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Oil Reserves Accounting: The Case Of Kuwait

Copyright © 2021 Energy Intelligence Group

Last week PIW ran a story that raised questions about the actual level of proven oil reserves in Kuwait, based on data contained in an end-2001 report on the country's reserves from Kuwait Oil Co. (KOC). This follow-up supplement lays out the key data shown in the report in the context of the wider debate over the accuracy of reserves reporting across the oil industry. The Kuwaiti numbers vary so strikingly from those in the public domain that they could fundamentally alter many of the basic operating assumptions about the status of world oil reserves. At the very least, they highlight the need for much greater transparency and clarification, particularly in the Mideast Gulf states which are being looked to as the main source of future global capacity increases. For years it was an article of faith in the oil industry that long-term increases in global demand would be met largely by the oil reserves of the Mideast Gulf, which are currently estimated to make up over 60% of the world's total. But in the past two years, this assumption has come into question. First, the rapid growth of demand from China in 2004 prompted Opec lynchpin Saudi Arabia to accelerate its capacity expansion program, currently geared towards reaching a world leading 12.5 million barrels per day by 2009 with a further ramp up to 15 million b/d if and when required. Other Opec producers also have elevated expansion plans but it is by no means certain that they are lining up the investment to achieve them. Further doubts were raised by skeptics such as Houston banker Matthew Simmons, who in a long treatise questioned the long-term reliability of the region's main massive oil fields such as Saudi Arabia's super giant Ghawar (PIW Mar.1'04,p6). Now, adding fuel to the debate, Kuwaiti oil company documents have emerged that refer to crude oil reserve levels which do not tally with Kuwait's official claim to possess proven reserves of around 100 billion barrels -- or around 8.3% of the global total. This raises fresh questions over the reliability of the reserves data for a key Opec producer, and the extent of the reserves themselves. The data in a 23-page dossier obtained by PIW, which was produced at the end of 2001 by state-owned Kuwait Oil Co. (KOC) and based on the findings of its reserves management committee, offer a unique insight into the true condition of the country's reserves. The most striking statistic in the report is that as of March 2001, Kuwait's remaining oil reserves stood at just 48 billion bbl. The total includes the whole of Kuwait plus its share of the Neutral Zone shared with Saudi Arabia, which is referred to in Kuwait as the Divided Zone (DZ). These barrels are split roughly 50-50 between "proven" reserves -- those with a 90% certainty of being produced -- and "nonproven," which is assumed to be a combination of probable and potential. The total figure is more than 50% lower than Kuwait's official proven reserves of 101.5 billion bbl, which are cited by Opec in its statistical bulletin for 2004. According to the US Energy Information Administration (EIA), Kuwait's proven reserves have since been updated to 104 billion bbl, including the share of the DZ. One of the main questions arising from the startling discrepancy between Kuwait's official proved reserve figures and the numbers revealed in the report is the accuracy of the data routinely given by producing countries both in and outside of Opec. Since the system of country production quotas was introduced in the 1980s, partly based on reserves levels, there have been dramatic reserves upgrades among Opec producers. In 1983, for example, Kuwait increased its proven reserves from 67 billion bbl to 92 billion bbl. In 1985-86, the UAE almost tripled its reserves from 33 billion bbl to 97 billion bbl. In 2001-02, Iran raised its proven reserves by some 30% to 130 billion bbl, which propelled it to second place in the global league table ahead of Iraq. Iran shrugged off suspicions of a political motive behind the readjustment, attributing the increase instead to a combination of new discoveries and improved recovery. No details were offered of how the upgrades were arrived at. "There are many definitions and categories for proven reserves which are not being adhered to and as a consequence governments are throwing together proven, probable, potential, speculative and conceptual," a senior Gulf oil executive says. Unlike big corporations, producing countries do not have an obligation to adhere to reserve criteria laid down by the Securities and Exchange Commission and other auditors. "Calculating reserves is not that different from accounting, where you have to distinguish between good and bad debts," the Gulf executive says (PIW May10'04,p6). At PIW press time, KOC Chairman Farouk al-Zanki had not responded to PIW requests to comment on the data. But in remarks reported by the Reuters news agency, he was quoted as saying that the data did not look "100% accurate." As the reserve data date back to more than four years ago, there is the possibility that they have undergone sharp upward revision since then. But, based on the fact that KOC had in the previous five years targeted and achieved a reserves replacement ratio of close to 100% -- replacing each year's production with the same volume of new proven reserves -- the overall figures are unlikely to have changed to a dramatic extent. The key data are listed in Table 1, which gives a detailed breakdown of KOC's reserves. It shows initial oil-in-place reserves standing at around 168 billion bbl in March 2001. Of this, some 80 billion bbl are original reserves, or oil already produced plus proven and nonproven reserves. This implies an overall recovery rate of around 48% to date, which industry sources say could be revised upwards with the application of modern technology, and given the likelihood that oil prices will remain high. Of the original reserves, 33 billion bbl had already been produced. Based on a conservative production