SPE DISTINGUISHED LECTURER SERIESSPE DISTINGUISHED LECTURER SERIESSPE DISTINGUISHED LECTURER SERIESSPE DISTINGUISHED LECTURER SERIES
Is funded principally through a grant of the
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The society gratefully acknowledges those companies that support the program by allowing their professionals to participate allowing their professionals to participate
as lecturers.
And special thanks to The American Institute of Mining metallurgicalAnd special thanks to The American Institute of Mining, metallurgical,
and petroleum engineers (AIME) for their contribution to the program.
2006-2007 SPE distinguished lecturer program2006-2007 SPE distinguished lecturer program
RESERVES MANAGEMENT
AND AUDITABILITY
RESERVES MANAGEMENT
AND AUDITABILITYAND AUDITABILITY
CRITICAL REQUIREMENTS IN TODAY’S
AND AUDITABILITY
CRITICAL REQUIREMENTS IN TODAY’S CRITICAL REQUIREMENTS IN TODAY’S OIL & GAS INDUSTRY
CRITICAL REQUIREMENTS IN TODAY’S OIL & GAS INDUSTRY
T HARRISON
Santos Ltd.
AgendaAgenda
• Reserves and resources – what are they?
F d ti f t t • From production forecasts to reserves
• Uncertainty and risk
• SPE/WPC/AAPG resource framework
• Workflow and audit trail
• 2007 Revisions to SPE/WPC/AAPG System
ReservesReserves
• Reserves are remaining quantities of
hydrocarbons to be commercially produced
• Reserves are remaining quantities of
hydrocarbons to be commercially producedhydrocarbons to be commercially produced
from a known accumulation as of a given date
hydrocarbons to be commercially produced
from a known accumulation as of a given date
under stated definitions and economic conditions.under stated definitions and economic conditions.
Reserves – What are they?Reserves – What are they?
FuelFuel
Losses
Market
Gas
Gas Liquids
Plant
Reserves
Oil
The volume of petroleum expected to be sold from assets in which the entity Reservoir assets in which the entity
has an entitlement
What are resources (and reserves)?What are resources (and reserves)?
• Resources (and reserves) are 100
Contract limit?
are…
– The summation of the future saleable production70
8090
e p
– From a given date forward
– Up to the economic or t t li it
405060
Dai
ly R
ate
contract limit
– NOT just a volume!102030
D
01 3 5 7 9 11 13 15 17
Years
Economic limit?(price and cost
dependent)
Key tests for reservesKey tests for reserves
• Are the hydrocarbons discovered?
• What entitlement do you have to hydrocarbons?• What entitlement do you have to hydrocarbons?
• Is the project commercial?
h h k f h h d b• What is the market for the hydrocarbons, especially for gas?
• What commitment is there to develop infrastructure?• What commitment is there to develop infrastructure?
• NONE of these tests (directly) mention volume!!!!
Tests are more about “Project Maturity”Tests are more about “Project Maturity”
From production forecasts to reservesFrom production forecasts to reserves
Sum of existing plus behind pipe productionSum of existing plus behind pipe production
++++Sum of production from future developmentSum of production from future development
totoTechnical or economic or contract or legal limit
whichever is firstTechnical or economic or contract or legal limit
whichever is firstwhichever is firstwhichever is first
Production forecasts – uncertaintiesProduction forecasts – uncertainties
1. Reservoir consistency/continuity
7. Mechanical integrityy y
2. Drive mechanism 8. Fluid composition
9. Metering accuracy3. Water/gas break through
4. Damage/damage removal10. Vertical lift
11 IOR i t5. Suction pressure profile
6 Impact & timing of
11. IOR impact
12. Market6. Impact & timing of
development 13. Weather
How do we ever get it right?How do we ever get it right?
Reserves are functions of technologyReserves are functions of technology
i d i 899
The Story of Kern River Oil Reserve
• Discovered in 1899.
• After 43 years of operation,i h d f 54 illi b lit had reserves of 54 million barrels.
• In next 43 years, it d d t 54 b t 730 illi b lit produced, not 54 but 730 million barrels.
• At the end of that time, in 1986, it had “remaining reserves” f b t 900 illi b lof about 900 million barrels.
