I worked closely for five years in Papua New Guinea (PNG) with a team of geologists and geophysicists from the British Geological Survey (BGS).
One of the main purposes of our project was to train the national staff in the Department of Petroleum and Energy there.
Expat life in PNG was very enjoyable. An occasional topic of conversation in our regular watering hole – the Aviat Club – was how strange geologists were as a part of the human race, compared with engineers, economists and other professionals in the department.
The underlying argument was that geologists spent most of their lives working with rocks and other inanimate objects, rather than with real people. I usually agreed, although two of the BGS geologists remain good friends a decade later, one of whom married an ex-PNG girlfriend of mine.
I believe I have a reasonably good understanding of how oil industry geologists make reserve estimates for discovered fields and also prospects. Now and again, however, I read estimates and do not understand how the geologists have come up with those numbers. The latest examples are for the Falklands, the Faroe Islands and Greenland.
Is geology a science? There has been a long-running debate about whether or not economics is a science or an art. When I was on the staff of Aberdeen University we were in the Department of Political Economy and I always thought that was an appropriate name but it was changed after I left.
I probably regarded myself as more an artist than a scientist. Various people have actually described some of my economics writings as works of fiction – but not my Energy columns, I hasten to add.
The purpose of this rambling introduction is to help explain that I have seen recent reserve estimates for both the Falklands and the Faroes that I simply do not believe. I find it incredible that professional geologists can produce such figures. And that banks and other people in the industry give them serious credence.
I understand that companies wish to present the best possible picture, particularly if they are trying to raise finance for an exploration programme. It is common for a range of reserve estimates to be presented, in which case it may well be legitimate to argue that the likely outcome is at the top end of the range.
The Securities and Exchange Commission (SEC) in the US seems to have strict criteria for the reserves claimed by oil and gas companies coming under their supervision, as Shell recently found out. Canada is tougher too. There do not seem to be similarly strict criteria in the UK – and presumably most other countries – particularly for the “minnows” in the industry. I believe that to be a serous omission.
I have followed the Falklands exploration campaign with great interest since it began away back in the 90s. Certain geologists claimed then that the area had billions of barrels of recoverable reserves and would turn out to be a second North Sea. Six wells were drilled in 1998 by companies such as Amerada Hess and Shell but unfortunately with no success.
Little happened for a decade but in 2010 a new drilling programme began by minnows Rockhopper and Desire Petroleum. The results appear to have been as disappointing as in 1998 but that has not prevented some geologists claiming a very important discovery with 242million barrels reserves. On the back of that the value of Rockhopper’s shares has soared and the company was recently able to raise another £200million for further drilling off the Falklands.
I am very sceptical. That said, I would be very pleased if the Falklands turned out to be a prolific basin, but my gut economics instincts make me suspicious. Some people have probably already made millions by trading in the shares of the companies with interests in the Falkland licences regardless of the actual results.
The same applies to the results of the latest well drilled in Faroese waters. I have some knowledge of what has been happening there because I was involved in the negotiations over the international boundary between the Faroese and the UK. At that time there had been some encouraging discoveries to the north of Shetland in UK waters and there were genuine hopes of similar finds in what are now Faroese (or Danish) waters. Sadly, the results since then have been very disappointing.
Some geologists have claimed that the latest well was a great success. My interpretation of the released results is very different but then I am just an economist.
I could give more examples. I am sure that most geologists in the industry are very professional in their estimates of recoverable reserves. There seem to be a few rogues, however, and they are probably very sociable humans.
Tony Mackay is MD of economists Mackay Consultants