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OIL AND GAS RESERVES ESTIMATING
WE HAVE MET THE ENEMY, AND HE IS US
Peter R. Rose
Senior Associate, Rose & Associates, LLP., and President AAPG
Austin, Texas
1. Write your name on the form
2. Follow instructions
3. Try hard to answer objectively
4. Write your answers down
5. No joint ventures -- work independently
6. P90 is a small number; P10 is a large number
RULES OF THE GAME
DETERMINISTIC ESTIMATE
A single number (best guess) among a wide range of possible real outcomes.
Low confidence in being precisely correct.
Amount of uncertainty affects willingness to invest in your estimate.
FOR $20, HOW MUCH ARE YOU PREPARED TO BET THAT YOUR BEAN-ESTIMATE IS EXACTLY CORRECT?
$10?$5?
$2?$1?
50¢?20¢?
10¢?5¢?
Chance of estimating
the exact number of beans?
!REMOTE!
UNCERTAINTY & CONFIDENCE
EXPRESSING CONFIDENCE I
• Traditional Engineering Convention -- ±10%?
• Ranges of Numbers Corresponding to Confidence:
Confidence (=,>)
> 10 beans
> 100 beans
> 1,000 beans
> 200 beans
> 2,000 beans
> 20,000 beans
very, very high
high
moderate
fairly high
low
very, very low
Confidence (=,>)
EXPRESSING CONFIDENCE II
LET US SPECIFY:
“High Confidence” = 90% sure =, > P90 value
“Low Confidence” = 10% sure =, > P10 value
“50/50 Confidence” = 50% sure =, > P50 = Median
Superiority Of Probabilistic Method
“. . . still just estimates cloaked in probabilities?”
Advantages:
1. Measure our estimating accuracy by comparing probabilistic forecasts against actual outcomes
2. Use statistical principles to make better estimates (lognormal expectation, calculate mean of distribution, defined low-side & high-side criteria
P1 Geologically possible; but extremely unlikely P10 Reasonable Maximum P50 Half below, Half above, the Median P90 Reasonable MinimumP99 As small as it could be . . . Yet detectable
PRACTICAL ATTRIBUTES OF KEY PARAMETERS
Boundary Conditions
80% confidence level
Superiority Of Probabilistic Method
“. . . still just estimates cloaked in probabilities?”
Advantages:
1. Measure our estimating accuracy by comparing probabilistic forecasts against actual outcomes
2. Use statistical principles to make better estimates (lognormal expectation, calculate mean of distribution, defined low-side & high-side criteria
3. Reality-checks -- natural limits, unrealistic extremes, analog distributions
4. Faster, more efficient
Compare your original “best estimate” (circled number, item 2, colored form) with your neighbor
Does anyone in the audience have a circled number that is EXACTLY
Another bean slide . . .
New confidence-level:
NOTE: REASONABLE CERTAINTY NOTE: REASONABLE CERTAINTY ≠ “BEST GUESS≠ “BEST GUESS
I am “Reasonably Certain” that there are ________ beans or more.
NOTE: THIS IS A PROBABILITY STATEMENT, ALTHOUGH NO PROBABILITY (= CONFIDENCE LEVEL) IS SPECIFIED
WHAT IS YOUR REASONABLE CERTAINTY?50%? 67%? 75%? 80%? 90%? 95%? 99%?
HOW CAN YOU MEASURE YOUR ESTIMATING HOW CAN YOU MEASURE YOUR ESTIMATING ABILITY USING AN UNDEFINED CRITERION?ABILITY USING AN UNDEFINED CRITERION?
444466
COMPLICATIONS
1. A larger estimate may be in your personal interest
2. Your boss may prefer larger to smaller estimates
3. Possible consequences if actual result is less than your estimate
a) Negative Press
b) Employer Disciplines
c) State Penalizes
U.S. SEC REFUSES TO SPECIFY THE CONFIDENCE-LEVEL OF“REASONABLE CERTAINTY”
99%?
80%?
95%?
67%?
