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The world of reserve definitions—can there be one set for everyone?
57
T h e w o r l d of reserve definitions - - can there be one set for e v e r y o n e ? T.J. Beardall
Within the oil and gas industry, the search for a consistent world-wide set of definitions for reserve quantities has been an elusive goal for many years. This paper discusses some of the historical and technical issues which separate the industry into the "deterministic" and "probabilistic" camps. It also reviews the attempts by the Society of Petroleum Engineers to promote its definitions as a world-wide standard and summarises feed-back from the membership. Finally, the paper tries to look to the future and offers some thoughts on how an industry wide set of reserve definitions might be achieved.
Introduction
reserves and they represent only a small part of the total resource base as illustrated by Fig. 1. In this paper I will concentrate on definitions of reserves; the remainder of the resource base will be the subject of other papers in this volume. Reserves numbers are used by the numerous stakeholders in the oil and gas industry. They are needed for diverse purposes such as field development plan-
The petroleum resource base can be classified in a number of ways but all classifications recognise both geological and economic uncertainties. Within a classification system, some part of the resource base will have been discovered and is economically recoverable. These estimated quantities are called
THE WORLD OF RESERVES DEFINITIONS RESERVES AND RESOURCES
Resources
I
I
Discovered resources
Undiscovered resources
or
or
initial volumes in place
future initial volumes in place
I Initial reserves
Unrecoverable volumes
I Future initial reserves
I Future unrecoverable volumes
I
- currently uneconomic volumes - residual unrecoverable volumes
Fig. 1. Classification of resources and reserves.
Quantification and Prediction of Petroleum Resources edited by A.G. Dorfi and R. Sinding-Larsen. NPF Special Publication 6, pp. 57-62, Elsevier, Amsterdam. 9 Norwegian Petroleum Society (NPF), 1996.
58
T.J. Beardall
ning, company strategic planning, loan financing, financial reporting, mergers, acquisitions and government reporting. They are used by reservoir engineers and geoscientists, economists, accountants, financial analysts and civil servants to name but a few, each with his or her perspective on what a reserve number should represent. To add to this diversity of opinion, there are different oil industry cultures around the world that have resulted in different concepts of what reserves numbers should represent. For instance, there is little correlation between the Middle East view centred on OPEC quotas and the requirements of the United Stated Securities and Exchange Commission (SEC). Against this background, a number of organisations such as the World Petroleum Congress (WPC) and the Society of Petroleum Engineers (SPE) have tried to develop and promote reserve definitions that can be used as an industry standard on a worldwide basis. In particular, the SPE published revised definitions in 1987. Given the SPE's large international membership, the SPE Board hoped that, if the revised definitions were acceptable within the SPE, they would quickly become the industry standard. In practice, the definitions were not accepted by the world-wide membership and the industry is still a long way from achieving a consensus. The main purpose of this paper is to discuss the SPE consultation process and the subsequent attempt to modify the reserves definitions before looking to a way forward. However, it is important for the reader to understand some of the issues concerning the history and basis of the main reserve definitions used in the industry. These are also discussed.
North Sea and other frontier areas. The application of probabilistic definitions was originally developed within Shell. They were first used publicly in the United Kingdom in 1982 during the privatisation of British Gas. Within the probabilistic definitions the word Proven was used to describe the 90% probability that the reserves would be larger than the number quoted. Corresponding probabilities of 50% and 10% were used to describe Proven + Probable and Proven 4- Probable + Possible categories. Although the words used are virtually identical to the deterministic definitions, they describe different quantities and concepts and this has led to confusion and misunderstanding ever since (D.R. Keith et al., 1986). In 1984, the WPC published a similar classification system to the SPE, and then in 1987 the SPE published a revised set of definitions which formally introduced Probable and Possible reserves categories: Probable being "less certain" than Proved and Possible being "less certain" than Probable. Proved reserves were to be estimated using "current prices and costs" with no escalation for inflation. Based on comments, particularly from the European sections, that they could not use the revised definitions, the SPE set up a task force and then proposed further revisions in 1991. The main changes were the introduction of confidence levels to try and quantify what is meant by "reasonable certainty" and the use of "specified" rather than "current" prices and costs. Finally in 1993, the Canadian Institute of Mining, Metallurgy and Petroleum has published a set of definitions for use in Canada which have many similarities to the proposed 1991 SPE revisions.