average of 2 million b/d for 2001-05, a further 3 billion bbl would have been produced since then. The 48 billion bbl of remaining reserves is divided in almost equal portions between proven and nonproven. There is no breakdown of the nonproven reserves, but a source familiar with such data says they would likely comprise more than 80% probable, with the rest categorized as potential or possible. The data make clear the extent to which Kuwait relies on Greater Burgan, the giant reservoir which covers a vast swathe of southeast Kuwait and embraces the Burgan, Magwa and Ahmadi reservoirs. Discovered in 1938 and brought on stream in 1948, Burgan is ranked the world's second largest oil field after Saudi Arabia's Ghawar structure. Much as Ghawar is the backbone of Saudi production, Burgan will continue to be Kuwait's most prolific source of oil for decades to come. According to the data, Greater Burgan had produced over 26 billion bbl by 2001, roughly 30% of the initial oil-in-place, and had over 20 billion bbl remaining, most of it in the proven category. There is still scope for an upward revision of Burgan's proven reserves. The report says that KOC is carrying out an extensive appraisal of the reservoir and expected to add an extra 500 million bbl of proven oil in 2002, based on a major petrophysical study. KOC was also conducting a reappraisal of the field's "probabilistic" reserves and drilling several infill wells with the aim of upgrading reserves within the proven categories. Mindful of the fact that Greater Burgan has been in production for over 50 years and is approaching maturity, KOC has tried to ease the strain on the reservoirs by holding back production. A senior Gulf industry source familiar with managing such large fields says the key to maximizing Burgan's performance will be in adopting a long-term approach and handling the decline as delicately as possible. "With a huge field like this, you have to be planning way ahead to ensure that you are optimally depleting," the source says. As the field gets older, so it will become more difficult and time-consuming to recover the remaining oil, even taking into account the advances in modern technology. "They're entering the more difficult phase," the source says. "The second half is not as easy to recover or produce as the first, as fields run deeper into depletion and the uncertainty in the balance of reserves increases." Burgan shares similar characteristics with Saudi Arabia's huge Safaniya field: a series of multiple reservoirs, it is made up of two basic parts; one is a prolific sand zone where up to 50% of the oil is produced, with the remainder made up of a multitude of thinner, harder-to-produce layers, where many more wells need to be drilled. The biggest potential upside in KOC's reserve portfolio appears to be at the northern fields, where by far the highest percentage of the country's nonproven reserves is located. Out of a total of 41 billion bbl of oil-in-place, the northern fields had produced just 4.5 billion bbl up to March 2001, and had 17 billion bbl remaining, of which some 13 billion bbl were unproven. This large proportion of unproven oil in the north appears to underline the significance to the country of the scheme devised over a decade ago for the world's major oil companies to assist in bringing production from complex reservoirs in the northern zone up to the 900,000 b/d mark over a period of 15 to 20 years. Known as Project Kuwait, the plan has been held up for several years by the reluctance of the National Assembly (parliament) to give its final seal of approval. Project Kuwait also faces some opposition among Kuwaiti oil industry officials, who believe the best way forward is to keep production at the northern fields on an even keel rather than run the risk of damaging the reservoirs through higher production. The data in the report show KOC had been achieving a year-on-year reserve replacement ratio of close to 100% on a consistent basis. In 2000-01, for example, KOC added an extra 745 million bbl of reserves, which was roughly the amount of oil produced during that year. KOC was expected to achieve a similar figure in 2001-02. Table 2 shows that over the three-year period running from 2001 through 2004, KOC was targeting 2.85 billion bbl in extra proven reserves, some 500 million bbl higher than targeted production of 2.29 billion bbl (2.1 million b/d). Another notable aspect of the report is the extremely low costs of finding oil, which KOC estimated at just 165 fils ($0.56) per bbl. During 2001-02, KOC had a relatively high drilling success ratio of 75% for exploration, and targeted an extra 350 million bbl of probable or possible reserves through exploration by the end of 2002. It is also clear that KOC is going to great lengths to reappraise its data and improve its reserves management system. It has established a new electronic system to improve the flow of data and worked through programs to enhance knowledge of "probabilistic" reserve estimates and to increase general awareness of reserve definitions. These detailed insights into the status of Kuwait's reserves make it clear that greater clarification is needed on the state of the world's oil resources. The data on Kuwait is at best contradictory and needs further elucidation. The official figures touted by other large producing countries are now also under a cloud of suspicion -- and all this at a time when demand is soaring, oil prices are setting new records and resource constraints loom larger than ever. Table 1: Kuwait Oil Reserves As Of Mar. 31, 2001 (million bbl) Initial Oil Original Cumulative Remaining Reserves Area In Place Reserves Production Proven Nonproven Total South 88,480 46,435 26,209 14,912 5,314 20,226 North 41,038 21,610 4,532 4,336 12,742 17,078 West 29,888 9,613 1,104 4,281 4,228 8,509 Divided Zone 9,503 3,547 1,244 677 1,626 2,303 Total 168,909 81,204 33,088 24,205 23,911 48,116 Source: KOC, report of Reserves Categorization Project, Dec. 2001. Table 2: KOC Reserves Growth Plan For Three Years From 2001 (million bbl) Area Reserves

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