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BP: Oil Reserves and Forecasting

Introduction

Being on the topic of Alternative Energy Sources and all the schemes and politics that goes into the entire energy sector, such as the billions of dollars in subsidies the US government gives US oil companies for oil exploration, inspired me to do just a quick look into a few things. Firstly, I wanted to see which oil company invests the most time and money into alternative oil sources (given it's kind of a conflict of interest) which would then also tell me which oil company is at least trying to be ethical and thinking about our future and the future of this planet earth. I was saddened to find out that, by far, BP (British Petroleum) spends more money on alternative energy sources than any other fossil fuel energy giant, even the mother of all energy giants, Exxon Mobil, which only until recently when it was passed up by Apple, it was the largest corporation in the world, by market capitalization.1) Yes, Exxon Mobil gets billions of dollars in government funding, free money, grants, subsidies, etc. Imagine finding out Apple, which earns nearly $30 billion in net cash-flows per year, was getting billions from tax payers so it can build more phones and computers. Wouldn't that be an outrage?

But that's exactly what's happening with US oil companies - they're madly profitable, they make massive positive cash-flows and regularly return billions on top of billions to their already rich shareholders, as they should be doing, but then we the tax payer, the working middle and lower class have to pay these enormous corporations billions of dollars per year in “help”? That's the most absurd thing I've heard - well, spending hundreds of billions on inefficient and not clean - green energy sources is just as mad-dog crazy but I won't go there as this paper is about the ins and outs of forecasting oil reserves and what the future picture of global oil reserves looks like and how much we can trust their numbers. The second thing I was hoping to find while looking into oil companies, besides which spend money on finding better and cleaner types of energy, is how they forecast their reserves or as it is better known in business, their inventory. After-all, Exxon Mobil and BP and the rest sell oil and that's about it, so they should be carrying billions of barrels of oil on reserves and given some have enormous wells which are presumably filled with oil, one would also then assume to see some type of future reserves somewhere on the books but after doing some research that simply wasn't the case.

It would appear the Alternative Energy Companies and Politicians aren't the only ones scheming but oil companies may be up to clever accounting and also, more importantly, all of these oil rich countries which America has become dependent on for oil, huge supposed oil reserve countries like Saudi Arabia. Let's take a closer look at BP since they seem to be the more “honest” of the bunch, given they actually spend a good amount of money compared to the rest of the oil companies, on our future, on green energy alternatives which I hope it pays for them in spades when the time comes given Exxon Mobil is much more rich yet they don't even spend 1% of their earnings on Alternative Energy Sources.

BP: Oil Reserves and Forecasting

I Googled every variation of Forecasting, Oil, and BP and did not find anything interesting or relevant that I could write at least two pages about. I had even less luck in searching for quality and BP. Sifting through BP’s large and difficult to understand SEC filings also gave me nothing more than a headache. The idea that hit me while I was in the middle of looking into BP, and their reserves, was that BP, like all other oil companies, have an inherent benefit which many companies, like Nike, Wal-Mart, etc…, do not enjoy, and that is that they do not need large amounts of inventory nor do they need to forecast supply or demand for consumption purposes. The goal is to find and drill for oil as efficiently and as quickly as possible and then get it out of the ground as fast and as cheaply as possible. If for some reason the market price for oil is not favorable then you simply slow down the oil wells or even bring them to a halt. In essence, the ground itself becomes your storage and inventory and since oil is a commodity the demand is always present. I think it was for this reason I was not able to find anything worth writing about in regards to BP and forecasting.

While searching however, I did find some interesting information regarding oil forecasting in general. It seems that there are many institutions, from Hedge/Mutual funds to independent individuals forecasting future oil supply and demand using various forecasting methods.

One such method is the Compumetric forecasting method which uses computers to identify the underlying model that produces the forecast. Typically, forecasting models are designed or specified by humans rather than machines. Compumetric methods are applied to determine whether models they provide produce reliable forecasts. Forecasts produced by two compumetric methods - genetic programming and artificial neural networks - are compared and evaluated relative to a random walk type of prediction. The results suggest that genetic programming has advantage over random walk predictions while the neural network forecast proved inferior.

The Compumetric forecasting method sounds very interesting and I’m sure it generates some outstanding results, but I did not quite understand it. I think one would need an advanced degree to make full sense of it, as you would with another method I ran across which is based on Support Vector Machines. On the other hand, the Heuristic Oil Forecasting Method, developed by Dr. Richard Duncan at Princeton University, makes more sense, to me at least.

The Heuristic Oil Forecasting method is a unique and entirely new approach (about ten years new) to predict oil production. It is used by first breaking down World oil production into the top forty-two oil-producing nations that account for more than 98% of the world’s oil. Then a separate forecast is made for each nation. Finally, these forecasts are combined to get the forecasts for regions, categories, and the World. This method was developed over a period of seven years with the intent to supersede the obsolete hand-drafting and outmoded curve-fitting techniques, and to meet a rigorous set of design specifications. And although this method is new to oil forecasting, it is a method that is widely used in systems engineering.