History of reserves definitions
Comparison of probabilistic and deterministic definitions
In the late 1930s, the American Petroleum Institute started to classify reserves and these were reported in its annual bulletins using the term Proved reserves. In 1965, the SPE published its first definition of reserves and this used the words "reasonable certainty" to describe Proved reserves. In 1979, the SEC issued its own similar definitions and shortly thereafter in 1981, the SPE updated its definitions to reflect the improvements in technology that had occurred over the period. However, the wording and concepts within both the SEC and SPE definitions were firmly based on single onshore wells. Also in this period, engineers had started to use the terms Probable and Possible to describe reserves which could not be classified as Proved. Meanwhile, it had been recognised that some of the restrictions within the definitions were not appropriate for the development of large offshore fields in the
Although there are many institutions promoting different reserve definitions, most can be divided into two camps: those using a deterministic approach based on the SPE and SEC definitions, and those based on probabilistic concepts. As mentioned previously, the deterministic definitions have been developed using single onshore wells as the primary quantification unit. Estimates are typically made using either decline curve analysis or relatively simple volumetric calculations where the uncertainty is mainly in the drainage area of the well and the likelihood of offset locations being productive. All other parameters tend to be best estimates although there are limitations on the use of hydrocarbon contacts. Finally, to reflect the incremental investments required, the Proved reserves are classified into developed and undeveloped categories.
The w o r m o f reserve definitions ~ can there be one set f o r everyone ?
Reserves estimated on a field scale are often built up from single well values so that Proved reserves tend to grow as more wells are drilled. Once a field is fully developed all the reserves are considered Proved and any uncertainty in reservoir performance is rarely quantified. Conversely, probabilistic definitions have been developed to describe large accumulations, often offshore, where the primary quantification unit is on a field scale. The whole approach is to recognise and quantify uncertainty for all parameters and then define an overall probability distribution for the field, based either on volumetric calculations or reservoir performance. The Proven reserves are always at a constant confidence level (usually 90%), while the Proven + Probable reserves are at a 50% confidence level. For practical purposes, the Proven + Probable reserves represent a most likely or best estimate for the field reserves at all stages of development. Finally, the reserves at all confidence levels are classified into Commercial, Potentially Commercial and Technical categories dependent on their economic and approval status. Economics are based on forecast prices and costs.
To help illustrate how the two sets of reserve definitions are applied, Fig. 2 shows a hypothetical field with two fault blocks. Block A to the east is fully developed. It has been on production for some time using a peripheral waterflood. Block B to the west is
59
undrilled but it is believed that the fault separating the two blocks probably seals. The engineer has made a deterministic best estimate of 50 MMstb (million stock tank barrels) recoverable from Block A and 10 MMstb recoverable from Block B assuming the two blocks have a common oil water contact. Under deterministic definitions, all of Block A would be considered Proved, i.e. 50 MMstb. Block B, because it is undrilled, would be classified as Probable. Additional Possible reserves might be considered based on a deeper contact in Block B but this scenario will often be ignored. Under probabilistic definitions, there will be both volumetric and recovery factor uncertainty in Block A. Block B is even more uncertain; it might not be oil bearing, it could be in communication with Block A or it could have a significantly deeper oil water contact. All these possibilities would be included in the probability distribution illustrated in Fig. 2. As a result, the reserves at the 90% confidence level would be only 35 MMstb with a corresponding upside of 70 MMstb at the 10% confidence level. In this case, the 50% confidence level or Proven + Probable reserves coincide with the deterministic Proved estimate of 50 MMstb. However, it needs to be recognised that the two estimates might not represent the same "barrels". For example, an actual recovery of 50 MMstb could be made up of a low recovery factor in Block A offset by additional reserves in Block B.
Fig. 2. An example of the application of deterministic and probabilistic reserve definitions.
