reserves definitions
TRANSCRIPT
Project No. D105
An Industry Presentation
Rawdon J.H. SeagerGaffney, Cline & Associates
www.gaffney-cline.com
SPE Petroleum Resources Management System (PRMS)
Sponsored by SPE/WPC/AAPG/SPEEApproved March 2007
Project No. D105
Technical and Management Advisers to the Petroleum Industry Internationally since 1962
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Worldwide Multi-disciplined Presence
Representative Office
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Field Engineering
GeologicalModeling
Reservoir Simulation& Characterization
Gas: LNG - GTL
Field, Pipeline, Plant
Unconventional / EOR
Reserves Audit & Certification
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Expert Witness
National Oil Company Government Interface
Project Finance Training
Market Studies
Regulation – ContractStructure & Negotiation
Valuation, Mergers &
Acquisitions
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Reserves
Reserves TrainingGCA provides a two-day reserves training course covering all aspects of reserve estimation and reporting
Technical basesUnderstanding of and compliance with definitions
Now includes detailed review of the new SPE/WPC/AAPG/SPEE Petroleum Resources Management System (PRMS) as well as regulatory requirements such as reporting to the US Securities and Exchange Commission (SEC)
“The course far exceeded my expectations, excellent instructors”S. P. Singh, Director – Occidental Reserves and Reservoir Engineering
Reserves ProcessGCA provides independent audit of companies internal reserves estimation, recording and reporting processes and proceduresPreparation and revision of reserve management guidelines to meet companies unique requirements
Project No. D105
An Industry Presentation
Rawdon J.H. SeagerGaffney, Cline & Associates
www.gaffney-cline.com
SPE Petroleum Resources Management System (PRMS)
Sponsored by SPE/WPC/AAPG/SPEEApproved March 2007
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Disclaimer
Still being studied
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Topics for Discussion
Review of key features of the new SPE PRMS
Discussion of the core definitions
Comparison with the 1997 SPE/WPC and 2000 SPE/WPC/AAPG documents
Brief comments on the revised “Standards” document and “auditing”
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SPE PRMS Key Features - 1
Combines four documents into one consolidated and unified system1997 SPE/WPC Petroleum Reserves Definitions2000 SPE/WPC/AAPG Petroleum Resources Classification and Definitions2001 SPE/WPC/AAPG Guidelines for the Evaluation of Petroleum Reserves and Resources2005 SPE/WPC/AAPG Glossary of Terms
The fundamental terminology of Reserves, Contingent Resources (CR) and Prospective Resources (PR) has been maintained
Using the classification framework presented in 2000
Key distinctions have been made between Reserves and Contingent Resources where some ambiguity previously existed
Particularly between CR and Probable or Possible Reserves
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SPE PRMS Key Features - 2
A “Project” has been identified as the primary element of the system“In order to assign recoverable resources of any class, a development plan needs to be defined consisting of one or more projects”Combines the “reservoir” and the “property” to derive entitlement to recoverable resourcesIs generally identified as the level at which investment decisions are made
Three distinct approaches are recognized for the categorization of volumesTwo deterministic and one probabilistic – discussed later
The “base case” scenario is predicated on a “forecast” of costs and pricesAlthough a “constant” case is still recognized as an alternative
Applies to both Conventional and Unconventional resources
There are several other issues for which a position has now been clarified
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What are Reserves - 1?
Volumes expected to be sold from assets in which the entity has an entitlement by the application of development projects
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What are Reserves - 2?
The summation of future production from a given date forward to the economic, contract or lease limit
0
20
40
60
80
100
120
1 3 5 7 9 11 13 15 17Time (years)
Production Rate (MB/D)
Economic LimitPrice and cost dependent
Contract Limit – extensions?
