Is Kuwait Lying About Its Oil Reserves?

Kuwait had a closed door session to discuss its reserves with Parliament before reaffirming the country’s proven oil reserves at 100 billion barrels.

As Xinhua points out, this is a odd and troubling set of events. Parliament had refused to pass the budget, which shows a large deficit, unless the oil ministry came clean with them about the status of the country;s reserves, hence the private briefing.

But that of course begs the question: if the reserves really were 100 billion, why the need to meet in cathedra? Because OPEC members are permitted each year to sell a certain amount of oil, and it is set as a percentage of the country’s published proven reserves. However, no one independently verifies this figure, which gives the member an incentive to cheat and exaggerate their reserves. Indeed, individual OPEC members have announced large increases in reserves in the absence of major discoveries.

In Kuwait’s case, the government’s budget is heavily dependent on oil revenues, so it cannot afford to sell less oil. But there are reasons to believe the Kuwaitis are exaggerating. Kuwait was one of the countries to boost its proven reserves from 63.1 billion to 90 billion the year the quota system was imposed. Petroleum Intelligence Weekly reported that it had seen internal Kuwait records that showed its reserves to be only 48 billion barrels, less than half the official figures. And today, colleague forward an e-mail from one of his partners stationed in the Middle East that said:

-A committee of Kuwait MPs claims to possess reserve report for Kuwait Oil Co. that indicates 48 billion bbl of actual oil reserves rather than the official 100 billion bbl of oil reserves

-Power shortages have caused the intermittent shutdown of the entire oil refining and export complex in Kuwait, rather than subjecting residents to power cuts.

Now if Kuwait is exaggerating its reserves, it almost goes without saying that other OPEC members are too, possibly even to the same degree. That means the Peak Oil scenario is much closer at hand that the mainstream realizes. And the Peak Oil crowd has been saying the result, when production falls, is triple digit oil prices. And they don’t mean low triple digit either.

From Xinhua:

Kuwait’s Acting Oil Minister Mohammad Al-Olaim has reaffirmed the oil reserves at 100 billion barrels under the pressure from the members of parliament.

Some lawmakers had threatened not to pass this year’s budget, which is with a projected deficit of around 10.3 billion U.S. dollars, if the oil sector didn’t tell them the truth about the country’s oil reserves.

This budget, one of the largest in Kuwait’s history, is heavily reliant on oil income.

So the parliament held a part of session behind closed doors to discuss Kuwait’s oil reserves before disclosing it to the public. “We are reaffirming the declared oil reserves,” the acting minister told reporters on Wednesday, raising speculation why Kuwait is so reluctant to make public its oil reserves?

Official Kuwait oil sector statistics placed the country’s oil reserves at some 100 billion barrels, accounting for 10 percent of the world’s total reserves. The country is pumping around 2.4 million barrels per day (bpd) and oil income contributes more than 95 percent of public revenues.

Asked whether the 100 billion barrels represented exploited and unexploited reserves, Al-Olaim, also Minister of Electricity and Water, said, “What is invested at present is not part of oil reserves … there is no doubt that Kuwait has not exploited its oil reserves.”

But industry newsletter Petroleum Intelligence Weekly last year said it has seen Kuwait’s internal records showing reserves were about 48 billion barrels – half the officially stated 99 billion. Former Oil Minister Sheikh Ali al-Jarrah al-Sabah, who resigned in late June, refused to disclose reserves during his tenure saying this is related to the country’s security.

Kuwait’s analyst Jamie Etheridge said in an article published here that there’s sound logic in keeping the real figure secret. First of all, within the energy industry there is a significant difference between proven, probable and possible reserves.

Generally, proven suggests about a 90 percent chance – all conditions being favorable – of the oil actually being pumped up from underground and sold on the market. Probable suggests a 50 percent chance and possible about a 10 percent chance.

He added that Kuwait’s proven reserves may represent only a fraction of the larger whole.

While banks and international stock markets will accept only “proven” reserves as assets, a nation or an energy company will develop its long term strategic plans based not only on what’s proven but also what’s probable and even possible.

In other words, Kuwait can raise funds by borrowing against proven reserves, if need be, from an international bank.

But Kuwait’s Energy Ministry, Supreme Petroleum Council and Kuwait Petroleum Corporation will plan for the country’s energy future by taking into account not just proven but also probable and possible reserves.

Another reason for Kuwait to keep silence on its oil reserve is the OPEC quota system, according to Etheridge.

In 1985, OPEC decided to tie production quotas to proven reserves.

Under its agreement with other OPEC producers, Kuwait has the right to produce nearly 2 million barrels per day. Its quota is based on Kuwait’s official statement that it has 99 billion barrels of proven oil reserves.

Since quotas are calculated based on proven reserves, there is considerable doubt about the veracity of each OPEC nation’s stated proven reserves, Etheridge said.

In 1984, the year before the quota system was introduced, Kuwait announced proven oil reserves of 63.9 billion barrels. A year later, when the quota system came in, Kuwait’s stated proven reserves jumped to 90 billion — an incredible leap of 26.1 billion in the space of one year.

Other OPEC producers also saw suspicious jumps in proven oil reserves. Iraq went from 47 billion barrels in 1987 to 100 billion barrels in proven reserves a year later. The same year, Iran doubled its reserves from 49 billion barrels to 93 billion.

Kuwait hopes to raise its production to 4 million barrels per day by 2020. To do so, it needs to increase its OPEC quotas which are tied to proven reserves.