90%?75%?
98%?
50%?
“Proved” Reserves
. . . are the estimated quantities which geological and engineering data demonstrate with reasonable certainty to be recoverable. . .
.sec.gov / divisions / corpfin / forms / regsx. htm
This is the foundational statement of what we think is an outdated (1978) system.
Let’s take a look at the evolution of the wording
reas
onab
le c
erta
inty
www
1936
Every reasonable probability
1964
Reasonable certainty
1976
CapenSPE 5579
1981
Revised def.for proved
1987
Provedprobable &possible
1978
Proved w reasonable
certainty
APIYergin and Hobbs, 2005 ogj
SPE
US SEC 1982
Year-endpricing
1997
Probabilistic methods
guidelinespublished
“Proved” Reservesre
ason
able
cer
tain
ty
DETERMINISM GETS INCREASINGLY COMPLEX
• Proved, Probable, Possible
• Developed & Undeveloped
• Weighting schemes to account for uncertainty
• ? Applicability to Undrilled Prospects and Plays?
PROBABILISTIC ESTIMATING COMES TO PETROLEUM EXPLORATION (≈ 1985 )
• Exploration is a “repeated-trials game” of many uncertain ventures
• Statistical treatment is appropriate
• Statistics = “Language of Uncertainty”
• Aids to Improved Estimating -- LognormalityReality ChecksProject post-audits improved estimating skills
• Leads to Portfolio Management
PROBABILISTIC ESTIMATING: STANDARD EXPLORATION PRACTICE
• Tipping Point mid-1990s
• SPE/WPC acknowledged in 1997, recognizing both Deterministic and Probabilistic approaches
• SPE/WPC recommendation:
Proved = 90% Confidence
Reserves Estimating: A Divided Industry
Exploration:Fully Probabilistic
Production: Mostly Deterministic (Proved, Probable, Possible,
Developed, Undeveloped, etc.)
TWO VIEWS OF E&P WORK:Deterministic View: Probabilistic
View:
TIM
E &
$$
← UNCERTAINTY →T
IME
& $
$← UNCERTAINTY →
“THE ANSWER”
(Determinism)P
90
P50
P10
STOP!
Use this time & $$ to find other
prospects
Determinism Promotes Unaccountability
Attempts to represent highly uncertain parameters with a single, “precise” number, and without expressing how much uncertainty surrounds it.
Proved, Probable, Possible: terms not defined quantitatively, so impossible to measure and calibrate estimating abilities objectively
So the Deterministic Method is unaccountable to:
Professionals
Clients and Employers
Investors
General Public
PROBABILISTIC METHODS PROMOTE ACCOUNTABILITY
All possible outcomes are assigned likelihood of occurrence
Compare estimates with outcomes:
• Detects and measures bias
• Encourages learning and improved estimating
Compatible with Portfolio Management
Adaptable to considerations of Chance of Success
Can be universally applied to all E&P projects
(Plays, Prospects, Developments, Workovers, EOR’s, etc.)
? Resistance to change?? Resistance to change?
? Propped up by SEC?? Propped up by SEC?
? Accountants can’t deal with uncertainty?? Accountants can’t deal with uncertainty?
? Encourages false confidence?? Encourages false confidence?
? Desire to remain unaccountable?? Desire to remain unaccountable?
DETERMINISM ENCOURAGES UNREALISTIC THINKING ABOUT HIGHLY
UNCERTAIN RESOURCE VALUES
• Executives, Board Members, Bankers, Analysts, Stockholders
• Enables Decision-makers to maintain unwarranted confidence
• Discourages realistic assessments of uncertainty and risk
One Simple Remedy to Start Fixing the Problem
A unified statement from the E&P professional community that “Proved” = 90% confidence.
•Imposed Definition on SEC
•Support of Professional Societies?
•Support of Influential Companies?
Industry professionals created this problem -- Industry professionals created this problem --
Why don’t we, as responsible Professionals, change it?Why don’t we, as responsible Professionals, change it?
(Walt Kelly, POGO)