New reserves definitions approved by SPE and WPC - Society of Petroleum Engineers; World Petroleum Congress

The Society of Petroleum Engineers (SPE), in collaboration with the World Petroleum Congress (WPC), recently rewrote their definitions for oil and gas reserves to recognize new methods and improve the quality of reserves estimation work

The SPE/WPC oil & gas reserves definitions are the culmination of a three-year effort, not to revolutionize the field of reserve evaluation but to expand the definitions to recognize current industry trends in technology and financial arrangements.

The new definitions as described here recognize current trends in evaluation and reporting conventions while retaining compatibility with as much of the current common usage as possible. As presently written, they insure the necessary continuity with past evaluations and allow for an orderly inclusion of the currently evolving evaluation methods and procedures.

HISTORICAL BACKGROUND

Petroleum is defined as, "Naturally occurring liquids and gases which predominately comprise hydrocarbon compounds. Petroleum may also contain non-hydrocarbon compounds in which sulfur, oxygen and/or nitrogen atoms are combined with carbon and hydrogen. Common examples of non-hydrocarbons found in petroleum are nitrogen, carbon dioxide and hydrogen sulfide."

Reserves are defined as, "Those quantities of petroleum, which are expected to be recovered from a given date forward from known reservoirs." Attempts to standardize definitions started early in the industry's life concurrent with the collection of data from underground reservoirs. In the mid-1930s, the American Petroleum Institute (API) considered classifications for petroleum and definitions, and introduced the terms "reasonable certainty" and "existing technical and economic conditions". API set the standards for defining proved reserves from the 1930s through 1964, and these terms have persisted in most reserves definitions developed since that time.

For part of that time, the American Gas Association joined API and the two associations jointly published the annual report, Proved reserves of crude oil, natural gas liquids, and natural gas. The SPE issued its first set of reserve definitions in 1964. These were widely accepted, but limited, in that they addressed only those volumes of petroleum that were considered proved reserves.

In 1972, McKelvey introduced a two-dimensional matrix that reflected the relationship between increased economic feasibility and certainty of occurrence.[1] This concept has been widely accepted within the industry and forms the idea behind many classification systems used by companies for both reserves reporting and business planning. In 1979, the U.S. Securities and Exchange Commission (SEC) issued its own definitions for proved reserves and regulations for reserves reporting. Since then, SEC definitions have tended to dominate discussions of proved reserves and have impacted most other sets of definitions currently in common usage.

In 1987, both SPE and WPC issued definitions, which extended the classification system. They included additional reserve categories for quantities of oil and gas lacking sufficient technical or financial support to be considered proved. These classifications have since been adopted as the standards across much of the international industry.

NEED FOR NEW DEFINITIONS

Soon after introduction of the two sets of definitions in 1987, it became apparent to both SPE and WPC that the two sets could be combined into a single set, which could be used by industry. A common set of definitions would enhance opportunities for worldwide acceptance and signify a common stance on an important issue facing the international petroleum industry.

During that time, fundamental changes also took place in the industry. As it grew more multinational, terms such as "reasonable certainty" became harder to define across different languages and cultures. In addition, new technology and evaluation techniques brought new tools to aid in reserve estimation.

The SPE Oil & Gas Reserves Committee and the WPC Scientific Program Committee formed a joint task force in 1994, which led to publication of a set of principles on which reserve estimations and definitions should be based. These principles form the basis of the draft SPE/WPC definitions published for industry review in the August 1996 Journal of Petroleum Technology. Comments were received from about fifty individuals, companies or groups.

The strongest support for the new definitions came from non-U.S.-based oil companies and national oil companies, while support from consultants (primarily within the U.S.) was the weakest. Based on responses from industry, further modifications to the definitions were made. While not all aspects of the definitions were supported by all respondents, they represented a broad consensus on terminology, classifications and procedures over a very diverse group. The revised definitions were approved by the WPC in October 1996 and by SPE in March 1997.

NEW SPE/WPC DEFINITIONS

The Task Force recognized that any major shifts in reserve definitions could disrupt the oil and gas business environment. The new SPE/WPC reserves definitions, then, represent more of an evolution of the conventions used to estimate oil and gas reserves. The Task Force also recognized that a large number of companies must conform to guidelines set down by SEC; therefore, industry's definitions could not conflict with those of SEC.

