It has become clear from the disaster in the Gulf of Mexico that oil companies tend to underestimate both the size of newly discovered reserves and the difficulty of the conditions they will face when drilling for them. There’s nothing new about this. Here are two passages from a review by R.W. Johnson of Christopher Harvie’s Fool’s Gold: The Story of North Sea Oil (1995):
The search for hydrocarbons in the North Sea led the oil companies into the deepest water and toughest conditions they had ever encountered. In 1964 it was reckoned that North Sea waves never got higher than forty feet, winds never higher than 53 mph. Gradually, bitter experience taught that nothing was ever quite tough enough for the North Sea, that you had to be ready for waveheights of 65-100 feet and wind speeds of 70 mph. The technology became more and more awesome, the rigs huger, the entire scenario more and more futuristic. It was, in Alvarez’s phrase, ‘outer space with bad weather’.
The companies continued to play down their discoveries: if the Government and public got too excited they would start clamouring for a larger share of the riches. The companies could point out that oil had been steadily declining in price, from $1.75 a barrel in 1949 to $ 1.25 in 1969, so many of the North Sea finds would be too expensive to exploit. And they minimised the size of the reserves they had found. In 1974 even the Department of Energy, using oil company figures, suggested total reserves of only 8.5 billion to 14 billion barrels. To the companies’ fury, the LSE academic, Peter Odell, argued that this was just an oligopolistic fudge: the true reserves he estimated to be between 78 and 100 billion barrels. In the end this turned out to be far closer to the truth: the early estimates of Brent and Forties both had to be upped tenfold. Similarly, attempts to minimise the value of the finds had to be dropped when the 1973 oil crisis saw the price shoot up sixfold to $18 a barrel. Development took several years but by 1977 38.3 million tons of oil flowed ashore, netting £2.23 billion and by 1980 this had risen to over 80 million tons and £8.85 billion. By 1982 the oil was worth £14.43 billion. The North Sea had become the world’s second biggest off-shore oil producer, after the Gulf. The economic effect was colossal: from 3.1 per cent of British exports in 1973 oil had risen to 21.7 per cent in 1983 and fuel exports as a whole came to almost a third of total exports. The value of the pound soared.