• At end 2000 the field had produced 1,760 million barrels
Adelman, 1987
Reserves uncertaintiesReserves uncertainties
1. Production forecast uncertainties
2. Price uncertainty
3. Cost uncertainty (both Capex & Opex)3. Cost uncertainty (both Capex & Opex)
4. Commercial/legal/political uncertainty
History of reserves definitionsHistory of reserves definitions
Year Organisation Comments
American Petroleum Institute (API)
American Gas Association (AGA) Gas reserve definitions
Oil reserves definitions - first use of term"proved reserves”
1946
1936
( )
API & AGA Published annual 1P U.S. reports of oil, gas and NGL's1946–1979
Society of Petroleum Engineers (SPE)
U.S. Securities & Exchange C i i (SEC)
Issued definitions for proved reserves
Adopted proved reserves definitions similar to API
1978
1964
Commission (SEC)
Issued revised definitions for proved reserves
p
1981
1978
SPE
History of reserves definitionsHistory of reserves definitions
CommentsYear Organisation Comments
Issued expanded definitions for reserves and resources1983
SPE + WPC
World Petroleum Congresses (WPC)*
Published independent definitions for 1P, 2P & 3P reserves1987
1997 SPE/WPC Jointly adopt 1P, 2P & 3P reserve definitions – deterministic & probabilistic
& 3P reserves98
2001
2000
SPE/WPC/AAPG
SPE/WPC/AAPG
Issue evaluation guidelines for reserves & resources
Issue full petroleum resource framework definitions
2001 SPE/WPC/AAPG & resources
2007 SPE/WPC/AAPG/SPEE Combined & updated definitions & guideline for reserve & resources - PRMS
*World Petroleum Congresses has subsequently been renamed "World Petroleum Council"
Risk and uncertaintyRisk and uncertainty
There is a RISK that I am There is a RISK that I am
going to fall off this cliff.going to fall off this cliff.
I am UNCERTAIN how far
it is to the bottom!
I am UNCERTAIN how far
it is to the bottom!it is to the bottom!it is to the bottom!
SPE/WPC/AAPG SYSTEMSPE/WPC/AAPG SYSTEM
Consistent approach to assessment of risk and uncertainty for all assetsConsistent approach to assessment of risk and uncertainty for all assets
RISK j t t itRISK … project maturity
Will the project go ahead?
UNCERTAINTY…
What is the range of estimated recoverable volumes if the project does go ahead?
PLA
CE
ProductionA
CE
IAL
ALLY
IN
-P
Y I
N P
LA
CO
MM
ER
CI
2PPROVED
+PROBABLE
1PPROVED
3PPROVED
+PROBABLE
+
ReservesReserves1PPROVED
ED
IN
ITIA
ITIA
LLY
RC
IAL
C
BESTESTIMATE
LOWESTIMATE
HIGHESTIMATE
PROBABLE +POSSIBLE
Contingent Contingent
BOOKINGBOOKING
ISC
OV
ER
E
EU
M I
NI
UB
-CO
MM
ER ESTIMATE
(P50)ESTIMATE
(P90)ESTIMATE
(P10) ResourcesResources
Unrecoverable
DI
PETR
OL SU
LOWESTIMATE
HIGHESTIMATE
BESTESTIMATE
Prospective Resources
Prospective ResourcesV
ER
ED
LLY
AC
E
Unrecoverable
TO
TA
L P
Unrecoverable
ESTIMATE(P90)
ESTIMATE(P10)
ESTIMATE(P50)
ResourcesResources
UN
DIS
CO
VIN
ITIA
LIN
-PLA
UnrecoverableU
Range of Uncertainty
Reserves – A sub-set of resourcesReserves – A sub-set of resources
Prospective Resources – Exploration Potential
Contingent Resources – Sub-Commerical
Exploration Discovery
Contingent Resources Sub Commerical
Commercialised
Reserves – Commercial
Commercialised
Developed
Production – Sales
From production to reserves & beyond From production to reserves & beyond
The work flow – Key elements:The work flow – Key elements:
Production actuals & forecasts
• Geo/engineering analysis
• Production actuals & forecasts
• Development opportunity inventory
• Economic analysis
“The Worktable”“The Worktable”
Process framework – the “Worktable”Process framework – the “Worktable”
ProjectAudit
Geo - Analysis Performance Opportunity Analysis
1
P j t
Audit
O t it
Opportunity Analysis
Production StorageProject Execution
Opportunity Inventory
Production Storage
ForecastActual
Reserves
2
Project Initiation
3Economic Analysis
Portfolio Analysis Corporate Planning
2
BudgetReserves
DocumentationIntranet SiteIntranet Site
Benefits of the worktableBenefits of the worktable
• Managing assets for value and not just volume
• Ensure the same forecast is used for cashflows, reserves and all planning purposes
• Asset forecasts visible to all levels of company
• Improve data quality and professional’s productivityp q y p p y
Guiding principlesGuiding principles
1. Single point ownership of forecasts, reserves and cashflows for each asset
2. Appropriately defined involvement and responsibilities
3. Data standardised: right data in the right place, at the right time, in the right format
4. Allow real time access and roll-ups of asset data
5. Single source data entry and handling – access ofteng y g
A few general commentsA few general comments
• Reserves must be part of general workflow of asset teams
• Projects, production history, production forecasts, and economic j , p y, p ,analysis, are all inextricably linked to reserves and portfolio analysis.
