The oil spill and credit crunch were bad. An oil crunch would be worse  

Posted by Big Gav in ,

Jeremey Leggett has an article in The Guardian on the latest BP Statistical Review of World Energy - The oil spill and credit crunch were bad. An oil crunch would be worse.

Big as BP's problems are as a result of failed risk assessments, it will very probably soon become worse. Growing numbers of people doubt its annual review of oil reserves, published today. Society builds its oil dependency on key cultural statements of faith about secure supply, such as BP's annual announcement that there is 40 years of supply or more, and no danger of supply falling short of demand, so ambushing oil-addicted economies.

You would think that BP's risk-assessment failures in the Gulf, and in US refineries, would make the company measured, given the stakes in this particular assessment. The reverse seems true.

After BP's chief economist, Christoph Buhl, finished his presentation launching the annual BP Statistical Review of World Energy this afternoon, I reminded him that last year he had played a question on peak oil for laughs, pouring scorn on the issue. In the interim, I pointed out, more and more people had become worried about the prospect for a premature peak in global oil production, not least the companies in the UK Industry Taskforce on Peak Oil and Energy Security (ITPOES). Given the heightened stakes with risk assessment in BP's world of late, how safe did he feel he that BP is serving its shareholders well by insisting, as he had, that "reserves remain sufficient to meet demand growth" and that "the supply will never peak". As he well knew, growing numbers of people – not least in his own industry – consider this assessment to be dangerously complacent.

"Very safe," he said. The invitation-only audience duly laughed.

I felt as the occasional whistleblowers must have felt when Goldman Sachs and their peers heaped scorn on them as they warned that some complex derivatives might end up not being assets at all, but rather toxic sludge on the global balance sheet.

I scanned my copy of the Statistical Review. At the top of the inside cover I read, in a big, bold font: "The Review is one of the most widely respected and authoritative publications in the field of energy economics, used for reference by the media, academia, world governments and energy companies."

A bible in other words. Journalists base statistics in articles on it, the world over. Students base learned papers upon it. World governments base their energy policies on it. And energy companies echo it, for it most part, to all who will listen.

And in small print at the bottom of the same page I read: "The data series for proved oil and gas reserves … does not necessarily meet the definitions, guidelines and practices used for determining proved reserves at company level, for instance, …. as published by the US Securities and Exchange Commission (SEC), nor does it necessarily represent BP's view of proved reserves by country. Rather, the data series has been compiled using a combination of primary official sources and third-party data."

Let me reword that. "We wouldn't necessarily get the SEC to sign off on this stuff, and to be honest, we don't even necessarily believe it ourselves. But go ahead, use it as a bible if you like. We don't want you to be worried about peak oil. The small print gets us off the hook."

"Primary official sources" includes Opec, of course, as the body of the report makes clear. Here is where the problems start. The ITPOES companies, and many others, fear that Opec have been being – how can I put this politely – "political" about their proved reserves since the 1980s. We fear they are 300bn barrels or more light as a result of political reserves, in a supposedly proved global reserve base of over a 1,300 or so, if we include a slug of the tar sands, and forget for the moment about any constraints on deepwater production.

But that is just the start of the concerns. The main frustration is that no matter how much oil, or tar, exists underground – as reserves or resources to be discovered – what matters is the rate it needs to be extracted at to keep pace with soaring global demand, mostly driven by China, India, and the Middle East. ITPOES fears the rate of extraction will start to fall fast, and soon: by 2015 at the latest.


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