The Shell Game; The case of Shell's missing oil suggests neither Enron-style book-cooking, nor evidence that the oil age is heading for a sudden, cataclysmic end.(Industry Overview)

Byline: Leonardo Maugeri, Maugeri is group senior vice president for corporate strategies and planning for the Italian energy company Eni

From its dawn after World War I, the petroleum age has been haunted by warnings that the world's oil is about to run out. As early as 1919, the head of the U.S. Geological Survey forecast that the end would come in nine years. The specter of crisis became a source of public hysteria, only to vanish in the global oil glut of the late 1920s. Imaginary crises have come and gone ever since, and the doomsayers are once again sounding alarms, inspired most recently by the news that Royal Dutch Shell overestimated its "proven reserves" by 20 percent.

The world is not running out of oil. Today's doomsayers are followers of American geologist M. King Hubbert, who came up with a predictive model in 1956. He believed that the world's geological structure is well understood, and that geology was enough to predict the rise and fall of an oilfield. He assumed that production would follow a smooth bell curve, so that if one saw signs that a field was peaking, one could also predict that it was about to fall at the same rate at which it rose. Hubbert's 1956 prediction that U.S. oil production in the Lower 48 states would peak in 1972 proved remarkably accurate, and the Hubbert camp was born.

Since then the Hubbertians have been trying to apply his model to the world, failing to see how changing technology, economic forces and new discoveries would make nonsense of his theory. The bell curve would accurately describe production trends in the unusual case of the United States--which by '56 was already the most heavily surveyed and tapped oil region in the world--but not in most oil states.

The most famous of his followers is another geologist, Colin Campbell, author of "The Coming Oil Crisis," who believes oil production will peak this decade, then fall rapidly, causing price shocks and a scramble for new sources of energy. Campbell claims that decades of explora-tion with increasingly sophisticated technology make it "inconceivable" that any large oil reserves have been overlooked.

Even the doomsayers see a threat only to "reserves," or the fraction of all oil resources that can be extracted at a reasonable price with existing technologies. To claim reserves as "proven," companies must show that they have a workable plan to get the oil to market. So to predict what share of oil resources will eventually become usable reserves is an insoluble puzzle involving dozens of factors, and geological surveys are only a starting point. Contrary to popular belief, oil is not found in great underground lakes or caves. It is trapped in porous subsurface rocks, which makes it very difficult to estimate the extent of any oil "reservoir."

The only sure way to find the bottom of the well is to drill. Far from rising and falling along a bell curve, the estimated size of oilfields tends to increase dramatically but erratically as they are drilled. In the late 1990s the first geological surveys by international oil companies of the mammoth Kashagan field in Kazakhstan estimated reserves at 2 billion to 4 billion barrels. By 2002, after exploratory drilling, the estimates had risen from 9 billion to 13 billion barrels.