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SPE Petroleum Resources Management

System (PRMS)

Sponsored by SPE/WPC/AAPG/SPEE
Approved March 2007

An Industry Presentation

Rawdon J.H. Seager


Gaffney, Cline & Associates

www.gaffney-cline.com
Project No. D105
Technical and Management Advisers to the
Petroleum Industry Internationally since 1962

Project No. D105


Worldwide Multi-disciplined Presence

Representative Office 3
D105
Gas: LNG - GTL
Geological
Modeling

Unconventional / Field, Pipeline,


EOR Plant

Reservoir Simulation Reserves Audit Field Engineering


& Characterization & Certification 4
D105
Valuation,
Mergers &
Expert Witness Acquisitions

National Oil Company Market Studies


Government Interface

Project Finance Regulation – Contract


Training 5
D105 Structure & Negotiation
Reserves

„ Reserves Training
… GCA provides a two-day reserves training course covering all aspects of
reserve estimation and reporting
„ Technical bases
„ Understanding of and compliance with definitions
… Now includes detailed review of the new SPE/WPC/AAPG/SPEE Petroleum
Resources Management System (PRMS) as well as regulatory requirements
such as reporting to the US Securities and Exchange Commission (SEC)
“The course far exceeded my expectations, excellent instructors”
S. P. Singh, Director – Occidental Reserves and Reservoir Engineering

„ Reserves Process
… GCA provides independent audit of companies internal reserves estimation,
recording and reporting processes and procedures
… Preparation and revision of reserve management guidelines to meet
companies unique requirements

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D105
SPE Petroleum Resources Management
System (PRMS)

Sponsored by SPE/WPC/AAPG/SPEE
Approved March 2007

An Industry Presentation

Rawdon J.H. Seager


Gaffney, Cline & Associates

www.gaffney-cline.com
Project No. D105
Disclaimer

„ Still being studied

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D105
Topics for Discussion

„ Review of key features of the new SPE PRMS

„ Discussion of the core definitions

„ Comparison with the 1997 SPE/WPC and 2000 SPE/WPC/AAPG documents

„ Brief comments on the revised “Standards” document and “auditing”

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SPE PRMS Key Features - 1

„ Combines four documents into one consolidated and unified system


… 1997 SPE/WPC Petroleum Reserves Definitions
… 2000 SPE/WPC/AAPG Petroleum Resources Classification and Definitions
… 2001 SPE/WPC/AAPG Guidelines for the Evaluation of Petroleum Reserves
and Resources
… 2005 SPE/WPC/AAPG Glossary of Terms

„ The fundamental terminology of Reserves, Contingent Resources (CR) and


Prospective Resources (PR) has been maintained
… Using the classification framework presented in 2000

„ Key distinctions have been made between Reserves and Contingent


Resources where some ambiguity previously existed
… Particularly between CR and Probable or Possible Reserves

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D105
SPE PRMS Key Features - 2

„ A “Project” has been identified as the primary element of the system


… “In order to assign recoverable resources of any class, a development plan
needs to be defined consisting of one or more projects”
… Combines the “reservoir” and the “property” to derive entitlement to
recoverable resources
… Is generally identified as the level at which investment decisions are made

„ Three distinct approaches are recognized for the categorization of volumes


… Two deterministic and one probabilistic – discussed later

„ The “base case” scenario is predicated on a “forecast” of costs and prices


… Although a “constant” case is still recognized as an alternative

„ Applies to both Conventional and Unconventional resources

„ There are several other issues for which a position has now been clarified

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D105
What are Reserves - 1?

„ Volumes expected to be sold from assets in which the entity has an entitlement by the
application of development projects

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What are Reserves - 2?

„ The summation of future production from a given date forward to the economic,
contract or lease limit

Contract Limit – extensions?