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Resources Classification
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Resources Classification
ReservesDiscovered, recoverable, commercial, remainingProved, Probable, Possible1P, 2P, 3P (now formalized)
Contingent ResourcesDiscovered, potentially recoverable, not yet commercial, remaining1C, 2C, 3C (new terms)
Equivalent to Low, Best and High Estimates
Prospective ResourcesUndiscovered, potentially recoverable, potentially commercial, remainingLow, Best and High Estimates
UnrecoverableDiscovered or undiscovered, not recoverable
Cla
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Categorization
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Project-Based Classification
The Reservoir assessment determines the petroleum initially in place, and fluid and rock properties that affect petroleum recoveryThe Project is applied to a specific reservoir volume to generate production and cash flow schedule
One project may develop many reservoirs or many projects may develop one reservoirThe Property incorporates contractual rights and obligations, and fiscal terms, defining the entitlement share of investments, production and revenue
One property may encompass many reservoirs or one reservoir may span many properties
RESERVOIR(in-place volumes)
PROJECT(production/cash flow)
PROPERTY(ownership/contract terms)
NetRecoverableResources
Entitlement
RESERVOIR(in-place volumes)
PROJECT(production/cash flow)
PROPERTY(ownership/contract terms)
NetRecoverableResources
Entitlement
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Resources Classification
Discovery Status
Commerciality Status
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Discovery Status
“A discovery is one petroleum accumulation, or several petroleum accumulations collectively, for which one or several exploratory wells have established through testing, sampling, and/or logging the existence of a significant quantity of potentially moveable hydrocarbons”
The PRMS intentionally does not require a flow test in order to establish a discoveryIn some instances it may nevertheless be considered that logging alone would not be considered sufficient to identify a discovery since some indication of fluid type and producibility will normally be required to comply with the following requirement:
“In this context, “significant” implies that there is evidence of a sufficient quantity of petroleum to justify estimating the in-place volume demonstrated by the well(s) and for evaluating the potential for economic recovery”
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Determination of Commerciality
“Discovered recoverable volumes (Contingent Resources) may be considered commercially producible, and thus Reserves, if the entity claiming commerciality has demonstrated firm intention to proceed with development and such intention is based upon all of the following criteria:
Evidence to support a reasonable timetable for developmentA reasonable assessment of the future economics of such development projects meeting defined investment and operating criteriaA reasonable expectation that there will be a market for all or at least the expected sales quantities of production required to justify developmentEvidence that the necessary production and transportation facilities are available or can be made availableEvidence that legal, contractual, environmental and other social and economic concerns will allow for the actual implementation of the recovery project being evaluated”
With some minor differences, these criteria were typically applied to Proved reserves under prior guidelines
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What Determines Commerciality?
“While each organization may define specific investment criteria, a project is generally considered to be “economic” if its “best estimate” case has a positive net present value under the organization’s standard discount rate, or if at least has a positive undiscounted cash flow”
It is generally understood that “commerciality” requires that the project provides a positive return on its investment to the organization at the discount rate used for its investment decision-making
There will of course be exceptions, when investments are made for strategic reasons
This is different from “economic” in the sense that even a positive undiscounted cash flow could be considered economic
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Project Maturity Linked to Decision Gates(can be quantified if desired)
Chance of discovery
Chance of commerciality
But apply chance to economic outcome, not to volumes
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Reserves Defined
RESERVES are those quantities of petroleum anticipated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions
Reserves must satisfy four criteria:discoveredrecoverablecommercialremaining (as of the evaluation date) based on the development project(s) applied
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Reserves
Categorized in accordance with the level of certainty associated with the estimates
Classified based on project maturityProject must be sufficiently defined to establish commercial viabilityReasonable timeframe for development (5 years suggested)
Characterized by development and production status
Producing/Non-ProducingDeveloped/Undeveloped
Cla
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Categorization
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Reserves - Producibility
High confidence in the commercial producibility supported by actual production or formation tests
In certain cases, Reserves may be assigned on the basis of well logs and/or core analysis that indicate that the subject reservoir is hydrocarbon-bearing and is analogous to reservoirs in the same area that are producing or have demonstrated the ability to produce on formation tests
Several of these criteria were applied to Proved Reserves only before
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Project Maturity - Reserves
On Production The development project is currently producing and selling petroleum to market
Approved for Development All necessary approvals have been obtained, capital funds have been committed, and implementation of the development project is under way
Justified for Development Implementation of the development project is justified on the basis of reasonable forecast commercial conditions at the time of reporting, and there are reasonable expectations that all necessary approvals/contracts will be obtained
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Project Maturity – Contingent Resources
Development PendingA discovered accumulation where project activities are ongoing to justify commercial development in the foreseeable future
Development Unclarified or on Hold A discovered accumulation where project activities are on hold and/or where justification as a commercial development may be subject to significant delay
