OPEC's Oil Reserve Revisionism
What’s with OPEC member’s recent oil reserve revisionism? First Venezuela, then Iraq, followed closely by Iran, and then again by Venezuela, in anticipation of further upgrades from Kuwait and Iraq.
Does Saudi Arabia still hold the world’s biggest reserves? Not according to Venezuela. And is there more oil in Iraq than in Iran? Or will Kuwait soon announce it has more than both?
It’s, to say the least, a bit puzzling, if nothing else because OPEC members have for decades tried to hide, not broadcast, how much oil they have.
At the beginning, it just seemed populist rhetoric for internal consumption meant to promise years of wealth. But the competition involves four of the five biggest reserve holders and Saudi Arabia could be tempted to join in, should it see its geopolitical clout diminished.
Regardless of the motivation, what is clear is that the revisions will eventually have a profound effect on oil markets.
Venezuela has 297 billion barrels of oil equivalent in reserves, according to Oil Minister Rafael Ramirez, who said earlier this month that his country is in a position to certify the figure. Around 220 billion barrels are in the Orinoco Belt, by some considered unconventional oil reserves because the crude there is too heavy and sour, but recent foreign investment there to extract and process that oil would confirm it’s conventional enough.
The revision would make Venezuela the world’s top reserve holder, more than Saudi Arabia’s 265 billion barrels, according to BP’s annual energy yearbook.
The third place is a lot more debatable. Canada has around 175 billion barrels, almost all of it in the form of oil sands, according to the Oil and Gas Journal. BP does not count its oil sands, among other reasons because investment in extraction and refining is economically less feasible than that of the Orinoco Belt, which means that these are last resort reserves, economically and technologically, in terms of unconventional oil resources.
Without Canada, Iraq and Iran are competing for third and fourth place. Iraq last October raised its reserves 25 percent to 143 billion barrels, followed days later by Iran, which raised them slightly to 150 billion barrels. But Iraq will almost surely continue revising its reserves upwards as exploration continues and it’s unclear whether Iran will be able to keep up.
A big question remains how much Kuwait will raise its own reserves, which stand at 102 billion barrels, in its revision expected by March, although longer term it will likely remain behind Iraq and Iran in a solid fifth place.
But what are the reasons behind the recent upwards spiralling of reserves claims? Some say it’s related to OPEC’s outdated quota system, others that is just the natural result of more exploration taking place throughout the world following peak oil hysteria. And of course, politics always has something to do with it.
“I wouldn’t expect it to be linked to the quota system,” said Chatham House’s John V Mitchell, an expert in energy security and OPEC. “All countries are approaching a point where increases in production require more reserves and many countries haven’t been exploring for decades. Their reserves have been depleted so they need exploration and that produces more reserves or more recovery from existing reserves.”
For others though, Iraq’s expected huge boost in production after decades of underinvestment, which could add as much as 10 million barrels a day, even if not for another decade, will force the cartel to update its quota system.
With that in mind, countries are positioning themselves, some believe, even if the rule of thumb in OPEC to determine quotas is no longer about reserves, but about production and spare capacity.
Manouchehr Takin, head of upstream research in the Center for Global Energy Studies, sees Iran’s reserve increase as a reaction to Iraq’s increase, among other reasons because there is an unwritten rule that both countries should share similar quotas, one that no doubt will change.
And what will be the Saudi reaction when Iraq reaches its full potential, giving it significant spare capacity? Will it also increase its reserves and if so, by how much?
That is where politics also fits in the Middle Eastern question. Iran and Iraq, individually or together, could be trying to capture a bigger deciding power within OPEC from Saudi Arabia, although this will not materialize until both increase spare production capacity.
For others, like Venezuela, politics seems to be the driving force of its reserve increase, not just as promise of wealth to its citizens, but as geopolitical tool to attract investment, namely from China, expected to become perhaps the largest single recipient of this oil.
And though it could be years before these reserve revisions alter oil markets, the motivation remains the key question.