Production Rate (MB/D)
120

100

80

60

40

20

Economic Limit
0
Price and cost
1 3 5 7 9 11 13 15 17
dependent
Time (years)

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Resources Classification

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Resources Classification

„ Reserves
… Discovered, recoverable, commercial,
remaining
… Proved, Probable, Possible
… 1P, 2P, 3P (now formalized)
„ Contingent Resources
… Discovered, potentially recoverable,

Classification
not yet commercial, remaining
… 1C, 2C, 3C (new terms)
„ Equivalent to Low, Best and High
Estimates
„ Prospective Resources
… Undiscovered, potentially
recoverable, potentially commercial,
remaining
… Low, Best and High Estimates
„ Unrecoverable
… Discovered or undiscovered, not
recoverable Categorization

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Project-Based Classification

„ The Reservoir assessment determines the petroleum initially in place, and fluid and
rock properties that affect petroleum recovery
„ The Project is applied to a specific reservoir volume to generate production and cash
flow schedule
… One project may develop many reservoirs or many projects may develop one reservoir
„ The Property incorporates contractual rights and obligations, and fiscal terms, defining
the entitlement share of investments, production and revenue
… One property may encompass many reservoirs or one reservoir may span many
properties

Net
RESERVOIR PROJECT
Recoverable
(in-place volumes) (production/cash flow)
Resources

Entitlement

PROPERTY
(ownership/contract terms)

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Resources Classification

„ Discovery Status

„ Commerciality Status

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Discovery Status

„ “A discovery is one petroleum accumulation, or several petroleum


accumulations collectively, for which one or several exploratory wells have
established through testing, sampling, and/or logging the existence of a
significant quantity of potentially moveable hydrocarbons”

… The PRMS intentionally does not require a flow test in order to establish a
discovery
… In some instances it may nevertheless be considered that logging alone would
not be considered sufficient to identify a discovery since some indication of
fluid type and producibility will normally be required to comply with the following
requirement:

„ “In this context, “significant” implies that there is evidence of a sufficient


quantity of petroleum to justify estimating the in-place volume demonstrated
by the well(s) and for evaluating the potential for economic recovery”

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Determination of Commerciality

„ “Discovered recoverable volumes (Contingent Resources) may be


considered commercially producible, and thus Reserves, if the entity
claiming commerciality has demonstrated firm intention to proceed with
development and such intention is based upon all of the following criteria:

… Evidence to support a reasonable timetable for development


… A reasonable assessment of the future economics of such development
projects meeting defined investment and operating criteria
… A reasonable expectation that there will be a market for all or at least the
expected sales quantities of production required to justify development
… Evidence that the necessary production and transportation facilities are
available or can be made available
… Evidence that legal, contractual, environmental and other social and economic
concerns will allow for the actual implementation of the recovery project being
evaluated”

„ With some minor differences, these criteria were typically applied to Proved
reserves under prior guidelines
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What Determines Commerciality?

„ “While each organization may define specific investment criteria, a project is


generally considered to be “economic” if its “best estimate” case has a
positive net present value under the organization’s standard discount rate, or
if at least has a positive undiscounted cash flow”

„ It is generally understood that “commerciality” requires that the project


provides a positive return on its investment to the organization at the
discount rate used for its investment decision-making
… There will of course be exceptions, when investments are made for strategic
reasons

„ This is different from “economic” in the sense that even a positive


undiscounted cash flow could be considered economic

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Project Maturity Linked to Decision Gates
(can be quantified if desired)

Chance of commerciality

Chance of discovery

But apply chance to economic outcome, not to volumes


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Reserves Defined

„ 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

„ Reserves must satisfy four criteria:


… discovered
… recoverable
… commercial
… remaining (as of the evaluation date)
… based on the development project(s)
applied

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Reserves

„ Categorized in accordance with the


level of certainty associated with the
estimates

„ Classified based on project maturity


… Project must be sufficiently defined to
establish commercial viability

Classification
… Reasonable timeframe for
development (5 years suggested)

„ Characterized by development and


production status
… Producing/Non-Producing
… Developed/Undeveloped

Categorization

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Reserves - Producibility

„ High confidence in the commercial producibility


… 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

„ Several of these criteria were applied to Proved Reserves only before

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Project Maturity - Reserves

„ On Production
… The development project is currently
producing and selling petroleum to
market
„ Approved for Development
… All necessary approvals have been
obtained, capital funds have been
committed, and implementation of the
development project is under way
„ Justified for Development
… Implementation of the development
project is justified on the basis of
reasonable forecast commercial
conditions at the time of reporting,
and there are reasonable
expectations that all necessary
approvals/contracts will be obtained

