RESERVES AND RESOURCES

We need to know about the quantity and quality of oil and gas reserves because the prosperity of the world is dependent upon petroleum-based fuels. The debate about forthcoming oil shortages—as soon as 2004 or perhaps later in the twenty-first century—hinges on our understanding of petroleum reserves and future resources. Global catastrophic changes are predicted by some if a shortage occurs early in the twenty-first century; however, others are less concerned, because of new estimates of reserves and potential petroleum resources.

Our concepts of petroleum reserves and resources and their measurements are changing to reflect the uncertainty associated with these terms. Petroleum reserves have been largely calculated deterministically (i.e. single point estimates with the assumption of certainty). In the past decade, reserve and resource calculations have incorporated uncertainty into their estimates using probabilistic methodologies. One of the questions now being addressed are such as "how certain are you that the reserves you estimate are the actual reserves and what is the range of uncertainty associated with that estimate?" New techniques are required to address the critical question of how much petroleum we have and under what conditions it can be developed.

The goal of most industry and financial groups is to forecast future production rates, cash flow, net present values (NPV) and other measures designed to prudently manage financial and production aspects of the petroleum reserve. The determination of the appropriate category to which a reserve is assigned is a critically important decision. These groups emphasize the least risky category of reserves—proved (measured) reserves.—because industry and financial groups can determine the present value of a reserve from existing infrastructure, whereas other resources require additional investment and increased uncertainty regarding the ultimate asset value.

Revisions of original reserve estimates, that generally increase the earlier estimates, have caused several groups to undertake studies of these changes. Many such studies focus on the original underestimation of reserves and the supporting analysis of reserve growth. However, there are instances of original overestimation of reserves. U.S. Geological Survey (USGS) studies on reserve growth of the world's oil fields demonstrate the significant potential of reserve growth, a potential that may be greater than that of undiscovered resources. Close estimation of the true petroleum reserves is critically important to both producers and consumers of hydrocarbons, and opinions about estimates are numerous, conflicting, and often contentious. To understand the current flux of reserves and resources, definitions are provided followed by a discussion. Definitions given are those used in western literature. Countries of the former Soviet Union (FSU) use different reserve and resource definitions. Our analysis of databases in the Volga-Ural and West Siberian Basins shows that when FSU data are converted to our western definitions, similar uncertainties exist.

DEFINITIONS

There are many definitions of reserves and resources, and we need some historical perspective to understand the current debates.

U.S. Geological Survey/U.S. Bureau of Mines

In 1976 the USGS/U.S. Bureau of Mines (USBM) defined resources and reserves (Figure 1) as follows.

Resources: A concentration of naturally occurring solid, liquid, or gaseous materials in or on the Earth's crust in such form that economic extraction of a commodity is currently or potentially feasible.

Reserves: That portion of the identified resource from which a usable mineral and energy commodity can be economically and legally extracted at the time of determination. According to the American Geological Institute (AGI), by using this resource/reserve scheme, we can update the definition: an estimate within specified accuracy limits of the valuable metal or mineral content of known deposits that may be produced under current economic conditions and with present technology. The USGS and USBM do not distinguish between extractable and recoverable reserves and include only recoverable materials.

Securities and Exchange Commission

The critical linkage between financial and accounting considerations and reserve definitions requires an understanding of the definitions given in Securities and Exchange Commission Regulation (SEC) Regulation 4-10. The SEC was empowered to develop energy accounting standards for the United States by the Energy Policy and Conservation Act of 1975 (EPCA), which was passed largely in response to the 1973 oil embargo. This act required the establishment of a national energy database including financial information. The SEC's definitions may be inherently conservative or restrictive thereby causing initial conservative estimates of reserves. The SEC definitions largely focus on proved oil and gas reserves, but are divided into two subcategories: (1) proved developed oil and gas reserves and (2) proved undeveloped reserves.

From SEC Regulation 4-10, Section 210.4-10 and as used by the industry, proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids that 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 date the estimate is made). It goes on to define proved reserves if economic producibility is supported by either actual production or conclusive formation test and include that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, and immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. Proved reserves do not include: oil that may become available from known reservoirs but is classified separately as "indicated additional reserves"; 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; crude oil, natural gas, and natural gas liquids that may occur in undrilled prospects; and crude oil, natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite, and other such sources.

Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.

Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir.

The World Petroleum Congress/Society of Petroleum Engineers

In 1997, the World Petroleum Congress (WPC) and the Society of Petroleum Engineers (SPE) jointly published petroleum reserve definitions that added the element of probability to the deterministic definitions in common use. The WPC/SPE definitions build on the SEC definitions by including probabilistic estimates.

Reserves are those quantities of petroleum which are anticipated to be commercially recovered from known accumulations from a given date forward.

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. 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 percent probability that the quantities actually recovered will equal or exceed the estimate.

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 further divided into two subcategories: probable reserves and possible reserves.

Probable reserves are those unproved reserves which analysis of geological and engineering data suggest 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 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.

The reserves identified in the upper left part of Figure 1, measured reserves, have greater economic feasibility and greater geologic certainty than indicated or inferred reserves. Undiscovered resources have even greater uncertainty than the previous categories. Many industry groups use the terms proved, probable, possible and speculative that roughly correlate to USGS categories of measured, indicated, inferred, and undiscovered. Proved, probable and possible reserves are commonly called P1, P2, and P3 respectively (Figure 2) and considerable analysis has been applied to relationships among these reserve categories to estimate ultimate recoverable resources.

Technological advances, particularly 3-D seismic techniques and deepwater drilling technology, have revolutionized our ability to discover and develop petroleum reserves. Technology has accelerated the rate of discovery of new global petroleum resources throughout the 1990s. Deepwater offshore drilling technology (up to 3,000 m water depths) permit exploration of many areas that were previously inaccessible, such as offshore west Africa and offshore South America. This geographic expansion of petroleum resource development into offshore areas provides opportunities for many non-OPEC nations. The discovery of significant oil resources in the Western Hemisphere, particularly in deepwater areas of the south Atlantic Ocean and Gulf of Mexico, are important to the United States, which seeks oil from more widely distributed potential supply sources. Any regional optimism springing from this discovery is mitigated by the realization that future contributions from field growth, which according to the USGS are nearly as large as undiscovered petroleum resource potential, will come from the areas where fields are already discovered.

Natural gas is an underutilized resource worldwide relative to oil but will play an increased role in the twenty-first century. New technologies such as gas-to-liquids and large-scale liquefied natural gas projects will also dramatically alter the fossil fuel landscape.

DISCUSSION

The definitions above are an abbreviated version of those used in a very complex and financially significant exercise with the ultimate goal of estimating reserves and generating production forecasts in the petroleum industry. Deterministic estimates are derived largely from pore volume calculations to determine volumes of either oil or gas in-place (OIP, GIP). This volume when multiplied by a recovery factor gives a recoverable quantity of oil or natural gas liquids—commonly oil in standard barrels or natural gas in standard cubic feet at surface conditions. Many prefer to use barrels of oil equivalency (BOE) or total hydrocarbons for the sum of natural gas, natural gas liquids (NGL), and oil. For comparison purposes 6,000 cubic feet of gas is considered to be equivalent to one standard barrel on a British thermal unit (Btu) basis (42 U.S. gallons).