T.J. Beardall
60
The other point to note is that the deterministic Proved § Probable estimate lies between the 50% and 10% confidence levels. In this case, it corresponds to about the 30% confidence level, so the overall range of the deterministic reserve estimates is much narrower than in the probabilistic case.
The SPE process The revised SPE definitions were published in 1987. In response to the SPE Board's desire to promulgate the definitions world-wide, a European Reserves Definitions Committee with representatives from a large number of oil companies and government institutions was set up. Many of the discussions were complex but in essence the committee concluded that the SPE definitions could not be used in a European context for two main reasons: lack of definition of what is meant by "reasonable certainty", and the specification of current prices and costs. These findings were reported to the SPE Board and as a result a task force was set up to try and address the concerns raised by the European committee and others. This task force recommended that numerical confidence levels should be associated with the words Proved (80 to 90%), Proved + Probable (50%) and Proven -t- Probable + Possible (10 to 20%). The wording was changed to emphasise that these confidence levels were not necessarily probabilities but a measure of the confidence the estimator had in the reserve estimate, as illustrated in Fig. 3. The task force also
recommended that the use of current prices and costs should be changed to specified economic conditions with the rider that current prices and costs were the industry standard. The proposed revisions were published for comment in 1991. Table 1 shows a brief summary of the responses by geographical area and the level of agreement with the two main issues. As can be seen, the proposals were generally widely accepted outside the USA and there was reasonable support from within the USA. However, many of the concerns in the USA were directed at the requirements of the SEC and this was particularly evident from the responses of the large group of US based consultants. The consultants and other respondees argued that the revised definitions were in conflict with the SEC. In particular, they objected to the use of specified rather than current prices and costs, and recommended that the SPE definitions should not be changed until the SEC changed. Table 1 SPE 1991 proposed divisions: summary of responses Area
Number of comments
Agreement with confidence levels (%)
Agreement with specified economics (%)
USA Canada Europe Rest of the world
86 2 18 9
35 100 89 67
24 100 94 45
US consultants
18
16
22
Fig. 3. Use of confidence levels - - SPE proposals.
The world of reserve definitions - - c a n there be one set for everyone?
The detailed responses also confirmed some earlier observations that for fields with good production history, estimators were using their best estimate as the Proved reserve: corresponding to Proven 4- Probable reserves under probabilistic terminology. This was not the case at the earlier stages of field development where Proved reserves tended to agree more closely with the 90% confidence level. It was therefore clear from the responses that the term "reasonable certainty" corresponds to a varying confidence level which is dependent on the stage of development of the field. This varying confidence level appears to be the biggest stumbling block in the way of bringing the two types of definitions together. One of the other issues of debate was that under probabilistic definitions there is an obvious problem with aggregation of reserves. If probabilistic estimates are added arithmetically then, other than at the 50% probability level, the probabilities are not preserved and the lower and upper bounds therefore become increasing pessimistic or optimistic respectively. Theoretically therefore, providing that the reasons for the uncertainty are not common to all fields, reserve estimates should be added probabilistically to preserve the correct confidence levels. This creates presentation problems with tables that "do not add up". This point was used to argue against using probabilistic definitions. However in reality, the same problems occur with deterministic definitions. If the confidence levels vary from one field to another depending on the development status, i.e. the estimator is adding a 90% confidence level estimate with a 50% confidence level estimate then the problem is at least as bad as for probabilistic estimates reserves. The estimator certainly has no idea what the resultant confidence level might be. The other major concern was that the SEC and, as a consequence, the SPE does not allow the disclosure or routine reporting of Probable and Possible reserves. Much of the potential resource base is hidden and therefore there is a tendency to call a reserve Proved to give it value. By specifying that Proved reserves had to correspond to an 80% confidence level there would undoubtedly be reserve write downs which could only be compensated for by disclosing Probable reserves. This is against the SEC rules. Following the membership feedback, some further modifications were made in an attempt to resolve some of the issues and address the membership concerns. The modifications also tried to further distance the definitions from probabilistic concepts to combat the ignorance and misconceptions which were evident from the initial responses. However, after a further restricted round of comment, the SPE Board has decided that there is insufficient consensus to move
61
forward and the modifications have been shelved for the time being.