They can and should be a single workflow They can and should be a single workflow They can and should be a single workflow – the asset value chainThey can and should be a single workflow – the asset value chain
• Keeps users happy – link systems to facilitate single point data t t IT t d th k!entry – get IT to do the work!
• Internal reserves audit function must be separated from those tasked with meeting company targets
• Good internal reserves audit is better than external reserves audit
• Include credible external expertise in the reserves review • Include credible external expertise in the reserves review process – Reviewers not doers
Major Changes in Proposed 2007 SPE/WPC/AAPG/SPEE RMS
Revision Comment
Combines 4 previous guidance documents into single "Petroleum Resources Management System":
1997 SPE/WPC Petroleum Reserves Guidelines1997 SPE/WPC Petroleum Reserves Guidelines2000 SPE/WPC/AAPG Petroleum Resources Classification and
Definitions2001 SPE/WPC/AAPG Guidelines for the Evaluation of
Petroleum Reserves & Resources
Separate documents combined, abbreviated and
clarified
Petroleum Reserves & Resources2005 SPE/WPC/AAPG Glossary of Terms
Major Changes in Proposed 2007 SPE/WPC/AAPG/SPEE RMS
Revision Comment
Recognizes most companies use forecasts of future
Allows use of evaluators forecast of future conditions while still permitting use of constant conditions
conditions to evaluate projects while some regulators
require constant conditions for external reportingexternal reporting
Major Changes in Proposed 2007 SPE/WPC/AAPG/SPEE RMS
Revision Comment
Project based system
- classification based on projects chance of
Builds on the 2000/2001 project based principlescommerciality
- categorization based on recoverable uncertainty
Major Changes in Proposed 2007 SPE/WPC/AAPG/SPEE RMS
Revision Comment
Recognizes growing importance of unconventional resourcesSystem applies to both
conventional and unconventional resources
Major Changes in Proposed 2007 SPE/WPC/AAPG/SPEE RMS
Revision Comment
L id d hi h t i f ti t l b l d t 1CAlignment to 1P, 2P & 3P Reserve
Low, mid and high categories of contingent resources relabeled to 1C, 2C & 3C respectively
uncertainty categories constrained by commerciality barrier(s)
Major Changes in Proposed 2007 SPE/WPC/AAPG/SPEE RMS
Revision Comment
Allows use of additional classification modifiers:- Reserves status of developed and undeveloped can be applied to
1P, 2P & 3P ReservesReserves Contingent Resources & Prospective Resources may be
Additional classification modifiers optional but may greatly assist in - Reserves, Contingent Resources & Prospective Resources may be
classified by project maturity sub-classes- Contingent Resources maybe classified by 'marginal economic' and
'sub-marginal economic' sub-classes
understanding and tracking reserves and resources
Major Changes in Proposed 2007 SPE/WPC/AAPG/SPEE RMS
Revision Comment
Combines 4 previous guidance documents into single "Petroleum Resources Management System":1997 SPE/WPC Petroleum Reserves Guidelines2000 SPE/WPC/AAPG Petroleum Resources Classification and Definitions2001 SPE/WPC/AAPG G idelines for the E al ation of Petrole m Reser es & Reso rces
Separate documents combined, abbreviated and
clarified2001 SPE/WPC/AAPG Guidelines for the Evaluation of Petroleum Reserves & Resources2005 SPE/WPC/AAPG Glossary of Terms
clarified
Allows use of evaluators forecast of future conditions while still permitting use of constant conditions
Recognizes most companies use forecasts of future
conditions to evaluate projects while some regulators
require constant conditions for external reporting
Builds on the 2000/2001 project based principles
Project based system
- classification based on projects chance of
commerciality
- categorization based on recoverable uncertainty
require constant conditions for external reporting
categorization based on recoverable uncertainty
Recognizes growing importance of unconventional resources System applies to both conventional and unconventional resources
Low, mid and high categories of contingent resources relabeled to 1C, 2C & 3C respectivelyAlignment to 1P, 2P & 3P Reserve uncertainty categories constrained by commerciality barrier(s), g g g , p y categories constrained by commerciality barrier(s)
