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Dr. K. H. Coats

 

 

"1P

Equivalent to Proved Reserves Glossary of Reserves/Resources Terminology - 2005.

Taken to be equivalent to Proved Reserves; denotes low estimate scenario of Reserves Glossary of Terms Used in Resources Evaluations - 2007 - 2.2.2.

2P

The Sum of Proved Reserves plus Probable Reserves Glossary of Reserves/Resources Terminology - 2005.

Taken to be equivalent to the sum of Proved plus Probable Reserves; denotes best estimate scenario of Reserves Glossary of Terms Used in Resources Evaluations - 2007 - 2.2.2.

3P

The Sum of Proved Reserves plus Probable Reserves plus Possible Reserves Glossary of Reserves/Resources Terminology - 2005.

Taken to be equivalent to the sum of Proved plus Probable plus Possible Reserves; denotes high estimate scenario of reserves Glossary of Terms Used in Resources Evaluations - 2007 - 2.2.2.

Reserves

Sub-Classes

Reserves are those quantities of hydrocarbons which are anticipated to be commercially recovered from known accumulations from a given date forward under defines conditions Glossary of Reserves/Resources Terminology - 2005.

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 Table 1: Definition: Recoverable Resources Classes and Sub-Classes - 2007.

Reserves must satisfy four criteria: they must be discovered, recoverable, commercial, and remaining based on the development project(s) applied. Reserves are further subdivided 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 development and production status Table 1: Guidelines: Recoverable Resources Classes and Sub-Classes - 2007.

  • To be included in the Reserves class, a project must be sufficiently defined to establish its commercial viability. There must be a reasonable expectation that all required internal and external approvals will be forthcoming, and there is evidence of firm intention to proceed with development within a reasonable time frame.

  • A reasonable time frame for the initiation of development depends on the specific circumstances and varies according to the scope of the project. While 5 years is recommended as a benchmark, a longer time frame could be applied where, for example, development of economic projects are deferred at the option of the producer for, among other things, market-related reasons, or to meet contractual or strategic objectives. In all cases, the justification for classification as Reserves should be clearly documented.

  • To be included in the Reserves class, there must be a high confidence in the commercial producibility of the reservoir as 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."

From the SEC Petroleum Reserves Definitions:

"PROVED RESERVES (SEC DEFINITIONS)

Securities and Exchange Commission Regultion S-X Rule 4-10 paragraph (a) defines proved reserves as follows:

Proved oil and gas reserves.  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 data the estimate is made.  Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions.

...

UNPROVED RESERVES (SPE/WPC DEFINITIONS)

Unproved reserves are based on geologic and/or engineering data similar to that used in estimates of proved reserves; but technical, contractual, economic, or regulatory uncertainties preclude such reserves being classified as proved.

Unproved reserves may be estimated assuming future economic conditions different from those prevailing at the time of the estimate.  The effect of possible future improvements in economic conditions and technological developments can be expressed by allocating appropriate quantities of reserves to the probable and possible classifications.

Probable Reserves. 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 percent probability that the quantities actually recovered will equal or exceed the sum of estimated proved plus probable reserves.

...

Possible Reserves. 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 percent probability that the quantities actually recovered will equal or exceed the sum of estimated proved plus probable plus possible reserves."

 

These P90, P50, and P10 exceedance probabilitiy definitions are correct and rigorous when robust probabilistic methods are used, but otherwise the 1P,2P, and 3P definitions become technically incorrect and somewhat arbitrary, and very confusing.