The future As mentioned in the introduction, there are different cultures throughout the oil industry and the debate on reserves definitions has highlighted many areas of ignorance and misunderstanding on all sides. Before attempting to revise the definitions again, the SPE intends to try to reduce the level of misunderstanding. A number of vehicles are being considered such as a Forum series, panel discussions and conference papers. However, a number of key issues will also have to be resolved, particularly the dominant influence of the SEC reporting requirements. One way forward may be for the SEC and the industry to adopt a "Canadian style" system. The Standing Committee of the Canadian Institute of Mining, Metallurgy and Petroleum (CIMMP) has recently published a report (DeSorcy et al., 1993) detailing proposed reserve definitions for use in Canada. The report also gives some simple guidelines as to how the definitions should be applied. In Canada, reporting of Probable reserves is allowed, as is the use of specified prices and costs. The CIMMP defines Proved reserves at the 80% probability level while Probable reserves are those between 40 and 80% probability. While the system can be criticised on a number of minor points it is a good attempt to fit both the deterministic and probabilistic camps together without needing to run Monte Carlo simulations every time. As well as Proved, Probable and Possible reserves, the CIMMP specifies that Expected reserves can be calculated using: Expected reserves = Proved + (Pb x Probable) + (Ps x Possible) where Pb = probability of recovering the probable reserves (80 to 40%), and P~ = probability of recovering the possible reserves (40 to 10%). The expected reserves can be aggregated to give a likely out-turn for a large number of reservoirs. The Canadian system is very similar to the proposed revisions to the SPE definitions and therefore suffers from many of the same problems in gaining acceptance. However, if we are to achieve a worldwide system something similar is needed, and the author believes the Canadian system should be used as a model for further debate.
Conclusions The major difficulties with bringing deterministic and probabilistic definitions into a common system
T.J. Beardall
62
centre on two main issues. Firstly, the term "reasonable certainty" used to define Proved reserves under a deterministic system has a changing probability which is dependent on development status or production history. Secondly, the restrictions imposed by the SEC in forcing the use of current prices and costs and the non-disclosure of Probable and Possible reserves means that a major part of the resource base is hidden. This conflicts with practice in many other parts of the world where full disclosure is encouraged. The future has to be to define a constant confidence level for Proved and then to allow disclosure of other categories of reserves. Therefore either the SPE has to break the SEC chain or the SEC itself will need to change. This process will require time, effort and education. It is possible to have a single set of reserve definitions and the Canadian system may be a way forward. There can be one set for everyone ~ but not yet.
T.J. BEARDALL
References DeSorcy, G.J., Warne, G.A., Ashton, B.R., Campbell, G.R., Collyer, D.R., Drury, J., Lang, R.V., Robertson, W.D., Robinson, J.G. and Tutt, D.W., 1993. Definitions and guidelines for classification of oil and gas reserves. J. Can. Pet. Technol., May, pp. 10-21. Eleventh World Petroleum Congress, 1984. 1933 and 1983 Study group report, classification and nomenclature systems for petroleum and petroleum reserves. Keith, D.R., Wilson, D.C. and Gorsuch, D.P., 1986. Reserve definitions - - an attempt at consistency. Society of Petroleum Engineers European Offshore Petroleum Conference, London, October, SPE Paper 15865. Society of Petroleum Engineers, 1965. Definitions of proved reserves for property evaluation. J. Pet. Technol., July, p. 815. Society of Petroleum Engineers, 1981. Proved reserves definitions. J. Pet. Technol., Nov., pp. 2113-2114. Society of Petroleum Engineers, 1987. Definitions for oil and gas reserves. J. Pet. Technol., May, pp. 577-588. Society of Petroleum Engineers, 1991. SPE considering changes for reserves definitions. J. Pet. Technol., June, pp. 708-709.