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Project Maturity – Contingent Resources

„ Development Pending
… A discovered accumulation where
project activities are ongoing to justify
commercial development in the
foreseeable future
„ Development Unclarified or on Hold
… A discovered accumulation where
project activities are on hold and/or
where justification as a commercial
development may be subject to
significant delay
„ Development Not Viable
… A discovered accumulation for which
there are no current plans to develop
or to acquire additional data at the
time due to limited production
potential

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Project Maturity – Prospective Resources

„ Prospect
… A project associated with a potential
accumulation that is sufficiently well
defined to represent a viable drilling
target
„ Lead
… A project associated with a potential
accumulation that is currently poorly
defined and requires more data
acquisition and/or evaluation in order
to be classified as a prospect
„ Play
… A project associated with a
prospective trend of potential
prospects, but which requires more
data acquisition and/or evaluation in
order to define specific leads or
prospects

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Developed and Undeveloped Reserves

„ “Developed Reserves are expected quantities to be recovered from existing


wells and facilities”
„ “Undeveloped Reserves are quantities expected to be recovered through
future investments”

„ Thus these subdivisions are applied to all Reserves categories, not just
Proved

„ Regarding the distinction between DNP and UD, the PRMS says:
… “Undeveloped Reserves [are] ... where a relatively large expenditure (e.g.
when compared to the cost of drilling a new well) is required to (a) recomplete
an existing well or (b) install production or transportation facilities for primary or
improved recovery projects

„ This is useful, but there is no quantitative guidance given

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Project Maturity – Economic Status

„ “All projects classified as Reserves


must be economic under defined
conditions”
„ Contingent Resources are divided into
Marginal and Sub-Marginal quantities
… Marginal
„ Technically feasible and economic,
but not committed due to some other
contingency
… Sub-Marginal
„ Technically feasible, but not
economic and/or other contingencies
exist
„ These are additional status descriptors
to the sub-classes in the Classification
Framework
„ The PRMS indicates that these different
sets of groups can be used together,
but it is not yet clear how this will work
in practice

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Resources Volume Categorization

„ The PRMS recognizes three distinct


approaches to volume categorization
… Deterministic incremental (“risk-based”)
„ Proved, Probable, Possible
„ There are no “incremental” categories for
CR or PR, so by inference this is expected
to be applied to Reserves only
… Deterministic scenario (“cumulative”)
„ 1P, 2P, 3P
„ 1C, 2C, 3C
„ Low, Best, High Estimates
… Probabilistic
„ P90, P50, P10

„ Probabilistic method may be applied to any


volume, it is most often applied to volumetric
calculations in the early phases of an
exploitation and development project
… Although not mentioned, it is also typically
applicable for Prospective Resources

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SPE Illustration of Uncertainty

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Proved Reserves Comparison

SPE/WPC 1997 SPE PRMS 2007 Comments


Proved reserves are those Proved Reserves are those Very similar definitions, with the
quantities of petroleum which, by quantities of petroleum, which by key difference being the use of
analysis of geological and analysis of geoscience and “defined” economic conditions
engineering data, can be engineering data, can be
estimated with reasonable estimated with reasonable Still requires “reasonable
certainty to be commercially certainty to be commercially certainty”
recoverable, from a given date recoverable, from a given date
forward, from known reservoirs forward, from known reservoirs
and under current economic and under defined economic
conditions, operating methods, conditions, operating methods,
and government regulations and government regulations

If deterministic methods are If deterministic methods are


used, the term reasonable used, the term reasonable
certainty is intended to express a certainty is intended to express a
high degree of confidence that high degree of confidence that
the quantities will be recovered the quantities will be recovered
If probabilistic methods are used, If probabilistic methods are used,
there should be at least a 90% there should be at least a 90%
probability that the quantities probability that the quantities
actually recovered will equal or actually recovered will equal or
exceed the estimate exceed the estimate

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Proved Reserves Comparison
SEC and SPE

