Kuwait Times

Published Date: July 11, 2007
By Jamie Etheridge

Parliament wants to know the truth about Kuwait's oil reserves. This week several prominent MPs called on the government to publicly disclose the size of Kuwait's proven oil reserves. The MPs claim that they cannot plan the country's budget without knowledge of the reserves.

Like most nations, Kuwait's oil reserves are a matter of national interest. 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. In laymen's terms, proven suggests about a 90 percent chance - all conditions being favorable - of the oil actually being lifted from the ground and sold on the market. Probable suggests a 50 percent chance and possible about a 10 percent chance.

So 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 the Energy Ministry, Supreme Petroleum Council and the 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 its mouth shut - metaphorically speaking - is the OPEC quota system.

In 1985, OPEC decided to tie proven reserves (the 90 percent category) to production quotas. 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 (remember the 90 percent) oil reserves.

In other words, Kuwait is allowed to produce 2.247 million barrels per day because it has nearly 100 billion barrels in proven reserves. In reality, Kuwait produces around 2.6 million bbl/d, according to the US Department of Energy and official OPEC statistics.

All OPEC producers cheat a bit on their production quotas. But not too much. The quotas exist to help OPEC collectively influence global oil prices. As long as oil producers keep the global oil supply tracking closely with global oil demand, they can manipulate global oil prices. Being able to affect the price of a barrel of oil is critical to Kuwait's long term economic health. Oil revenues account for two-fifths of Kuwait's GDP.

In other words, Kuwait works with Algeria, Indonesia, Iran, Iraq, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela to control global oil prices and by extension the revenue it will earn each year from oil exports.

Of course, since quotas are calculated based on proven reserves, there's considerable doubt about the veracity of each OPEC nation's stated proven reserves. In 1984, the year before the quota system was introduced, Kuwait had 63.9 billion in proven reserves.  A year later, the quota system came in and with it, Kuwait's stated proven reserves jumped to 90 billion - an incredible leap of 26.1 billion in the space of one year.

A remarkable leap for any oil producer, but especially so for Kuwait given that it did not find any new mega fields that year, which just happened to coincide with the new production quotas.

Other OPEC producers also saw suspicious (or auspicious depending on how you look at it) 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 bbls to 93 bbls. The UAE also saw an astonishing increase in its holdings from 1987 to 1998, with proven reserves tripling from 31 billion barrels to 92 billion barrels.

Nor would it make sense for Kuwait to reveal the truth about its oil reserves. In January 2006, Petroleum Intelligence Weekly (PIW) reported that Kuwait's proven reserves were about half of what the government claimed or about  48 billion barrels. The report, which cited internal documents, was later denied by oil officials in Kuwait but then vaguely reaffirmed by recently ousted Oil Minister Sheikh Ali Al-Jarrah, who told Al-Jarida that he couldn't deny the PIW estimates. 

Conflicting information, doubt and ambiguity are useful and necessary. Kuwait hopes to raise its production to 4 million barrels per day by 2020. To do so, however, it needs to increase its OPEC quotas - and remember the quotas are tied to proven reserves.

So does Kuwait have 99 billion or 48 billion barrels? The truth is that no one really knows the truth. Or at least no one outside the top tiers of the government and energy industry. But that's why state secrets exist in the first place. None of other the 11 OPEC members allow independent auditors to confirm their reserves.

Kuwait can't be expected to break the rules of a game that all its allies are playing.