ERC Tigress Ltd., Chapel House, Liston Road, Marlow, Bucks, SL7 1XJ, UK Present address: T.J. Beardall and Associates, Ltd., 2 Silver Lane, West Challow Wantage, Oxon 0X12 9TX, UK
T h e w o r l d of reserve definitions - - can there be one set for e v e r y o n e ? T.J. Beardall
Within the oil and gas industry, the search for a consistent world-wide set of definitions for reserve quantities has been an elusive goal for many years. This paper discusses some of the historical and technical issues which separate the industry into the "deterministic" and "probabilistic" camps. It also reviews the attempts by the Society of Petroleum Engineers to promote its definitions as a world-wide standard and summarises feed-back from the membership. Finally, the paper tries to look to the future and offers some thoughts on how an industry wide set of reserve definitions might be achieved.
Introduction
reserves and they represent only a small part of the total resource base as illustrated by Fig. 1. In this paper I will concentrate on definitions of reserves; the remainder of the resource base will be the subject of other papers in this volume. Reserves numbers are used by the numerous stakeholders in the oil and gas industry. They are needed for diverse purposes such as field development plan-
The petroleum resource base can be classified in a number of ways but all classifications recognise both geological and economic uncertainties. Within a classification system, some part of the resource base will have been discovered and is economically recoverable. These estimated quantities are called
THE WORLD OF RESERVES DEFINITIONS RESERVES AND RESOURCES
Resources
I
I
Discovered resources
Undiscovered resources
or
or
initial volumes in place
future initial volumes in place
I Initial reserves
Unrecoverable volumes
I Future initial reserves
I Future unrecoverable volumes
I
- currently uneconomic volumes - residual unrecoverable volumes
Fig. 1. Classification of resources and reserves.
Quantification and Prediction of Petroleum Resources edited by A.G. Dorfi and R. Sinding-Larsen. NPF Special Publication 6, pp. 57-62, Elsevier, Amsterdam. 9 Norwegian Petroleum Society (NPF), 1996.
58
T.J. Beardall
ning, company strategic planning, loan financing, financial reporting, mergers, acquisitions and government reporting. They are used by reservoir engineers and geoscientists, economists, accountants, financial analysts and civil servants to name but a few, each with his or her perspective on what a reserve number should represent. To add to this diversity of opinion, there are different oil industry cultures around the world that have resulted in different concepts of what reserves numbers should represent. For instance, there is little correlation between the Middle East view centred on OPEC quotas and the requirements of the United Stated Securities and Exchange Commission (SEC). Against this background, a number of organisations such as the World Petroleum Congress (WPC) and the Society of Petroleum Engineers (SPE) have tried to develop and promote reserve definitions that can be used as an industry standard on a worldwide basis. In particular, the SPE published revised definitions in 1987. Given the SPE's large international membership, the SPE Board hoped that, if the revised definitions were acceptable within the SPE, they would quickly become the industry standard. In practice, the definitions were not accepted by the world-wide membership and the industry is still a long way from achieving a consensus. The main purpose of this paper is to discuss the SPE consultation process and the subsequent attempt to modify the reserves definitions before looking to a way forward. However, it is important for the reader to understand some of the issues concerning the history and basis of the main reserve definitions used in the industry. These are also discussed.
North Sea and other frontier areas. The application of probabilistic definitions was originally developed within Shell. They were first used publicly in the United Kingdom in 1982 during the privatisation of British Gas. Within the probabilistic definitions the word Proven was used to describe the 90% probability that the reserves would be larger than the number quoted. Corresponding probabilities of 50% and 10% were used to describe Proven + Probable and Proven 4- Probable + Possible categories. Although the words used are virtually identical to the deterministic definitions, they describe different quantities and concepts and this has led to confusion and misunderstanding ever since (D.R. Keith et al., 1986). In 1984, the WPC published a similar classification system to the SPE, and then in 1987 the SPE published a revised set of definitions which formally introduced Probable and Possible reserves categories: Probable being "less certain" than Proved and Possible being "less certain" than Probable. Proved reserves were to be estimated using "current prices and costs" with no escalation for inflation. Based on comments, particularly from the European sections, that they could not use the revised definitions, the SPE set up a task force and then proposed further revisions in 1991. The main changes were the introduction of confidence levels to try and quantify what is meant by "reasonable certainty" and the use of "specified" rather than "current" prices and costs. Finally in 1993, the Canadian Institute of Mining, Metallurgy and Petroleum has published a set of definitions for use in Canada which have many similarities to the proposed 1991 SPE revisions.
