Fwd: Reserves Reporting – The Greatest Truth a Company Can Tell
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Reserves Reporting – The Greatest Truth a Company Can Tell
There is an historical echo in the Oil & Gas news these days concerning “shale drillers" (a derogatory media term) and their actual reserves, and ultimate value. The application of "Fracking" (another derogatory media term) which correctly termed is "Hydraulic Sand Water Fracturing" and is being touted as new technology (first applied during the mid 1950's.) Many reports reference 1P, 2P, and 3P reserves and are being challenged by analysts.
The echo heard today comes from the April 2004 report that Shell Oil Company had overstated its reserves.
Headline news stated “Shell Scandal Points to Exaggerated Estimates of Oil Reserves.” The New York Times reported that internal Shell documents and other data indicated that Shell had overestimated its proven oil reserves in Oman by as much as 40 percent. But that seems to have been done because the expectation was that technological advances in drilling techniques could extract more crude from mature fields than had previously been possible. The Oman episode is important because if the advanced techniques, including what is known as "horizontal drilling" - drilling outward at an angle, rather than simply boring down vertically - are not as effective as they have been made out to be, then the amount of oil that is deemed recoverable will have to be lowered. That's bad news for Oman, which is heavily dependent on oil and gas exports. But it's also bad news for the world as a whole. “Sound Familiar?”
The irony of the Shell Oil Company write down is that a few years later, based on the oil price, it was concluded that Shell Oil Company had actually been correct in reporting its initial reserve estimates, and was the only company who was actually reporting correctly. By then it was too late, many corporate Shell people lost jobs and the integrity of the company was put under the microscope.
Today, the US “Shale Plays,” which more accurately are geological “Petroleum Source Rock Resources,” are facing the same "Shell" scrutiny. To unlock the oil and gas, the industry is using similar if not identical technological terms to describe their reserves and methods as did Shell. But the focus is also on foreign companies as well. The terms and meanings of the reserve estimates and the companies reporting them need to be understood.
(Image modified by: Raymond Pierson)
The following information is selected abbreviated text from “Mark J. Kaiser, Yunke Yu, Center for Energy Studies, Louisiana State University, Baton Rouge.”
The primary determinants of the value of an oil and gas company are its reserves, level of production, and commodity price at the time of assessment. The purpose of this article is to establish the relationship between the factors that determine company value for a cross-section of publicly traded oil and gas companies for the year ending 2010. Oil and gas companies vary in the size of their reserves and production, earnings, growth potential, ownership, corporate and financial structure, degree of integration, and property portfolio, and all these factors potentially impact equity value.
The value of an oil and gas company and/or property is intended to reflect the worth of the company and/or property on the open market. According to the 2005 International Valuation Standards, worth is defined as "the value of property to a particular investor, or class of investors, for identified investment objectives." The market value of a property is defined as the "estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion… reflecting the collective perceptions and actions of a market …".
The primary value of any company is its cash flows and earnings, which is dependent upon the quantity and quality of the product that it provides, and the sales price. Production is derived from reserves and the inventory of capital assets, production equipment, infrastructure, and acreage. Reserves lie below the surface and have not yet been produced but are economically and technically viable to extract. In North America, the United States Securities and Exchange Commission (SEC), the Ontario Security Commission (OSC), Toronto Stock Exchange (TSE), and Canadian Security Administration (CSA) provide guidelines on resource classifications and company requirements to list on their stock exchanges.
The primary assets of oil and gas companies are their entitlements to future production from reserves, and one of the distinct features of the industry is its depleting asset base and need for replacement through drilling and acquisition. The physical attributes of the asset class – located miles under the ground in rocks with variable properties and uncertain boundaries, relying on indirect measurements that are expensive to perform – means that reserves estimates and deliverability are uncertain, and because future production is subject to variable production rates, unknown prices and cost, and is impacted by regulatory and fiscal uncertainty, the value of reserves are uncertain.
