Undiscovered Oil and Gas Resources: An Evaluation of the Department of the Interior's 1989 Assessment Procedures (1991)

The recent Persian Gulf crisis brought concerns about the domestic petroleum supply to the forefront of national attention. U.S. policymakers are debating how to stabilize domestic petroleum production—in addition to cutting demand—to halt the nation's growing import dependence. Once again, policymakers are considering seriously whether environmentally sensitive areas like the Arctic National Wildlife Refuge and offshore California should be opened for petroleum exploration.

Central to questions of whether a new emphasis on domestic petroleum production can slow imports and whether sensitive lands should be opened for development are predictions of how much undiscovered petroleum remains in the U.S. Periodic national resource assessments carried out by the U.S. Department of the Interior (DOI) provide the government with its key measure of undiscovered petroleum supplies. Every few years, the DOI has gathered geological information from the entire nation—both onshore and in the Exclusive Economic Zone, which extends 200 nautical miles out to sea—to estimate the volume of undiscovered crude oil and natural gas beneath U.S. territory.

The DOI's most recent undiscovered oil and gas resource estimate, published in 1989, caused concern among some in the petroleum industry, because it suggested that the volume of undiscovered oil and gas may be smaller than two prior government surveys, published in 1975 and 1981, had indicated. The 1989 estimate projected a mean undiscovered recoverable natural gas volume of 399 trillion cubic feet: 33 percent lower than the 1981 estimate, which had slightly exceeded the 1975 estimate (U.S. Department of the Interior, 1989). For crude oil, the drop was even more significant. The 1989 estimate projected

a mean undiscovered crude oil volume of 49 billion barrels: 41 percent below the 1981 estimate, which was slightly lower than the 1975 estimate (U.S. Department of the Interior, 1989).

The apparent deviation from prior estimates caused some members of the natural gas industry to question whether the new, lower estimates were justified. An industry group, the Potential Gas Committee, had estimated undiscovered natural gas volumes close to the 1981 DOI figures (U.S. Department of the Interior, 1989). The natural gas industry was concerned that the new, lower estimates might affect government decisions about whether to provide incentives for natural gas development.

Yet, the 1989 DOI estimates may not be as low as a cursory examination of mean values suggests. The mean is only the average of a broad range of potential values, not a precise indicator of the volume of undiscovered oil or gas. The assessment concluded, with a 90 percent probability, that anywhere from 307 to 507 trillion cubic feet of natural gas and 33 to 70 billion barrels of recoverable oil remain undiscovered in the U.S. Though the mean values of these ranges are lower than the mean values from the two earlier assessments, the ranges of values for all three assessments overlap. Also, the DOI 's estimate was in the same range as or higher than estimates prepared by some industry experts, including analysts from Sohio and Shell (see Figure 18 in U.S. Department of the Interior, 1989, for a comparison between the DOI's 1989 assessment and other assessments).

To resolve the questions about the 1989 assessment, the Secretary of the Interior called upon the National Academy of Sciences to determine whether DOI analysts had used appropriate methods to produce the new estimates. The Secretary requested that the Academy “review the assumptions and procedures employed in the [assessment].” To conduct the review, the Academy convened the Committee on Undiscovered Oil and Gas Resources, composed of 17 experts in resource assessment from academia, industry, and government. This report represents the culmination of the committee's extensive review.

A common problem with resource assessments is that the way they are reported often underemphasizes the uncertainty inherent in the final estimates. Users of petroleum assessments (for example, members of Congress) tend to focus on only one number, the mean value, as providing a definitive answer to the

question of how much undiscovered petroleum the United States possesses. The focus on the mean value is misleading. In reality, what an assessment offers is a broad range of possible values—like the 33 to 70 billion barrel crude oil range from the DOI assessment—based on the best knowledge available at the time. No two groups of experts asked to predict the volume of undiscovered oil and gas will produce exactly the same figures.

The variation in resource assessments and their overall uncertainty have many causes. One cause of the difference in reported estimates is disagreement over which types of oil and gas should be included in an assessment. For example, the 1989 DOI assessment included only “conventional” crude oil and natural gas. The DOI defined “conventional” resources as oil or gas recoverable by currently used, widely available extraction technology. The assessment excluded oil and gas that is more difficult to extract, like gas from low-permeability sandstones and fractured shales. The PGC's natural gas assessment, on the other hand, included gas from these sources because operable extraction technology exists (though it is more expensive and is used less commonly than the technologies the DOI labelled “conventional”).