History of reserves definitions
Comparison of probabilistic and deterministic definitions
In the late 1930s, the American Petroleum Institute started to classify reserves and these were reported in its annual bulletins using the term Proved reserves. In 1965, the SPE published its first definition of reserves and this used the words "reasonable certainty" to describe Proved reserves. In 1979, the SEC issued its own similar definitions and shortly thereafter in 1981, the SPE updated its definitions to reflect the improvements in technology that had occurred over the period. However, the wording and concepts within both the SEC and SPE definitions were firmly based on single onshore wells. Also in this period, engineers had started to use the terms Probable and Possible to describe reserves which could not be classified as Proved. Meanwhile, it had been recognised that some of the restrictions within the definitions were not appropriate for the development of large offshore fields in the
Although there are many institutions promoting different reserve definitions, most can be divided into two camps: those using a deterministic approach based on the SPE and SEC definitions, and those based on probabilistic concepts. As mentioned previously, the deterministic definitions have been developed using single onshore wells as the primary quantification unit. Estimates are typically made using either decline curve analysis or relatively simple volumetric calculations where the uncertainty is mainly in the drainage area of the well and the likelihood of offset locations being productive. All other parameters tend to be best estimates although there are limitations on the use of hydrocarbon contacts. Finally, to reflect the incremental investments required, the Proved reserves are classified into developed and undeveloped categories.
The w o r m o f reserve definitions ~ can there be one set f o r everyone ?
Reserves estimated on a field scale are often built up from single well values so that Proved reserves tend to grow as more wells are drilled. Once a field is fully developed all the reserves are considered Proved and any uncertainty in reservoir performance is rarely quantified. Conversely, probabilistic definitions have been developed to describe large accumulations, often offshore, where the primary quantification unit is on a field scale. The whole approach is to recognise and quantify uncertainty for all parameters and then define an overall probability distribution for the field, based either on volumetric calculations or reservoir performance. The Proven reserves are always at a constant confidence level (usually 90%), while the Proven + Probable reserves are at a 50% confidence level. For practical purposes, the Proven + Probable reserves represent a most likely or best estimate for the field reserves at all stages of development. Finally, the reserves at all confidence levels are classified into Commercial, Potentially Commercial and Technical categories dependent on their economic and approval status. Economics are based on forecast prices and costs.
To help illustrate how the two sets of reserve definitions are applied, Fig. 2 shows a hypothetical field with two fault blocks. Block A to the east is fully developed. It has been on production for some time using a peripheral waterflood. Block B to the west is
59
undrilled but it is believed that the fault separating the two blocks probably seals. The engineer has made a deterministic best estimate of 50 MMstb (million stock tank barrels) recoverable from Block A and 10 MMstb recoverable from Block B assuming the two blocks have a common oil water contact. Under deterministic definitions, all of Block A would be considered Proved, i.e. 50 MMstb. Block B, because it is undrilled, would be classified as Probable. Additional Possible reserves might be considered based on a deeper contact in Block B but this scenario will often be ignored. Under probabilistic definitions, there will be both volumetric and recovery factor uncertainty in Block A. Block B is even more uncertain; it might not be oil bearing, it could be in communication with Block A or it could have a significantly deeper oil water contact. All these possibilities would be included in the probability distribution illustrated in Fig. 2. As a result, the reserves at the 90% confidence level would be only 35 MMstb with a corresponding upside of 70 MMstb at the 10% confidence level. In this case, the 50% confidence level or Proven + Probable reserves coincide with the deterministic Proved estimate of 50 MMstb. However, it needs to be recognised that the two estimates might not represent the same "barrels". For example, an actual recovery of 50 MMstb could be made up of a low recovery factor in Block A offset by additional reserves in Block B.