SEC 1978 SPE PRMS 2007 Comments


Proved oil and gas reserves are Proved Reserves are those Both definitions require
the estimated quantities of crude quantities of petroleum, which by “reasonable certainty”
oil, natural gas, and natural gas analysis of geoscience and
liquids which geological and engineering data, can be
engineering data demonstrate estimated with reasonable
with reasonable certainty to be certainty to be commercially
recoverable in future years from recoverable, from a given date
known reservoirs under existing forward, from known reservoirs
economic and operating and under defined economic
conditions, i.e., prices and costs conditions, operating methods,
as of the date the estimate is and government regulations
made
If deterministic methods are
Prices include consideration of used, the term reasonable
changes in existing prices certainty is intended to express a
provided by contractual high degree of confidence that
arrangements, but not on the quantities will be recovered
escalations based upon future If probabilistic methods are used,
conditions there should be at least a 90%
probability that the quantities
actually recovered will equal or
exceed the estimate

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Reasonable Certainty – SEC Guidance

„ “The determination of reasonable certainty is generated by supporting


geological and engineering data

„ There must be data available which indicate that assumptions such as


decline rates, recovery factors, reservoir limits, recovery mechanisms and
volumetric estimates, gas-oil ratios or liquid yield are valid

„ If the area in question is new to exploration and there is little supporting data
for decline rates, recovery factors, reservoir drive mechanisms etc., a
conservative approach is appropriate until there is enough supporting data to
justify the use of more liberal parameters for the estimation of proved
reserves

„ The concept of reasonable certainty implies that, as more technical data


becomes available, a positive, or upward, revision is much more likely than a
negative, or downward, revision”

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D105
Probable Reserves Comparison

SPE/WPC 1997 SPE PRMS 2007 Comments


Probable reserves are those Probable Reserves are those Removed mathematical
unproved reserves which additional Reserves which inconsistency in the definitions
analysis of geological and analysis of geoscience and of Probable and 2P
engineering data suggests are engineering data indicate are
more likely than not to be less likely to be recovered than
recoverable Proved Reserves but more
certain to be recovered than
Possible Reserves.
It is equally likely that actual
remaining quantities recovered
will be greater than or less than
the sum of the estimated Proved
plus Probable Reserves (2P)

In this context, when In this context, when


probabilistic methods are used, probabilistic methods are used,
there should be at least a 50% there should be at least a 50%
probability that the quantities probability that the actual
actually recovered will equal or quantities recovered will equal or
exceed the sum of estimated exceed the 2P estimate
proved plus probable reserves

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Probable Reserves

„ Probable Reserves may be assigned to areas of a reservoir adjacent to


Proved where data control or interpretations of available data are less certain
… The interpreted reservoir continuity may not meet the reasonable certainty
criteria

„ Probable estimates also include incremental recoveries associated with


project recovery efficiencies beyond that assumed for Proved

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D105
Possible Reserves Comparison

SPE/WPC 1997 SPE PRMS 2007 Comments


Possible reserves are those Possible Reserves are those Essentially identical definitions
unproved reserves which additional reserves which
analysis of geological and analysis of geoscience and
engineering data suggests are engineering data indicate are
less likely to be recoverable than less likely to be recoverable than
probable reserves Probable Reserves

The total quantities ultimately


recovered from the project have
a low probability to exceed the
sum of Proved plus Probable
plus Possible (3P), which is
equivalent to the high estimate
scenario
In this context, when When probabilistic methods are
probabilistic methods are used, used, there should be at least a
there should be at least a 10% 10% probability that the actual
probability that the quantities quantities recovered will equal or
actually recovered will equal or exceed the 3P estimate
exceed the sum of estimated
proved plus probable plus
possible reserves

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Possible Reserves

„ Possible Reserves may be assigned to areas of a reservoir adjacent to


Probable where data control and interpretations of available data are
progressively less certain
… Frequently, this may be in areas where geoscience and engineering data are
unable to clearly define the area and vertical reservoir limits of commercial
production from the reservoir by a defined project

„ Possible estimates also include incremental quantities associated with


project recovery efficiencies beyond that assumed for Probable

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Contingent Resources Comparison

