Resource and Reserve Classification and Reporting Standards for Oil and Gas

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Resource and Reserve Classification and
Reporting Standards for Oil and Gas
IASB BOARD MEETING, APRIL 2005, AGENDA PAPER 2B

• Duncan Frost
• Member, SPE Oil and Gas Reserves Committee
• Presented to IASB Board Meeting, 19th April 2005,
  on behalf of IASB Extractive Activities Project
  Team and SPE Oil and Gas Reserves Committee.

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Outline

• Background.
• Types of oil and gas accumulations.
• Reservoir Characteristics.
• What is a hydrocarbon Resource or Reserve?
• SPE and other Classification Systems Reporting
  Standards.
• SPE/WPC/AAPG resources reserves system.
• Regulatory reporting codes.
• Who prepares the estimates?
• Uses of resource and reserve estimates.
• Current resource / reserve reporting practices
• Current future developments.

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Oil Gas Presentation
BACKGROUND
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BackgroundTypes of Hydrocarbon Accumulations

• Conventional reservoirs (Oil and Gas)
• Tar Sands / Bitumen
• Coal Bed Methane
• Tight Gas
• Gas Hydrates

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BackgroundTypical Reservoir Characteristics
Hydrocarbons trapped in porous permeable
rocks Oil in place rock volume porosity
saturation Recovered volume Oil in Place
Recovery Factor
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BackgroundScale

• Typical Deepwater West Africa Field
• Height of St Pauls
• 50 square kilometres
• Develop decision on 2 6 wells
• Wells are 15 cm in diameter
• 1 part in a billion areal sampling !

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BackgroundScale - Field over London
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Houston Horn Mt
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BackgroundTypical lifecycle of an oilfield
2015
2035
1995
2025
2005
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Oil Gas Presentation
What is a Hydrocarbon Resource or Reserve?
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What is a Resource / Reserve?Nomenclature
Resources and Reserves
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What is a Resource / Reserve?Summary of key
points

• Resource evaluation is
• inherently uncertain
• an estimate at a point in time and subject to
  change.
• Reliant on evaluator competence, skill and
  judgement
• It is dependent on technical commercial factors
• Development choices
• Reservoir geological complexity
• Data quantity quality
• Stage of development

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What is a Resource / Reserve?Estimation of
recovery in place volumes

• Area Seismic, well test analysis
• Thickness wells seismic
• porosity saturation wellbore measurements /
  seismic
• fluid properties fluid samples
• Fluid contacts well penetration, pressure
  measurements, seismic

Integrated evaluation, heavily reliant on data
quality, data quantity, geological and
engineering interpretation
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What is a Resource / Reserve?Estimation of
recovery Recovery Factor

• Recovery can range from 1 to 80. Typically 20
  50
• Project choice what recovery for what effort to
  get it?
• Key choices include
• What recovery method? Improved Recovery?
• How many wells?
• What contingency mitigations?
• Outcome uncertain due to state of nature and
  future reservoir management choices

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What is a Resource / Reserve?Estimation of
recovery commercial

• Does it Make Money?
• Costs
• Production profile
• Fiscal regime
• Economic conditions (product price, exchange
  rate)
• Will it happen?
• Contractual rights
• Political risks
• Internal and external approvals

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Oil Gas Presentation
SPE Classification System and other Reporting
Standards
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SPE Classification SystemWho are the SPE?

• The Society of Petroleum Engineers
• A volunteer technical / professional
  organisation.
• Mission statement
• To collect, disseminate, and exchange technical
  knowledge concerning the exploration, development
  and production of oil and gas resources

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SPE Classification SystemSPE Oil Gas Reserves
Committee

• The committee is charged with
• Oil and gas reserve matters, including reserve
  definitions and standards
• Disseminating reserve information to other groups
  
• Liaising with other organizations to achieve
  worldwide use of standard reserve definitions
• Monitoring of activities in the reserve
  definition area
• Informing the SPE Board on reserves issues.
• IASB recently appointed an observer.

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SPE Classification SystemHistory of SPE Reserves
Definitions

• 1964 First SPE definitions, from API
• 1978 SEC Reserves Definitions
• 1987 Separate SPE WPC definitions
• 1997 SPE / WPC Reserves Definitions
• 2000 SPE/WPC/AAPG Resource Definitions
• 2001 Guidelines Auditing Standards
• 2004 SPE Glossary of Terms

SEC Securities and Exchange Commission WPC
World Petroleum Council AAPG American
Association of Petroleum Geologists
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SPE Classification SystemSPE/WPC/AAPG Resource
Definitions
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SPE Classification SystemResource Definitions
with project status
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SPE Classification SystemProved Reserves

• Proved reserves are 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. Proved reserves can be categorized
  as developed or undeveloped.