Fig. 2. An example of the application of deterministic and probabilistic reserve definitions.
T.J. Beardall
60
The other point to note is that the deterministic Proved § Probable estimate lies between the 50% and 10% confidence levels. In this case, it corresponds to about the 30% confidence level, so the overall range of the deterministic reserve estimates is much narrower than in the probabilistic case.
The SPE process The revised SPE definitions were published in 1987. In response to the SPE Board's desire to promulgate the definitions world-wide, a European Reserves Definitions Committee with representatives from a large number of oil companies and government institutions was set up. Many of the discussions were complex but in essence the committee concluded that the SPE definitions could not be used in a European context for two main reasons: lack of definition of what is meant by "reasonable certainty", and the specification of current prices and costs. These findings were reported to the SPE Board and as a result a task force was set up to try and address the concerns raised by the European committee and others. This task force recommended that numerical confidence levels should be associated with the words Proved (80 to 90%), Proved + Probable (50%) and Proven -t- Probable + Possible (10 to 20%). The wording was changed to emphasise that these confidence levels were not necessarily probabilities but a measure of the confidence the estimator had in the reserve estimate, as illustrated in Fig. 3. The task force also
recommended that the use of current prices and costs should be changed to specified economic conditions with the rider that current prices and costs were the industry standard. The proposed revisions were published for comment in 1991. Table 1 shows a brief summary of the responses by geographical area and the level of agreement with the two main issues. As can be seen, the proposals were generally widely accepted outside the USA and there was reasonable support from within the USA. However, many of the concerns in the USA were directed at the requirements of the SEC and this was particularly evident from the responses of the large group of US based consultants. The consultants and other respondees argued that the revised definitions were in conflict with the SEC. In particular, they objected to the use of specified rather than current prices and costs, and recommended that the SPE definitions should not be changed until the SEC changed. Table 1 SPE 1991 proposed divisions: summary of responses Area
Number of comments
Agreement with confidence levels (%)
Agreement with specified economics (%)
USA Canada Europe Rest of the world
86 2 18 9
35 100 89 67
24 100 94 45
US consultants
18
16
22
Fig. 3. Use of confidence levels - - SPE proposals.
The world of reserve definitions - - c a n there be one set for everyone?
The detailed responses also confirmed some earlier observations that for fields with good production history, estimators were using their best estimate as the Proved reserve: corresponding to Proven 4- Probable reserves under probabilistic terminology. This was not the case at the earlier stages of field development where Proved reserves tended to agree more closely with the 90% confidence level. It was therefore clear from the responses that the term "reasonable certainty" corresponds to a varying confidence level which is dependent on the stage of development of the field. This varying confidence level appears to be the biggest stumbling block in the way of bringing the two types of definitions together. One of the other issues of debate was that under probabilistic definitions there is an obvious problem with aggregation of reserves. If probabilistic estimates are added arithmetically then, other than at the 50% probability level, the probabilities are not preserved and the lower and upper bounds therefore become increasing pessimistic or optimistic respectively. Theoretically therefore, providing that the reasons for the uncertainty are not common to all fields, reserve estimates should be added probabilistically to preserve the correct confidence levels. This creates presentation problems with tables that "do not add up". This point was used to argue against using probabilistic definitions. However in reality, the same problems occur with deterministic definitions. If the confidence levels vary from one field to another depending on the development status, i.e. the estimator is adding a 90% confidence level estimate with a 50% confidence level estimate then the problem is at least as bad as for probabilistic estimates reserves. The estimator certainly has no idea what the resultant confidence level might be. The other major concern was that the SEC and, as a consequence, the SPE does not allow the disclosure or routine reporting of Probable and Possible reserves. Much of the potential resource base is hidden and therefore there is a tendency to call a reserve Proved to give it value. By specifying that Proved reserves had to correspond to an 80% confidence level there would undoubtedly be reserve write downs which could only be compensated for by disclosing Probable reserves. This is against the SEC rules. Following the membership feedback, some further modifications were made in an attempt to resolve some of the issues and address the membership concerns. The modifications also tried to further distance the definitions from probabilistic concepts to combat the ignorance and misconceptions which were evident from the initial responses. However, after a further restricted round of comment, the SPE Board has decided that there is insufficient consensus to move
61
forward and the modifications have been shelved for the time being.