Allows use of additional classification modifiers:- Reserves status of developed and undeveloped can be applied to 1P, 2P & 3P Reserves- Reserves, Contingent Resources & Prospective Resources may be classified by project maturity sub-
classesC ti t R b l ifi d b ' i l i ' d ' b i l i ' b l
Additional classification modifiers optional but may greatly assist in understanding and tracking reserves and resources
- Contingent Resources maybe classified by 'marginal economic' and 'sub-marginal economic' sub-classes
Contingent resource to reservesContingent resource to reserves
• Project must be commercial:Economics must be run to differentiate technical from commercial
Minimal risk of project not proceeding• Demonstrate commitment to develop and place on
production within reasonable time frame:
─ Project Sanction
─ Plan of Development
Gas Sales Agreement/Spot Market─ Gas Sales Agreement/Spot Market
• Reasonable Level of technical uncertainty:─ Is low side break-even?
─ Is the uncertainty such that the company is unable to commit to go
ahead with project?
If the project does not proceed reserves may need to be de-booked
LOWER RANGE OF UNCERTAINTYLOWER RANGE OF UNCERTAINTY
Undiscovered to discoveredUndiscovered to discovered
Prospective resource to contingent resourceProspective resource to contingent resource
M t h b t t d b ll• Must have been penetrated by a wellAdjacent fault blocks – sealing/non sealing – down dip/up dip?
• In general – moveable hydrocarbon must be shown to flow to surface or at least some recovery
• Where log and/or core data exist – may be OK if there is a good ‘geologically comparable’ analogy nearby
Key words: “Nearby” & “ Geologically Comparable”Key words: Nearby & Geologically Comparable
Note: Commercial/economic analysis of discovery not required for Contingent Resourcesfor Contingent Resources
LARGE RANGE OF UNCERTAINTYLARGE RANGE OF UNCERTAINTY
Tracking Volumetric UncertaintyTracking Volumetric UncertaintyU
R) Exploration Appraisal Development/Production
eco
very
(U
P10Contingent Resources Reserves
HighEstimate 3P
ltim
ate
Re
P50
Estimate
BestEstimate
2PRange
of
FieldAbandonment
tim
ate
d U
Estimate
Low 1P
Uncertainty
Time (years) (Arps, 1956)
Es
P90Estimate
1P
NB: Reserves = UR - Production
• Complete Petroleum resource system from Undiscovered to Production
• Incorporates series of ‘gates’ or decision points
Focal Points for Corporate GovernanceFocal Points for Corporate Governance
1. Undiscovered
(Prospective Resource)
1. Undiscovered
(Prospective Resource)
Discovered Hydrocarbon(Contingent Resource)
Discovered Hydrocarbon(Contingent Resource)
2. Discovered
(Contingent Resource)
2. Discovered
(Contingent Resource)
Discovered – Commercial
(Reserves)
Discovered – Commercial
(Reserves)( )( )
3. Unproved Reserves
(Probable & Possible)
3. Unproved Reserves
(Probable & Possible)
Proved Reserves
(Proved)
Proved Reserves
(Proved)
• First two transition points relate to ‘Project Maturity’ – both technical and
(Probable & Possible)(Probable & Possible) (Proved)(Proved)
commercial
• Third transition point relates to ‘ Project Uncertainty’ – mainly technical
Attributes of Proved ReservesAttributes of Proved Reserves
Reasonable Certainty– High degree of confidence
If P b bili ti th d d 90% h ill d ti t– If Probabilistic methods used – 90% chance reserves will exceed estimate– Fluid contacts or LKH or as indicated by definitive geo/eng or performance
data– Undeveloped – within defined area – reasonable certainty formation is
l t ll ti & t i i ll bl h d blaterally continuous & contains commercially recoverable hydrocarbons
Commercially Recoverable– Commitment to go ahead with project
Evidence of commercial productivity– Evidence of commercial productivity– Legal entitlement
Current Economic Conditions– Price & cost forecasts based on historical data– Price & cost forecasts based on historical data– Economic Limit– Appropriate contract obligations & Government regulations– PSC Complexities
Attributes of proved + probable reservesAttributes of proved + probable reserves
More likely than not to be recoverable– Middle ground – best estimate– If Probabilistic methods used – 50% chance reserves will equal