SPE/WPC/AAPG 2000 SPE PRMS 2007 Comments


Contingent Resources are those Contingent Resources are those Essentially identical definitions
quantities of petroleum which are quantities of petroleum
estimated, on a given date, to be estimated, as of a given date, to
potentially recoverable from be potentially recoverable from
known accumulations, but which known accumulations, but the
are not currently considered to applied project(s) are not yet
be commercially recoverable considered mature enough for
commercial development due to
one or more contingencies

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Contingent Resources

„ CONTINGENT RESOURCES may


include, for example, projects for which
there are currently no viable markets,
or where commercial recovery is
dependent on technology under
development, or where evaluation of
the accumulation is insufficient to
clearly assess commerciality

„ Contingent Resources are further


categorized 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 economic status

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Prospective Resources Comparison

SPE/WPC/AAPG 2000 SPE PRMS 2007 Comments


Prospective Resources are those Prospective Resources are those Essentially identical definitions
quantities of petroleum which are quantities of petroleum
estimated, on a given date, to be estimated, as of a given date, to
potentially recoverable from be potentially recoverable from
undiscovered accumulations undiscovered accumulations by
application of future
development projects

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Prospective Resources

„ PROSPECTIVE RESOURCES have both


an associated chance of discovery and
a chance of development

„ Prospective Resources are further


subdivided in accordance with the level
of certainty associated with
recoverable estimates assuming their
discovery and development and may be
sub-classified based on project
maturity

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Unrecoverable

„ UNRECOVERABLE is that portion of


Discovered or Undiscovered Petroleum
Initially-in-Place quantities which is
estimated, as of a given date, not to be
recoverable by future development
projects

„ A portion of these quantities may


become recoverable in the future as
commercial circumstances change or
technological developments occur; the
remaining portion may never be
recovered due to physical/chemical
constraints represented by subsurface
interaction of fluids and reservoir rocks

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Additional Comments on Reserves

„ Reserves
… To qualify for allocation of volumes as Reserves, a project must be shown to
have passed the relevant commerciality confidence
… For both primary and enhanced recovery projects, the requirements are now
similar to those that were previously applied to Proved Reserves only

„ No Proved
… It is permissible to report Probable and/or Possible Reserves even if the low
estimate fails to qualify as Proved Reserves (for instance, it does not pass the
economic test)
… It is not necessary or appropriate to relegate all volumes to Contingent
Resources in such cases

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Unconventional Resources

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Standards Pertaining to the Estimating
and Auditing of Oil and Gas Reserve
Information

„ Although the standards have no legal or other force, they represent a


generally-accepted set of guidelines for the conduct of Reserves Estimation
and Auditing

„ The original version was published in 1977 and last updated in 2001

„ The current 2007 edition:


… Includes modifications required to incorporate the latest PRMS
„ Although it remains concerned with Reserves only at present
… Clarifies the terms “auditors” and “auditing”, as well as “process review”
… Acknowledges the integration of geoscience with engineering in the
preparation of reliable reserves information

„ Companies may require their internal or external Reserves Estimators and


Auditors to comply with these standards

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Conclusions

„ The PRMS is a major contribution to international oil and gas resources


management and one that many companies will adopt

„ There is clear recognition of the different ways that reserves and resources
can be estimated and these are all embraced within the system

„ Certain changes in procedures will probably be required to ensure that the


differences with the prior definitions are recognized and incorporated into
resource reporting
… Nothing will change with respect to reporting Proved reserves to the SEC

„ Contingent Resources should become better understood and more


acceptable as a valid resource category and not just “not reserves”

„ The revised “Standards” document should remain a valuable guidebook in


the practical and ethical application of reserves estimation and auditing
procedures

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D105
SPE Petroleum Resources Management
System (PRMS)

Sponsored by SPE/WPC/AAPG/SPEE
Approved March 2007

An Industry Presentation

Rawdon J.H. Seager


Gaffney, Cline & Associates

www.gaffney-cline.com

Project No. D105


Technical and Management Advisers to the
Petroleum Industry Internationally since 1962

Project No. D105

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