A second cause of variation among assessments is different economic assumptions. Assessments commonly estimate resources that are economically recoverable—those that will yield a profit when developed under given economic conditions. For example, the DOI assessment assumes that industry will produce petroleum only if it yields an 8 percent return or better on the total investment (an assumption used to represent standard industry practice in deciding whether to develop a petroleum field). Calculations of whether an oil or gas source is profitable hinge on a myriad of economic assumptions, ranging from the future price of a barrel of oil to the cost of transportation to major petroleum markets. Different economic assumptions can lead to significantly different estimates of how much undiscovered oil and gas is economically recoverable.

A third cause of variation among assessments is the role played by the subjective judgments of the scientists who prepare the estimates. Subjective judgment plays a role in assigning probabilities to “ risk factors” in order to calculate the likelihood that oil or gas will be present in a setting with certain geological characteristics. Accumulation of petroleum in significant quantities requires the interplay of many complex geologic events: the accumulation of organic matter in a source rock; the maturation of this organic matter into petroleum; the presence of a reservoir rock with adequate thickness, porosity, and permeability; the migration of the petroleum into a trap with adequate size and seals; and the preservation of the petroleum in the trap. Given the same set

of geologic data about an oil and gas province, experts may disagree about the likelihood that each of these factors is adequate to have promoted the formation of an oil or gas accumulation.

For these and other reasons, two groups of equally trained experts can produce significantly different resource assessments. Thus, it is predictable that DOI assessments produced several years apart would yield different resource estimates, even when adjusted for petroleum discovered between the two assessments.

The 1989 assessment departed from the 1981 assessment in more ways than the final outcome. It was the first collaborative effort between two agencies within the DOI: the Minerals Management Service (MMS) and the U.S. Geological Survey (USGS). The USGS alone was responsible for the 1981 assessment. But in 1982, the DOI created the MMS to manage oil and gas resources on the Outer Continental Shelf (or OCS, the part of the U.S. offshore under federal jurisdiction). In the 1989 assessment, the USGS was responsible for estimating undiscovered petroleum volumes onshore and in state waters, while the MMS produced the estimates for the OCS. The two agencies worked fairly independently, combining their results at the end of the project.

More importantly, the 1989 assessment departed from earlier assessments in that it was the first time USGS geologists applied an assessment method called “play analysis” on a national scale. This method evaluates resource potential by grouping targets for oil and gas discovery into “plays ”—families of prospective and/or discovered petroleum pools that share a common history of oil or gas generation, migration, reservoir development, and trap configuration (Podruski et al., 1988; White, 1980). In play analysis, statistical methods are used to translate the judgments of geologists into a set of probabilities that given petroleum volumes will exist within the plays.

To review the assessment, the Committee on Undiscovered Oil and Gas Resources met with MMS and USGS representatives and held working sessions to evaluate aspects of the assessment. Prior to completing this review, the committee produced two related reports, reprinted in appendix A and appendix B. The first report evaluates the MMS's data base for assessments of resources off the California and Florida coasts. The second report examines the data base the

MMS used to estimate resources in the George's Bank area, in the North Atlantic OCS off the New England coast.

The following chapters present in detail the committee's evaluation of the USGS's and MMS's assessment methods. Chapter 2 discusses limitations of resource assessments in general. It elaborates on why uncertainty is inherent in resource assessments and why different assessments can produce such different results. Chapter 3 evaluates separately the USGS and MMS assessment methods. It offers detailed suggestions for how the assessment methods might be improved. Chapter 4 summarizes the committee's major conclusions and recommendations.

U.S. Department of the Interior, Geological Survey and Minerals Management Service. 1989. Estimates of Undiscovered Conventional Oil and Gas Resources in the United States—A Part of the Nation's Energy Endowment. Washington, D.C.: U.S. Government Printing Office.

Podruski, J. S., J. E. Barclay, A. P. Hamblin, P. J. Lee, K. G. Osadetz, R. M. Procter, and G. C. Taylor. 1988. Conventional Oil Resources of Western Canada. Geological Survey of Canada Paper 87-26. Ottawa, Canada.

White, D.A. 1980. Assessing oil and gas plays in facies-cycle wedges. American Association of Petroleum Geologists, Bulletin 64: 1158-1178 .