or exceed estimate– Fluid contacts or as indicated by geo/eng or performance data –
if no indicative data – half way between LKH & LCC often usedy
Commercially recoverable– Commitment to go ahead with project– Less stringent evidence of commercial productivityg p y– Legal entitlement
Reasonably improved economic, technical & operating methods– Reasonably improved Price & cost forecasts y p– If fault separated from proved area – included if faulted area higher than
proved area– Appropriate contract obligations & Government regulations
PSC ComplexitiesPSC Complexities– PSC Complexities
Attributes of proved + probable + possible reservesAttributes of proved + probable + possible reserves
Less likely to be recoverable than 2P reserves
– High Side Estimate – Upside potential– If Probabilistic methods used – 10% chance reserves will equal
or exceed estimate– Fluid contacts or as indicated by geo/eng or performance data –
if no indicative data – LCC often usedif no indicative data LCC often used
Commercially recoverable
– Commitment to go ahead with projectMay not currently be shown to be commercially producible– May not currently be shown to be commercially producible
– Legal entitlement
Reasonably improved economic, technical & operating methods
– Reasonably improved Price & cost forecasts – If fault separated from proved area – included if faulted area lower than
proved area– Appropriate contract obligations & Government regulationsAppropriate contract obligations & Government regulations– PSC Complexities
Developed & undeveloped reservesDeveloped & undeveloped reserves
Developed
• Production from Existing Completions• Production from Existing Completions
• Behind pipe if only minor expenditure
• Compression restagingp g g
UndevelopedU de e oped
• New wells/deepening existing wells
• Connections & recompilationsp
• Additional compression
Aggregation of accumulationsAggregation of accumulations
• Probabilistic up to ‘project’ level where project has common sales point
• Arithmetic above project level
• Arithmetic assumes dependant variables & probabilistic assumes independent
• Real World = somewhere between the two
• Project under way to include probabilistic summation in Volts reporting
Aggregation of accumulations continuedAggregation of accumulations continued
• Probabilistic versus arithmetic
• Probabilistic will tend to over-estimate the low side if there • Probabilistic will tend to over estimate the low side if there are dependencies between the distributions
• Arithmetic will tend to under-estimate the low side if the distributions are independent
• Probabilistic methods assume a continuous distribution not three deterministic estimatesthree deterministic estimates
• In a probabilistic world the sum of the individual components will not equal the sum of the total
Contingent resources continuedContingent resources continued
Contingent resources are “contingent” on overcoming a barrier in order to become reserves:Contingent resources are “contingent” on overcoming a barrier in order to become reserves:
Development pending:Requires further data acquisition and/or evaluation in order to confirm commercialityto confirm commerciality
Development on hold:Of significant size, but awaiting development of a market or removal of other constraints to development, - may be technical, environmental, or political.
Development not viable:pNo current plans to develop or to acquire additional data at this time due to limited production potential.
Coal Seam Methane (CSM)Coal Seam Methane (CSM)
• Classified by same convention as conventional oil & gas reserves:
– But; CSM reserves more related to volume of coal & ability of coal to liberate gas rather than estimate of recoverable gas in pore spaces as in conventional reservoirs
• 1P, 2P & 3P limits in CSM fields not defined by conventional contacts (LKG,HKW,LCC) as most coal contains gas absorbed onto coal surface independent of structural location
• CSM fields located in a variety of structural settings such as anticlines, synclines & monoclines
l f h h l d• CSM resource comprises volume of gas throughout coal and surrounding strata