An interesting note on oil production and oil reserves: The oil production data up through 1959 were obtained from BP Amoco (1965-1999), Campbell (1991), Bermudez, (1963, for Mexico), and FLPH (1959, for Romania). However, the production data from 1960 to 1998 were obtained exclusively from the BP Amoco Statistical Review of World Energy. Dr. Duncan is confident that the BP Amoco oil production data are satisfactory for his work. As was mentioned, however, 'proved reserves' are fictional (i.e. they vary widely and are highly contentious). Happily however, that is of no consequence to the Heuristic Method because it integrates the oil production profile for each nation to predict each nation's Expected Ultimate Recovery and Reserves. Finally, they are all summed up to get the Heuristic estimate for the World's Expected Ultimate Recovery and Reserves.

As one can see, the Heuristic method is easier to understand but I was not able to find any factual data to show how accurate it is in comparison to other, more proven methods. Given Dr. Duncan’s credentials, I have to give him the benefit of the doubt, at least for this short essay.

On a personal note, I have to admit that I am very surprised that what is referred to as “proved reserves” is not really proved at all. I also just became aware of the fact that outside independent parties are not allowed to go inside OPEC territories to validate their claims for oil reserves. This is a real danger because the OPEC countries have nothing to gain by being honest with us. We could wake up one day to devastating news that we will shortly run out of our most needed resource, Oil. I remember reading an article a few years back which explained that new satellite photographs are predicting that Saudi Arabia is greatly over-inflating their supposed proved oil reserves and since nobody is allowed to go there to double check their numbers there is no reason why we should trust them. In my mind, if you're telling the truth why not have a third party verify your so called proved oil reserves.

This article went on to explain that new oil extraction techniques which are used only when oil wells are nearly dry leave a visible landmark on the surface of the earth above the well and this is what satellites have been picking up all throughout Saudi Arabia. Saudi Arabia has been supplying most of the oil to oil hungry countries like the US for over 50 years, it shouldn't come as a surprise that the party for Saudi Arabia is nearly over and maybe that's the real reason for so much fighting and conflict in the middle east.

I mean, is it any surprise that new data shows Iraq has potential oil reserves under its land second only to that of the number 1 proved reserves in the world, Saudi Arabia (presuming they're telling the truth, of course)?2) All of a sudden the long war in Iraq has a whole different meaning as that is a lot of oil and this information was not public information when we first attacked Iraq but I wouldn't be surprised if somebody at some level knew about this information.

And what about the most recent and enormous discovery I read about no more than 6 months ago? They just found enormous reportedly proven oil reserves under that tiny piece of land, Israel, which Arabs and Palestinians have been warring over for countless decades.3) That is the most unbelievable thing given how small that country is, land-wise. Absolutely stunning and interesting turn of events. Is this a coincidence or is every war these days tied to oil the way old wars were about gold, salt or silver? The article I read also stated that they believe the oil reserves under Israel are the biggest in the world, bigger than even what Saudi Arabia claims to have. This is all relatively new information so I am curious to see what a closer look find underneath Israel and if they do have that much oil then I'd expect the mother of all wars to break out because if those nations have been warring for so many years over a plot of land then I can't imagine what will happen when the stakes are raised to the level and riches of a potential future global superpower. And what is the now very large and very powerful Saudi Arabia going to do if those Satellite pictures are correct and they are running out of oil? Saudi Arabia has tried for many decades now to invest its money in its own people, in education, in an infrastructure but unfortunately they have no seen the same growth and innovation phenomenan happen there as it has in the United States, even though many of their young men and women were paid to graduate from the very same Universities as where the innovators and innovations of America come from, American Universities. I simply cannot fathom seeing a country the size of Saudi Arabia being sent back to the dark ages which is where it will go if they run out of oil with no other real economy to speak of, when all that is standing in their way is a country the size of a small island with a population of a small state, Israel. And in my mind what this spells is WWIII.

It is for this reason, among many others, that the United States should rapidly take a more proactive and aggressive approach in becoming more energy efficient and independent. Why get dragged into a third world war because we won't have a choice if we don't have enough energy at home when America has huge oil reserves and an entire island (Alaska) where it can explore and most likely find enough oil just there to make America energy independent for the next 200 years. I know 200 years is not an eternity but that is a long time when it comes to technology - and if we can stay out of will most likely certainly be an enormous middle eastern war, over oil, not civil liberty or religion, then I say let's start drilling now because it takes years to get oil out of the ground after it is found.

- Maximilian Wilhelm

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