1P, 2P, and 3P are low ("proved"), median ("proved plus probable"), and high ("proved plus probable plus possible") estimates of reserves may be quantified in probabilistic reservoir modeling (and economics), from uncertainties in the descriptive and control (and economic) variables, as exceedance P90, P50, and P10 (or as cumulative P10, P50, and P90) estimates of reserves, respectively. Commercially-recoverable reserves could be defined in units of BOE, by some simple value function of production and injection, or  by NPV.  The latter is more accurate and appropriate, as the definition of what will be "commercially-recoverable" in the future certainly depends on economics, and is specifically indicated by NPV > 0, but it introduces large uncertainties in  economic model variables.  Estimates "made under existing economic and operating conditions" as defined by the SEC (as required for "proved" reserves) generally have no significant meaning, because those conditions are constantly changing, and our projects last for decades.  The conditions "anticipated to be commercially recovered" and "under existing economic and operating conditions" are absolutely contradictory and nonsensical, since anticipated means "to expect in the future".  ABSOLUTELY NO RESERVES are anticipated to be recovered in the future under existing economic and operating conditions.  The assumption that economic and operating conditions are fixed is completely invalid.  One of the main purposes of simulation is to optimize production by determining the optimal process and boundary (operating) conditions as a function of time (see Goals of Reservoir Simulation).  Optimization is a pre-requisite of prediction.

The SEC rules also state:

"(iii) Estimates of proved reserves do not include the following:

(B) crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; "

All production is subject to reasonable doubt, before it occurs, due to guaranteed high levels of uncertainty in all of those and many more factors.

It is virtually impossible to estimate with any degree of certainty what will be "commercially recoverable" in the future under unknown and unpredictable economic and operating conditions.  For example, (1) a major advance in the efficiency of alternative energy sources could eliminate most of the value of all hydrocarbon reserves at any time.  Regulation may also do so, for example (2) the destruction of the US coal industry by the Clean Power Plan that has reduced the value of US coal reserves to near 0.  Other examples are (3) proposed regulation of CO2 emissions (see SRMS and SPE CCUS Technical Section) that would eliminate true reserves and hugely increase the cost of energy to the public for no reason or benefit that can be substantiated, and (4) regulation following the BP Macondo incident that has virtually eliminated the value of all oil and gas reserves in federal waters, and (5) unknown future and present values of the true rates of dollar devaluation (inflation) resulting in misapplied "cost of capital" and discount factor considerations.  There are an infinite number of such uncertainties that cannot be reliably predicted, unless one has or believes in psychic abilities.  The existence and incompetence of reserves definitions and reporting requirements are certainly indications of that "Crystal Ball Syndrome".

Strictly speaking, according to the SPE/SEC rules, the amounts and value of all defined proved, probable, and possible reserves are and will always be exactly 0.

Beyond any reserves reporting requirements that they may rigorously satisfy, probabilistic performance predictions are obviously required to optimize production and our operations, and to minimize the cost of energy.  As a result we have developed some of the most complex and advanced software systems in the world (using Pipe-it workflow integration and iterative optimization software applied to Sensor), which are now capable of automated probabilistic optimization for characterization, upscaling, history matching, forecasting, and predictive optimization - all of the components required to achieve our goal of solving the real-time global predictive optimization problem under uncertainty.  Simulators can predict future production, for given values of all the data, but most of that data is usually uncertain.  So we must employ probabilistic methods to make any predictions or optimizations in reserves estimations or in reservoir modeling, using any model making valid assumptions while rigorously accounting for the uncertainties.

These methods, capabilities, optimizations, and predictions are the basic components of business management and (national) free-market competition in the energy industry  Those companies able to better plan their operations and better optimize reserves and production to minimize risk and maximize efficiency and profit will be more successful and others will fail, thus minimizing the cost of energy and maximizing efficiency, technical advancement, corporate responsibility, sustainable development, and growth of the economy (assuming necessary and proper regulation for a sustainable national economy that is a prerequisite of sustainable development (and of the basic sustainability of all individuals and businesses).

Regardless of how reserves may be defined, probabilistic analysis in reservoir modeling provides for the most rigorous possible forecasts and (more importantly, as mainly used historically) for probabilistic predictive optimizations of reserves and reservoir performance.  It can also potentially eliminate or rewrite, into very simple and much more meaningful engineering/economic and mathematical terms, the definitions, methods, and rules for reserves estimation.


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