The future As mentioned in the introduction, there are different cultures throughout the oil industry and the debate on reserves definitions has highlighted many areas of ignorance and misunderstanding on all sides. Before attempting to revise the definitions again, the SPE intends to try to reduce the level of misunderstanding. A number of vehicles are being considered such as a Forum series, panel discussions and conference papers. However, a number of key issues will also have to be resolved, particularly the dominant influence of the SEC reporting requirements. One way forward may be for the SEC and the industry to adopt a "Canadian style" system. The Standing Committee of the Canadian Institute of Mining, Metallurgy and Petroleum (CIMMP) has recently published a report (DeSorcy et al., 1993) detailing proposed reserve definitions for use in Canada. The report also gives some simple guidelines as to how the definitions should be applied. In Canada, reporting of Probable reserves is allowed, as is the use of specified prices and costs. The CIMMP defines Proved reserves at the 80% probability level while Probable reserves are those between 40 and 80% probability. While the system can be criticised on a number of minor points it is a good attempt to fit both the deterministic and probabilistic camps together without needing to run Monte Carlo simulations every time. As well as Proved, Probable and Possible reserves, the CIMMP specifies that Expected reserves can be calculated using: Expected reserves = Proved + (Pb x Probable) + (Ps x Possible) where Pb = probability of recovering the probable reserves (80 to 40%), and P~ = probability of recovering the possible reserves (40 to 10%). The expected reserves can be aggregated to give a likely out-turn for a large number of reservoirs. The Canadian system is very similar to the proposed revisions to the SPE definitions and therefore suffers from many of the same problems in gaining acceptance. However, if we are to achieve a worldwide system something similar is needed, and the author believes the Canadian system should be used as a model for further debate.
Conclusions The major difficulties with bringing deterministic and probabilistic definitions into a common system
T.J. Beardall
62
centre on two main issues. Firstly, the term "reasonable certainty" used to define Proved reserves under a deterministic system has a changing probability which is dependent on development status or production history. Secondly, the restrictions imposed by the SEC in forcing the use of current prices and costs and the non-disclosure of Probable and Possible reserves means that a major part of the resource base is hidden. This conflicts with practice in many other parts of the world where full disclosure is encouraged. The future has to be to define a constant confidence level for Proved and then to allow disclosure of other categories of reserves. Therefore either the SPE has to break the SEC chain or the SEC itself will need to change. This process will require time, effort and education. It is possible to have a single set of reserve definitions and the Canadian system may be a way forward. There can be one set for everyone ~ but not yet.
T.J. BEARDALL
References DeSorcy, G.J., Warne, G.A., Ashton, B.R., Campbell, G.R., Collyer, D.R., Drury, J., Lang, R.V., Robertson, W.D., Robinson, J.G. and Tutt, D.W., 1993. Definitions and guidelines for classification of oil and gas reserves. J. Can. Pet. Technol., May, pp. 10-21. Eleventh World Petroleum Congress, 1984. 1933 and 1983 Study group report, classification and nomenclature systems for petroleum and petroleum reserves. Keith, D.R., Wilson, D.C. and Gorsuch, D.P., 1986. Reserve definitions - - an attempt at consistency. Society of Petroleum Engineers European Offshore Petroleum Conference, London, October, SPE Paper 15865. Society of Petroleum Engineers, 1965. Definitions of proved reserves for property evaluation. J. Pet. Technol., July, p. 815. Society of Petroleum Engineers, 1981. Proved reserves definitions. J. Pet. Technol., Nov., pp. 2113-2114. Society of Petroleum Engineers, 1987. Definitions for oil and gas reserves. J. Pet. Technol., May, pp. 577-588. Society of Petroleum Engineers, 1991. SPE considering changes for reserves definitions. J. Pet. Technol., June, pp. 708-709.
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