Development Not Viable A discovered accumulation for which there are no current plans to develop or to acquire additional data at the time due to limited production potential
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Project Maturity – Prospective Resources
Prospect A project associated with a potential accumulation that is sufficiently well defined to represent a viable drilling target
Lead A project associated with a potential accumulation that is currently poorly defined and requires more data acquisition and/or evaluation in order to be classified as a prospect
PlayA project associated with a prospective trend of potential prospects, but which requires more data acquisition and/or evaluation in order to define specific leads or prospects
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Developed and Undeveloped Reserves
“Developed Reserves are expected quantities to be recovered from existing wells and facilities”“Undeveloped Reserves are quantities expected to be recovered through future investments”
Thus these subdivisions are applied to all Reserves categories, not just Proved
Regarding the distinction between DNP and UD, the PRMS says:“Undeveloped Reserves [are] ... where a relatively large expenditure (e.g. when compared to the cost of drilling a new well) is required to (a) recompletean existing well or (b) install production or transportation facilities for primary or improved recovery projects
This is useful, but there is no quantitative guidance given
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Project Maturity – Economic Status
“All projects classified as Reserves must be economic under defined conditions”Contingent Resources are divided into Marginal and Sub-Marginal quantities
MarginalTechnically feasible and economic, but not committed due to some other contingency
Sub-MarginalTechnically feasible, but not economic and/or other contingencies exist
These are additional status descriptors to the sub-classes in the Classification FrameworkThe PRMS indicates that these different sets of groups can be used together, but it is not yet clear how this will work in practice
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Resources Volume Categorization
The PRMS recognizes three distinct approaches to volume categorization
Deterministic incremental (“risk-based”)Proved, Probable, PossibleThere are no “incremental” categories for CR or PR, so by inference this is expected to be applied to Reserves only
Deterministic scenario (“cumulative”) 1P, 2P, 3P1C, 2C, 3CLow, Best, High Estimates
ProbabilisticP90, P50, P10
Probabilistic method may be applied to any volume, it is most often applied to volumetric calculations in the early phases of an exploitation and development project
Although not mentioned, it is also typically applicable for Prospective Resources
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SPE Illustration of Uncertainty
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Proved Reserves Comparison
Very similar definitions, with the key difference being the use of “defined” economic conditions
Still requires “reasonable certainty”
Proved Reserves are those quantities of petroleum, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods, and government regulations
If deterministic methods are used, the term reasonable certainty is intended to express a high degree of confidence that the quantities will be recoveredIf probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate
Proved reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under current economic conditions, operating methods, and government regulations
If deterministic methods are used, the term reasonable certainty is intended to express a high degree of confidence that the quantities will be recoveredIf probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate
CommentsSPE PRMS 2007SPE/WPC 1997
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Proved Reserves ComparisonSEC and SPE
Both definitions require “reasonable certainty”
Proved Reserves are those quantities of petroleum, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be commerciallyrecoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods, and government regulations
If deterministic methods are used, the term reasonable certainty is intended to express a high degree of confidence that the quantities will be recoveredIf probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate
Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made
Prices include consideration of changes in existing prices provided by contractual arrangements, but not on escalations based upon future conditions
CommentsSPE PRMS 2007SEC 1978
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Reasonable Certainty – SEC Guidance
“The determination of reasonable certainty is generated by supporting geological and engineering data
There must be data available which indicate that assumptions such as decline rates, recovery factors, reservoir limits, recovery mechanisms and volumetric estimates, gas-oil ratios or liquid yield are valid
If the area in question is new to exploration and there is little supporting data for decline rates, recovery factors, reservoir drive mechanisms etc., a conservative approach is appropriate until there is enough supporting data to justify the use of more liberal parameters for the estimation of proved reserves
The concept of reasonable certainty implies that, as more technical data becomes available, a positive, or upward, revision is much more likely than a negative, or downward, revision”
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Probable Reserves Comparison
Removed mathematical inconsistency in the definitions of Probable and 2P
Probable Reserves are those additional Reserves which analysis of geoscience and engineering data indicate are less likely to be recovered than Proved Reserves but more certain to be recovered than Possible Reserves. It is equally likely that actual remaining quantities recovered will be greater than or less thanthe sum of the estimated Proved plus Probable Reserves (2P)
In this context, when probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the 2P estimate
Probable reserves are those unproved reserves which analysis of geological and engineering data suggests are more likely than not to be recoverable
In this context, when probabilistic methods are used, there should be at least a 50% probability that the quantities actually recovered will equal or exceed the sum of estimated proved plus probable reserves
CommentsSPE PRMS 2007SPE/WPC 1997
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Probable Reserves
Probable Reserves may be assigned to areas of a reservoir adjacent to Proved where data control or interpretations of available data are less certain
The interpreted reservoir continuity may not meet the reasonable certainty criteria
