Crude Oil Reserves -- Commentary -- March 27, 2020

The purpose of this post: to consider whether it is likely that crude oil will come off the global market a lot faster than folks think possible, and the implications for countries and companies that cut production (or not).

Part One

I don't know if this is generally accepted but this is what wiki says which fits with how I understand this:

Oil reserves denote the amount of crude oil that can be technically recovered at a cost that is financially feasible at the present price of oil.

Hence reserves will change with the price, unlike oil resources, which include all oil that can be technically recovered at any price.

Reserves may be for a well, a reservoir, a field, a nation, or the world. Different classifications of reserves are related to their degree of certainty.

The total estimated amount of oil in an oil reservoir, including both producible and non-producible oil, is called oil in place. However, because of reservoir characteristics and limitations in petroleum extraction technologies, only a fraction of this oil can be brought to the surface, and it is only this producible fraction that is considered to be reserves. The ratio of reserves to the total amount of oil in a particular reservoir is called the recovery factor.

Determining a recovery factor for a given field depends on several features of the operation, including method of oil recovery used and technological developments.

US crude oil reserves, under the definition above, will fluctuate based on the price of oil. When oil trades in a narrow band, year-over-year, the reserves assessment/estimate should not change much. When the price of oil changes significantly year-over-year, one would assume that oil reserves in the US would change (and perhaps significantly) year-over-year.

It will be interesting to see if any "rating" agency announces new numbers for US reserves based on $15 WTI.

Definitions at wiki and SEC rules that changed effective January, 2010.

Proven reserves (90% confidence, 1P, P1):

• proven developed (PD) -- minimal additional investment (advantaged oil?)
• proven undeveloped (PUD) -- additional capital investment needed

Unproven reserves:

• probable (50% confidence, P50, 2P, P2); P2 includes proven (PD, PUD) and probable
• possible (10% confidence, P10, 3P, P3); P3 includes proven (PD, PUD) probable, and possible 

Part Two 

Saudis "reserves" have never changed over decades.

US "reserves" have changed significantly (up and down) over decades.

Russian "reserves": I don't know. I assume somewhere in between Saudi (no change) and the US (quite volatile).

Part Three

Oil coming off market. I think we will be surprised how fast crude oil comes off the market.

From twitter:

By country:

Petro-states (Mideast, Venezuela, Libya, Mexico): could be hard hit with no financial reserve. Won't be able to compete with Russia, Saudi Arabia which can lease VLCC to store crude oil. Iraq, apparently, is in particularly bad shape.

Iraq, link here:

“My main worry today is not on shale,” Fatih Birol, executive director of the International Agency (IEA), told CNBC’s Steve Sedgwick earlier this week. Birol suggested countries like Iraq, Algeria and Nigeria — all OPEC producers — were in a “very, very difficult situation” and would require support from the rest of the world. [Said no one ever.]

“They are facing major fiscal strains. Many of them will have difficulties to pay the salaries for the public sector, spending for health, for education, which in turn may provide social pressures in those countries.

Iraq, OPEC’s second-largest producer, is thought to be particularly exposed to an all-out price war because it has one of the least diversified economies of the producer group — despite relatively low production costs.

US oil imports from OPEC: Iraq is exporting to the US almost the same amount that Saudi Arabia is exporting to the US. Something has got to give -- Saudi vs Iraq.


Canada: costing more to ship it than to buy it. Accounts for 5 million bopd US imports.

This is how it plays out:

• marginal US companies fail
• marginal OPEC+ countries unable to produce; societies fail; funding unavailable;
• majors will "protect" only their most important global plays; the others end production;
• Russia agrees not to increase production;
• Saudi won't increase exports; 
• oil production will drop a lot faster than folks think;

Posted late morning / early afternoon Saturday, March 28, 2020.

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Part IV

6:19 p.m. CT, Saturday, March 28, 2020: just announced. Rosneft (the company that started the OPEC+ spat with Saudi Arabia) just sold all its Venezuelan assets to the Russian government. Huge bailout. Huge. Rosneft isn't holding stranded assets on its book, but will be in a position to buy them back when things are "back to normal." The question is whether Rosneft's former assets will still be producing crude oil for export or if this is Venezuela crude oil taken off the global market. As of January, 2020:

• Venezuela was exporting one million bopd
• In terms of customers, Russia’s Rosneft was the largest receiver and intermediary of Venezuelan oil with 33.5% of total exports, followed by state-run China National Petroleum Corp (CNPC) and its units with 11%, and Cuba’s state-run Cubametales with 7%.