Accommodation of risk (or uncertainty) in reserve estimations is incorporated in economic decisions in several ways. One common method incorporates the expected value (EV) which is the probability-weighted average of all possible outcome values. This process is called "decision analysis"; however, the estimation or production forecast process has become so important that even more sophisticated analysis is commonly undertaken. In regions such as the North Sea, operating costs are high and critical infrastructure decisions are needed early in order to maximize the value of the reserve. Oil price, transportation costs, capital expense, operating expenditures, production rates, and closely estimated reserve volumes are the principal parameters used in developing an evaluation strategy. Reserve estimates can change quite dramatically. The United States is by far the most intensely developed petroleum region in the world with more than 3.5 million wells drilled and a long history of reserve estimation that shows substantial increases in ultimate recoverable reserve estimates. However, negative revisions also occur; either overestimation or underestimation of reserves can be costly. Petroleum reserve estimates are one of the parameters used in determining the EV of a field's reserves. In order to accommodate uncertainty in the various reserve categories, the reserve estimates are probability-weighted and used to determine the EV as shown in the following example and in Figure 3. Although a company may believe they have 3,525,000 barrels of recoverable oil, their probability-weighted reserve is only 31 percent of that figure or 1,093,750 barrels of recoverable oil. This procedure, repeated over and over in many fields throughout the world, has led to underestimation of ultimate recoverable reserve estimates. The subsequent upward revision of these initial conservative estimates is known as reserve growth or field growth. In the United States field growth accounts for twice the volume of future potential reserves of oil (i.e., 60 billion barrels) as undiscovered oil resources (i.e., 30 billion barrels) according to USGS 1995 estimates. In the world as a whole, field growth, based on analysis of the PetroConsultants datafile for a sixteen year period (1981–1996), accounts for nearly 500 billion barrels of oil for just those fields discovered since 1981.

Although, initially, deterministic or point value estimates of reserves were largely believed to be adequate, it is now clear that many factors complicate reserve estimation for recoverable oil or gas. Some complicating geologic and reservoir factors include: variations in reservoir architecture and quality (low complexity or high complexity), microscopic displacement efficiency, volumetric sweep efficiency (the effectiveness of hydrocarbon recovery from secondary and tertiary recovery processes), data quality and analysis. In the North Sea study, these variables are quantified and scored to improve field reserve estimates. In another study of North Sea fields, 65 percent of the responding countries used deterministic ultimate recovery estimates, whereas 53 percent used probablistic estimation methods. Inaccuracies of ultimate recovery and production forecasts were very expensive to those North Sea operators who either underestimated or overestimated facilities requirements. The conclusion that more unified and refined reserve definitions are needed is almost universally

supported. Appraisals at reservoir level are on a smaller scale than at field level. There are three basic ways to describe uncertainty in relation to reservoir and estimation models: fuzziness, incompleteness, and randomness. Fluctuations in the price of oil or natural gas affect the recoverability of the resource base and as prices increase, reserves increase as they become more economically viable. Advances in exploration and production technology also make recoverability more viable and enhance the amount of reserves that can be extracted from any given reservoir.

IMPLICATIONS

It is well known that reserve estimates made early in the development of a field are often wrong and that there's a 50 percent change in estimated ultimate recovery in many fields during the first ten years. In addition, the average field lifetime has been a decade longer than initially expected in the North Sea. If you believe in reserve growth, you would conclude that there will not be a petroleum crisis anytime soon. If, on the other hand, you believe that reserves have been overstated and you make negative revisions to reserve estimates, there will be a crisis soon. Current known petroleum reserves (proved + P50 probable) in the world are 1.44 trillion barrels of oil, 5,845 trillion cubic feet of gas, and 80 billion barrels of natural gas liquids based on 1996 PetroConsultants data. Depending upon the volume of undiscovered and field growth reserves added to these known reserves, you can develop either pessimisitic or optimistic scenarios.

In 1997, net U.S. petroleum imports of 8.9 million barrels of oil per day were worth $67 billion and exceeded U.S. petroleum production of 8.3 million barrels of oil per day. Concerns about oil shortages caused the United States to build a strategic petroleum reserve in 1977 that currently holds 563 million barrels of oil or about two months of net imported petroleum. Although domestic oil and gas production declined from 1970 to 1993, natural gas production has increased since the mid-1980s and energy equivalent production from natural gas exceeded domestic oil production in the late 1980s. Estimates in 1999 of per well oil production for the United States have fallen to 11.4 barrels a day, the lowest value in the last forty-five years. Considering this decline, the world's reserves and resources are critical to our future because the United States is the largest consumer of petroleum resources (~22% of world consumption). Increasingly, the United States relies on foreign oil supplies. Determining how much oil the world has and where it is located will continue to focus our attention on reserve estimation.

Thomas S. Ahlbrandt

See also: Energy Economics; Oil and Gas, Drilling for; Oil and Gas, Exploration for; Oil and Gas, Production of; Supply and Demand and Energy Prices.

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