Truth, lies and the 'club of Pinocchios'

A vexed finance minister in Nigeria once observed that three government departments each had widely varying estimates for how much oil was being produced in the country, a critical flaw for a nation that depends on oil for almost all of its hard currency. She might have added that all three estimates were wrong, because a good portion of the nation's output is siphoned off pipelines or tapped from abandoned well heads by smugglers before anyone has had a chance to measure it.

In Venezuela, I remember a well publicised but ultimately unsuccessful lawsuit alleging that the brother of the head of the national oil company had hived away millions of barrels of crude oil in a storage tank on the shores of Lake Maracaibo by tampering with the meters at nearby fields. Iran has also suffered perennial doubts over its oil production rates, and on one occasion Tehran invited several trade press hacks on a dog-and-pony trip to look at meters on pipeline manifolds and counter what it considered to be gross underestimations of production capacity by the industry press.

Oil output estimations are crucial tools both for energy importers in the West, who use them for policy and planning, and for exporters, for whom they form the basis of public spending. In OPEC, these numbers define a country's status, and at times of market weakness they take on a whole new level of significance. For OPEC nations, they are a window into a country's compliance with output cuts, which are pretty much the only policy lever available to the group, now that prices are determined on futures markets. So much is riding on these figures that, understandably, their formulation and distribution is a constant source of fascination for anyone in the oil business.

At the end of the 1990s, cheating and lying about OPEC quotas was such a popular sport that the Venezuelan oil minister, Erwin Arrieta, referred to the organisation as a "club of Pinocchios". Official figures so lacked credibility that OPEC in 1996 decided to give up using official data for production, relying instead on an average of six external estimates. At one level, it was a cleansing moment for the organisation; a step to persuade a sceptical world that it really was capable of sticking to its decisions. The secondary sources included the US government, the International Energy Agency, two private sector consultancies and two industry newsletters.

The decision served its purpose three years later, when, as oil prices sank into single digits, OPEC embarked on a series of drastic output cuts triggered in part by a radical change of government in Caracas and the arrival of Hugo Chavez. This marked the start of oil's longest bull run, culminating in the US$147 a barrel price reached in July last year. Quota discipline, independently verified, reinforced a view that OPEC had salvaged its credibility and reimposed its dominion over the global cost of energy.

Venezuela has remained at the centre of the quota debate since then. Having been OPEC's worst quota-buster in 1998, Venezuela is again at odds with the organisation. This time, Caracas wants to persuade fellow members that it is pumping a third more, not less, than reported. After a crippling strike by state oil executives in 2002, which led to a failed coup d'état, Venezuela for years struggled to meet its 11 per cent share of OPEC's ceiling. In 2007, OPEC reduced Venezuela's share, partly to reflect a realignment of quotas when Indonesia left and Ecuador and Angola joined the group.

But in a lively article in this week's Middle East Economic Survey, Juan Carlos Boue, a senior adviser to the Venezuelan oil minister, delivers a powerful blow to the doubters and asserts that Venezuelan oil capacity is back. Mr Boue goes into a lengthy explanation, laced with a measure of conspiracy theory, as to why international consultants and the industry's press have failed to catch on to the recovery. Suffice to say it centres around the classification of extra-heavy oil, which makes up a quarter of Venezuelan production.

The ministry hired an inspection company, Inspectorate, to audit its oil trade from November to March. They detail exports which, when twinned with the ministry's estimates of domestic consumption, show a steady supply of about 2.9 million barrels daily. By contrast, the secondary sources have them pumping 2.1 million, while OPEC's quota for Venezuela stands at 1.99 million. If Venezuela's figures are right, they present three dilemmas. For the secondary sources, they mean that years of data published down to three decimal places have been very, very wrong. For OPEC, they mean reopening the debate about quota allocations and the classification of crudes. And for Venezuela, they imply that Mr Chavez, who staked his reputation as a price hawk, has made almost no attempt to share in the output cuts agreed with the rest of OPEC since the end of last year.