In the new definitions, reserves are defined as, "Those quantities of petroleum, which are anticipated to be commercially recovered from known accumulations from a given date forward." All reserve estimates involve some degree of uncertainty. Clearly, the level of uncertainty depends on the amount of reliable geologic and engineering data at the time the estimate is made, and interpretation of that data. Of equal importance, financial, political and contractual uncertainty must be considered if the estimate is to reflect future development and production.

To accommodate the levels of uncertainty, the SPE/WPC definitions retain the two primary classifications of reserves, proved and unproved. Unproved reserves are less certain to be recovered than proved reserves and are further sub-classified as probable and possible reserves to denote increasing technical, financial and/or political uncertainty. For reference, excerpts from the new definitions are repeated below.

Proved reserves. These are defined as, "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 recovered. If probabilistic methods are used, there should be at least a 90% probability that the actual quantities recovered will equal or exceed the estimate.

"Establishment of current economic conditions should include relevant historical petroleum prices and associated costs and may involve an averaging period that is consistent with the purpose of the reserve estimate, appropriate contract obligations, corporate procedures and government regulations involved in reporting these reserves."

Probable reserves. This category includes, "Those unproved reserves which analysis of geological and engineering data suggests are more likely than not to be commercially recoverable. In this context, when probabilistic methods are used, there should be at least a 50% probability that the quantities recovered will equal or exceed the proved reserves plus the probable reserves."

Possible reserves. Under the new definitions these are, "Those unproved reserves which analysis of geological and engineering data suggests are less likely to be commercially recoverable than probable reserves. In this context, when probabilistic methods are used, there should be at least a 10% probability that the actual quantities recovered equal or exceed the proved plus probable plus possible reserves estimates."

The full text of the definitions can be obtained by contacting the SPE headquarters office in Richardson, Texas.

USING AVERAGE HISTORICAL PRICES

One significant change in the new definitions is the allowance of historical average oil and gas prices to establish current economic conditions in the proved reserve estimate, where appropriate. Previously, most definitions stipulated that prices in effect as of the effective date of the evaluation must be used. Using an average price that is relevant and appropriate for the estimate will prevent unrealistic swings in reserves caused by artificially high or low prices in existence on the effective date. This position remains consistent with current SEC rules, which require in essence a one-day average.

DETERMINISTIC VS. PROBABILISTIC ESTIMATES

Probably the biggest change in the new definitions is the explicit reference to probabilistic methods for reserve estimation. According to the definitions, "The method of estimation is called deterministic if a single best estimate of reserves is made based on known geological, engineering and economic data. The method is called probabilistic when the known geological, engineering and economic data are used to generate a range of estimates and their associated probabilities."

There is growing use and acceptance of probabilistic methods to estimate reserves, especially in countries outside the U.S. The Task Force recognized the need to include specific reference to probabilistic methods, but to also make it clear that they are quite different and distinct from deterministic methods. "Reasonable certainty" for proved reserves equates to a "high degree of confidence" as stated in the definitions, but does not necessarily mean a 90% probability of occurrence.

Some possible confusion arises from the expression "a single-best estimate of reserves" used to define the deterministic method. This means that there can be: 1) a single-best estimate of proved reserves based on appropriate procedures and assumptions, 2) a different single-best estimate of probable reserves based on procedures and assumptions which are appropriate for probable reserves but different from those used for the proved estimate, and so on for possible reserves.

FUTURE WORK

Both SPE and WPC recognize that the new reserve definitions are not static and will continue to evolve. In fact, possibly the greatest benefit of the process of rewriting the definitions and soliciting responses has been the heightened awareness of certain issues, and the discussion that has ensued. As individuals, companies and groups continue to consider these issues, that dialog can only improve the quality of reserve evaluations being made. Several of the more relevant issues, which came up during the process, are discussed below.

Aggregation of reserves. The reserve estimator must be aware of the two different methods of aggregating reserves that are determined probabilistically. The P90, or proved reserve numbers for individual properties can simply be arithmetically added, which is normally what occurs. Alternately, the probability distributions for all of the properties can be combined and then an estimate corresponding to the overall 90% confidence level chosen. If the estimator arithmetically sums proved reserves estimates for, say, ten fields, each with a 90% chance of being met or exceeded, then the total reserve estimate will actually have a significantly greater than 90% chance of being met.

As estimates for different properties are combined (assuming the properties produce and behave independently of each other), the range of uncertainty shrinks significantly. One issue, which has arisen, is at what level of aggregating reserves should the estimator apply the confidence level? This is an issue which has only begun to be discussed and will require some consideration by industry before reaching consensus. This question has two interesting facets to it:

1. If possible reserves estimates for a number of different fields (each of them having a 10% chance of being met or exceeded) are added together, then the aggregate will have a much lower than 10% chance of being met.