Probable estimates also include incremental recoveries associated with project recovery efficiencies beyond that assumed for Proved
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Possible Reserves Comparison
Essentially identical definitionsPossible Reserves are those additional reserves which analysis of geoscience and engineering data indicate are less likely to be recoverable than Probable Reserves
The total quantities ultimately recovered from the project have a low probability to exceed the sum of Proved plus Probable plus Possible (3P), which is equivalent to the high estimate scenarioWhen probabilistic methods are used, there should be at least a 10% probability that the actual quantities recovered will equal or exceed the 3P estimate
Possible reserves are those unproved reserves which analysis of geological and engineering data suggests are less likely to be recoverable than probable reserves
In this context, when probabilistic methods are used, there should be at least a 10% probability that the quantities actually recovered will equal or exceed the sum of estimated proved plus probable plus possible reserves
CommentsSPE PRMS 2007SPE/WPC 1997
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Possible Reserves
Possible Reserves may be assigned to areas of a reservoir adjacent to Probable where data control and interpretations of available data are progressively less certain
Frequently, this may be in areas where geoscience and engineering data are unable to clearly define the area and vertical reservoir limits of commercial production from the reservoir by a defined project
Possible estimates also include incremental quantities associated with project recovery efficiencies beyond that assumed for Probable
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Contingent Resources Comparison
Essentially identical definitionsContingent Resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations, but the applied project(s) are not yet considered mature enough for commercial development due to one or more contingencies
Contingent Resources are those quantities of petroleum which are estimated, on a given date, to be potentially recoverable from known accumulations, but which are not currently considered to be commercially recoverable
CommentsSPE PRMS 2007SPE/WPC/AAPG 2000
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Contingent Resources
CONTINGENT RESOURCES may include, for example, projects for which there are currently no viable markets, or where commercial recovery is dependent on technology under development, or where evaluation of the accumulation is insufficient to clearly assess commerciality
Contingent Resources are further categorized in accordance with the level of certainty associated with the estimates and may be sub-classified based on project maturity and/or characterized by their economic status
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Prospective Resources Comparison
Essentially identical definitionsProspective Resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects
Prospective Resources are those quantities of petroleum which are estimated, on a given date, to be potentially recoverable from undiscovered accumulations
CommentsSPE PRMS 2007SPE/WPC/AAPG 2000
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Prospective Resources
PROSPECTIVE RESOURCES have both an associated chance of discovery and a chance of development
Prospective Resources are further subdivided in accordance with the level of certainty associated with recoverable estimates assuming their discovery and development and may be sub-classified based on project maturity
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Unrecoverable
UNRECOVERABLE is that portion of Discovered or Undiscovered Petroleum Initially-in-Place quantities which is estimated, as of a given date, not to be recoverable by future development projects
A portion of these quantities may become recoverable in the future as commercial circumstances change or technological developments occur; the remaining portion may never be recovered due to physical/chemical constraints represented by subsurface interaction of fluids and reservoir rocks
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Additional Comments on Reserves
ReservesTo qualify for allocation of volumes as Reserves, a project must be shown to have passed the relevant commerciality confidenceFor both primary and enhanced recovery projects, the requirements are now similar to those that were previously applied to Proved Reserves only
No ProvedIt is permissible to report Probable and/or Possible Reserves even if the low estimate fails to qualify as Proved Reserves (for instance, it does not pass the economic test)It is not necessary or appropriate to relegate all volumes to Contingent Resources in such cases
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Unconventional Resources
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Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserve Information
Although the standards have no legal or other force, they represent a generally-accepted set of guidelines for the conduct of Reserves Estimation and Auditing
The original version was published in 1977 and last updated in 2001
The current 2007 edition:Includes modifications required to incorporate the latest PRMS
Although it remains concerned with Reserves only at presentClarifies the terms “auditors” and “auditing”, as well as “process review”Acknowledges the integration of geoscience with engineering in the preparation of reliable reserves information
Companies may require their internal or external Reserves Estimators and Auditors to comply with these standards
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Conclusions
The PRMS is a major contribution to international oil and gas resources management and one that many companies will adopt
There is clear recognition of the different ways that reserves and resources can be estimated and these are all embraced within the system
Certain changes in procedures will probably be required to ensure that the differences with the prior definitions are recognized and incorporated into resource reporting
Nothing will change with respect to reporting Proved reserves to the SEC
Contingent Resources should become better understood and more acceptable as a valid resource category and not just “not reserves”
The revised “Standards” document should remain a valuable guidebook in the practical and ethical application of reserves estimation and auditing procedures
Project No. D105
An Industry Presentation
Rawdon J.H. SeagerGaffney, Cline & Associates
www.gaffney-cline.com
SPE Petroleum Resources Management System (PRMS)
Sponsored by SPE/WPC/AAPG/SPEEApproved March 2007
Project No. D105
Technical and Management Advisers to the Petroleum Industry Internationally since 1962