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What the oil companies don't tell you

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Interview

Richard Pike, President of the Royal Chemistry Society

Oil supplies will actually last for far longer than our politicians think, the scaremongers fear, and the oil companies tell us. So says Dr Richard Pike, head of the Royal Society of Chemistry, and someone who isn’t afraid to stir controversy. Whither, then, Peak Oil?

In a wide-ranging interview, Dr Pike talked about energy independence, Peak Oil, and how to educate our scientifically illiterate elites.

Before becoming chief executive of the RCS, Pike spent twenty five years in the oil industry. His background hasn’t prevented him from calling for alternative energy sources to fossil fuels, and making criticisms that have embarrassed industry executives, latterly over the amount of oil lost to leakages.

But the most intriguing argument is that we’re simply not told the truth about how long oil supplies will last. Conventional wisdom reports the oil reserves as 1.2 trillion barrels. There’s far more than the oil companies report. This is neither cock-up nor conspiracy, he says, but a combination of conservative reporting, a failure to understand probability theory, and consequently a lack of understanding of the figures actually mean. Oil engineers and planners have their own – these are figures we don’t see.

The figure quoted when oil companies declare their reserves is a “P90” figure, which means an oil reserve has been discovered, the oil in it is recoverable, and the estimate has a 90 per cent chance of being exceeded. This is always on the conservative side. Another figure, the P50 estimate refers to “proven but possible” oil reserves, and is rarely quoted. P50 can exceed P90 by a factor of two or three, and often reflects the output more accurately. So why don’t we hear P50, rather than P90?

“P90 is a lower bound, and companies have a duty to report what the lower bound is to statutory bodies, such as the Securities and Exchange Commission, and BERR in the UK,” says Pike. And that figure is conservative.

“Over time, ‘lower bound’ has come to mean ‘proven reserves’. But it’s actually the extreme left hand side of the probability curves.”

Pike illustrates this with the example of throwing dice.

The oil man's odds

“If you add together the estimates of thousands of reserves, you’re taking the lower bound each time. Say you throw a dice: The probability of throwing one is one in six. With two dice, you’ll be above one 97 per cent of the time. With three, it’s 99.4 per cent of the time. So if you throw thousands of dice, the chances of you getting all ones are infinitesimally small. But this is what oil companies are doing in their statutory reporting.

“The statutory bodies will effectively say, ‘We don’t want some complicated probability analysis on what P90 is, just give us the straight simple number.”

Then other bodies, such as the Peak Oil eschatologists (“the end of the world is nigh…”), take the number and use it for something else.

Pike blames the compartmentalisation of the industry – engineers rarely make it to executive level and the people at the top never get to understand probabilistic analysis.

Inside the oil companies themselves, he points out, they’ll often use the probabilistic approach – whether when estimating their own prospects, or eyeing up a rival in an M&A analysis.

So why do they do it, then?

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Next page: Oiling the Peak

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