SPE DISTINGUISHED LECTURER SERIESSPE DISTINGUISHED LECTURER SERIESSPE DISTINGUISHED LECTURER SERIESSPE DISTINGUISHED LECTURER SERIES

Is funded principally through a grant of the

SPE FOUNDATIONSPE FOUNDATION

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

Thank you for your attention

Any Questions?

BACKUP SLIDES

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