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SPE Classification SystemDeterministic or
Probabilistic approach
Proved
Probable
Possible
Probability
Probabilistic
P50
P90
P10
Reserves
Deterministic / Scenario based
Best Estimate
Conservative Case
Upside Scenario
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SPE Classification SystemUnproved Reserves

• Un proved recovery less certain than proved.
• Probable recovery is more likely than not.
• Possible greater than 10 chance of recovery
• So, colloquially (for a given project)
• Proved pretty sure youll get at least this
• Proved Probable what you expect to get
• Proved Probable Possible what youll get if
  youre lucky

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SPE Classification SystemKey aspects of SPE
Reserves Definitions

• Principle based definitions
• Recognition that application will evolve over
  time
• Guidelines provide the details
• 3P basis, with resource framework
• Deterministic or probabilistic
• Flexibility in economic conditions

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Other Classification Systems / Reporting Codes

• National Resource Classifications.
• e.g. China Norway Russia
• National Disclosure regulations
• e.g. USA (SEC), UK (SORP), Canada (NI 51-101)
• Evolving International Standards.
• SPE / WPC / AAPG Resource Reserves Definitions
• UNFC

UNFC United Nations Framework Classification
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Other Classification Systems / Reporting
Codes UNFC Potential alignment with SPE
E Axis Reflects Economic and Commercial Viability
F Axis Reflects Project Status
G Axis Reflects Level of Uncertainty
From SPE Paper 90839
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Oil Gas Presentation
Who prepares the estimates?
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Who Prepares the Estimates?

• Not specified in most regulations
• SPE publishes Standards Pertaining to the
  Estimating and Auditing of Oil and Gas Reserve
  Information
• This standard not formally adopted by any
  regulator

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Oil Gas Presentation
Uses of Resource And Reserve estimates?
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Uses of Resource / Reserves EstimatesVolumes

• Financial Reporting (on UOP basis)
• Oil Gas property transactions
• Bank Lending
• Equity investment
• Oil and Gas Companies
• National Governments
• The Relevant volume depends on your use for it.

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Uses of Resource / Reserves EstimatesValue

• Volume not always a good proxy for value .e.g.
  PSC
• Only value related disclosure is SEC SMOG.
• Value is a function of production profile (hence
  volume), capex, opex, fiscal terms, product
  prices, exchange rates, risks to recovery.

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Oil Gas Presentation
Current Resource / Reserve Reporting Practices?
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Current Reporting Practices Financial Reporting

• Each jurisdiction has separate reserves
  definitions.
• SEC de facto global regulator. SEC proved
  only.
• Canada Proved and Probable
• UK A choice Proved or proved plus probable
• Evolving International Standards.
• SPE / WPC / AAPG
• UNFC

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Oil Gas Presentation
Current and future developments
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Current future developments

• IASB development of extractive activities
  standard.
• SEC de facto global regulator at present.
• SPE / WPC / AAPG de facto industry standard
• UNFC broad, integrating framework

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Current Future DevelopmentsSPE Vision
current activities

• Vision - A set of reserves resource definitions
  (and an associated set of estimating guidelines,
  which are current best practices) universally
  adopted by the oil and gas industry,
  international financial organizations, and
  regulatory and reporting bodies.
• Activities
• Update of definitions / guidelines
• Liaison with IASB, UNFC group
• Mapping of other definitions

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Oil Gas Presentation
Concluding Comments
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Differences between minerals / oil gas volume
reporting.

• Mineral Resource/Reserve classification based on
  deterministic methods, whereas Oil and Gas
  Resource/Reserve classification based on
  deterministic or probabilistic methods.
• Both systems include Proved and Probable
  Reserves, but
• There are important differences in the respective
  definitions
• Oil/gas system includes Possible Reserves which
  are not recognised in the Minerals system
• Oil/gas system includes Contingent and
  Prospective Resources Minerals system includes
  Measured, Indicated and Inferred Mineral
  Resources
• Sub-categories of Mineral Resources and Ore
  Reserves must be reported separately.
  Sub-categories of Oil/gas Resources/Reserves
  usually reported combined (2P, 3P)

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Concluding CommentsSummary of key points

• Reserve/Resource estimates are inherently
  uncertain
• There is no universally accepted global standard
• SPE/WPC/AAPG definitions in most widespread use.
• UNFC a flexible framework, possibly consistent
  with SPE/WPC/AAPG
• Proved reserves are to a confidence level of
  reasonable certainty. i.e. pretty confident of
  them
• Most regulators require disclosure of proved,
  some also of probable.
• Volume not necessarily a good proxy for value.

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Concluding CommentsFurther Information.

• SEC definitions (Regulation S-X 4.10)
  www.sec.org
• There is no universally accepted global standard
• SPE/WPC/AAPG definitions in most widespread use.
• UNFC a flexible framework, possibly consistent
  with SPE/WPC/AAPG
• Proved reserves are to a confidence level of
  reasonable certainty. i.e. pretty confident of
  them
• Most regulators require disclosure of proved,
  some also of probable.
• Volume not necessarily a good proxy for value.

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Concluding CommentsFurther Information.

• SPE Reserves Definitions Other Resources
• www.spe.org/spe/jsp/basic/0,,1104_1730,00.html
• www.spe.org
• SEC Definitions (Regulation S-X 4.10)
• www.sec.gov/divisions/corpfin/forms/regsx.htmgas
• Canadian Definitions
• www.albertasecurities.com
• UNFC Definitions
• www.unece.org/ie/se/reserves.html
• UK Definitions
• www.oiac.co.uk