2. The problem of confidence level of aggregated reserves has always been with us, even when using deterministic reserve estimates. If the estimator has "reasonable certainty" of the individual estimates on a number of properties, then he or she should be much more certain of the estimate when adding them together.

Resources. One recurring comment received during the response phase of this project related to the definition of hydrocarbon resources. The definitions, as presently written, apply only to known, i.e., discovered, accumulations of hydrocarbons. In addition, within known deposits it applies only to those volumes that qualify as proved, probable or possible reserves from a technical, financial, contractual and regulatory basis.

These two qualifications exclude large quantities of hydrocarbons from being classified as reserves. While they do not meet the requirements, these quantities are clearly an asset to the lease holding company or country where they exist and could one day qualify as reserves.

Inclusion of categories for these resources within the classification system would recognize these quantities and provide a better understanding of the industry's petroleum potential. Presently, these types of deposits or accumulations cannot be classified as reserves. Due to the criticality of these resources to many regions of the world, a number of responses suggested expanding the definitions, at a future date, to include categories of hydrocarbon resources.

DEFINITION SUPPLEMENTS, TECHNICAL GROUPS

The SPE Oil & Gas Reserves Committee will follow up on the reserves definitions with a supplemental volume of papers, which address specific reserve estimation topics in more detail. Topics will include such things as:

* Treatment of fuel gas and non-hydrocarbon gas

* Application of probabilistic methods

* Use of seismic data and geostatistics in reserves estimation

* Treatment of production sharing and risk service contracts

* Treatment of current economic conditions and its effect on reserve estimates.

The work will normally represent the opinions and methods used by an individual or company, and so will not carry the formal approval of the SPE or the Oil & Gas Reserves Committee.

SPE has recently formed a number of Technical Interest Groups (TIGs) as a forum for discussing technical matters related to certain facets of petroleum engineering. One group will deal with reserves estimation issues. The discussion will take place online within the SPE web site. While each TIG will have its own area within the site, they are not chat rooms. Instead, they will use threaded discussions to help an interested party focus only on those items of interest.

CONCLUSION

SPE/WPC oil & gas reserves definitions are the culmination of a three-year effort and represent the consensus view of the reserves committees from both organizations. The purpose is not to revolutionize the field of reserve evaluation but rather to expand the definitions to recognize current industry trends in technology and financial arrangements.

Care was taken to retain consistency with past definitions and not introduce changes that would produce major disruptions in the way reserves were evaluated or booked. Therefore, the new definitions do not represent a major shift from previous SPE and WPC definitions. They have been reviewed on an industry-wide basis and revised, where possible, to insure broadest acceptance.

The definitions are not static and will continue to evolve. To facilitate this process, the organizations have established liaisons on reserve matters to consider future revisions as changing technology, financial environment and political conditions dictate. It is hoped that other professional, governmental and business organizations will join this effort to address the full spectrum of reserves-related issues and reach the broadest possible consensus.

The new definitions recognize current trends in evaluation and reporting conventions while retaining compatibility with as much of the current common usage as possible. As presently written, they insure the necessary continuity with past evaluations and allow for an orderly inclusion of the currently evolving evaluation methods and procedures.

LITERATURE CITED

1 McKelvey, V. E., "Mineral resource estimates and public policy," American Sci., Vol. 60, Issue 1, pp. 32-40, 1972.

The authors

James E. Smith, senior reservoir engineer for Marathon Oil Co. in Oklahoma City, is the 1996-97 chairman of the SPE Oil & Gas Reserves Committee and served on the joint SPE/WPC Task Force which rewrote the oil & gas reserves definitions. Before joining Marathon, he was division reservoir engineer for Kerr-McGee; has worked for Fina and ARCO Oil & Gas and holds BS and MS degrees in petroleum engineering from the University of Kansas.

Claude McMichael, PhD, independent consultant, earned MS and BS degrees in petroleum engineering from Louisiana Tech, and a PhD from the University of Tulsa. Before opening a consulting practice, he worked 25 years with Mobil (International E&P Division and Mobil R&D Corp.). During his tenure with Mobil, he held numerous managerial and technical positions. Throughout most of his career, he has specialized in various aspects of reservoir engineering and reservoir management. Dr. McMichael is active in the SPE; he was a member of the Oil and Gas Reserves Committee and served two terms as chairman, working closely with WPC's technical committee on establishing a common set of reserves definitions.

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