions of years. The first subclassification of PIIP is “discovered” versus “undiscovered.” The oil that is discussed in the above article is thus “undiscovered PIIP.” The entire volume is regarded as “resources.” Part of this resource cannot be extracted (and the fraction is normally larger than the aria in the figure), but the remainder is a “prospective resource.”
What Modi’in is saying is that their “best estimate” for the prospective resource is 208 million barrels of oil. The previously declared volume of 133 million barrels may have been a “low estimate.” One also notes that “there is no certainty that any resources will be discovered or commercially produced” and they make the judgment that “geologic probabilities of success are 17-29% for different horizons”. Thus, the decision to finance a drilling rig to look for oil is a bit of a lottery.
If one drill and finds oil then the discovery is placed in the “Discovered PIIP” class and as “sub-commercial” and “contingent resources.” Within contingent resources, it can be subclassed at 1C, 2C or 3C. Eventually, when all necessary test drilling is done to be able to produce the oil it is regarded as “proved reserves.” The reserves that are given in the “BP Statistical Review of World Energy” are usually 1P reserves.
Today one can investigate a discovered resource sufficiently thoroughly to be able to estimate with good certainty the 2P reserves – proven and probable. The IEA, CERA, our research group, and others usually normally discuss the future from the perspective of 2P reserves. When 1P reserves have discussed the investments for the production of oil from these reserves are already in place while 2P reserves are still waiting for investment. When oil production begins depends partially on the price of oil and a company can make a revised estimate of 2P reserves if the oil price is high. The fraction Recoverable/Unrecoverable is called the recovery factor, and this factor varies greatly between fields. Some years ago it was estimated that the average recovery factor over all of the world’s oilfields was 30%. Oil companies hope that new technology will raise this fraction which would increase reserves somewhat, but the resources are already found.
There are no agreed international rules regarding how one should classify unconventional resources and what we see is that the industry is trying to apply the rules for conventional oil to unconventional production. By doing this, they can mislead investors that are not aware that the production volume per day from an unconventional reserve is much less than that from conventional reserves. Regarding reportage by the media, we see that they usually report large discoveries and the start of a project with large headlines. However, that the oil industry frequently drills dry holes does not normally make it into the news. It remains to be seen what reality will make of the news of the possible 208 billion barrels described above. If that volume were to be real, it would be equivalent to the oil consumed by the world in 2.5 years.