Proved Reserves
Proved reserves are defined as the estimated remaining quantities of oil and gas anticipated to be economically producible, as of a given date, by application of development projects to known accumulations under existing economic and operating conditions. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and gas to market, and all permits and financing required to implement the project. Proved reserves estimates must be made with "reasonable certainty" and are defined conservatively in the sense that the reserves estimates are met. Engineering and geological data are needed to make the estimates, and generally speaking, the knowledge offered by greater amounts of engineering and geological data will improve the quality of the estimation. The relative uncertainty of reserves is characterized by reference to deterministic categories – proved, 1P ("much more likely than not"); probable, 2P ("as likely than not"); and possible, 3P ("possible, but not likely") – or in probabilistic terms. If probabilistic methods are used, there should be at least a 90% probability that the quantities of proved reserves actually recovered will equal or exceed the estimate. For probable and possible reserves, the exceedance probabilities are 50% for probable and 10% for possible reserves.
Proved reserves may be developed or undeveloped and are classified into Proved Developing Producing (PDP), Proved Developed Non Producing (PDNP), and Proved Undeveloped (PUD) categories. PDP reserves are expected to be recovered from completion intervals that are open and producing. PDNP reserves are expected to be recovered from completion intervals that are open at the time of the estimate but are not producing (shut-in) or completion intervals that are not yet open but behind existing wells (behind-pipe). PUD reserves are expected to be recovered from new wells on undrilled acreage or existing wells in new formations. Reserves that are undeveloped require significant capital expenditures to convert into producing fields and cash flow generating assets. PDP is the least risky and the most certain proved reserves class; conversely, PUD is the most risky and least certain proved reserves class.
Ownership
The international oil industry is a complex and dynamic combination of public and private ownership reflecting historic trends, national policy, and the strategic objectives of countries. Public corporations have broadly dispersed ownership while companies with concentrated ownership are privately owned. In the U.S., private companies are the most numerous and tend to be much smaller than publicly traded companies.
Large multinational oil companies are commonly referred to as International Oil Companies (IOCs). IOCs are listed on stock exchanges with 100% of their stock owned by the public. They publish annual reports and abide by regulatory rules of the stock exchange listing. National Oil Companies (NOCs) are owned entirely by state government and in contrast to IOCs, production, reserves, revenue, profitability, and other key variables are not publicly disclosed. Over the past decade, a third class of company has become increasingly popular – companies that are part public and part government owned – referred to as Government Sponsored Enterprises (GSEs). The publicly owned portion of GSEs provide production and financial data in annual reports.
Examples of GSE’s
Eni from Italy, Petrobras from Brazil, Statoil from Norway, and PetroChina from China are examples of GSEs. Some GSEs have shed all previous government ownership (e.g., BP, Total, Repsol, PetroCanada), while other GSEs continue to have varying degree of state ownership (e.g., Sinopec (76%), Eni (30%), PetroChina (86%), Statoil (63%), Petrobras (32%), GazProm (51%), Rosneft (89%), ONGC (84%)).
Reserves reporting
Government agencies and regulatory bodies in many countries have developed reserves reporting regulations prescribing how volumes are classified and which volumes are reported. In the US, the SPE/WPC/AAPG/SPEE Petroleum Resources Management System (PRMS) is an industry standard for classifying and reporting oil and gas reserves and resources.
The SEC, the regulatory agency that oversees the U.S. stock market and the manner publicly traded companies evaluate and report their assets and cash flows, require that companies report proved developed and undeveloped and total proved reserves. On December 29, 2008, the SEC published revised rules for oil and gas reserves disclosures which now closely align with guidelines in PRMS.3 Reserves volumes and values for publicly traded US companies are attached to financial statements and disclosed annually on Form 10-K while foreign issuers trading as an American Depository Receipt file Form 20-F. Private companies have no reserves disclosure requirements. The regulatory oversight and transparency in reserves reporting for NOCs and GSEs vary widely. For some NOCs, reserves data is considered a state secret.
Oil vs. Gas Company
Wells and fields are classified as oil or gas depending on the volume of produced gas (measured in cubic feet) per unit of produced oil (measured in barrels). We apply the same convention to reserves holdings and classify companies based on their relative mix of oil and gas reserves. **
Oil and gas proved reserves are denoted by Ro and Rg and companies with Rg/Ro < 10,000 cf/bbl are classified as oil companies; gas companies are identified by Rg/Ro > 10,000 cf/bbl.
** End source stated above.
Glossary of Terms Used in Petroleum Reserves/Resources Definitions Introduction - For several decades, the terminology used in the classification of petroleum reserves and resources has been the subject of study and ongoing revision. Since the mid-1930s, numerous technical organizations, regulatory bodies, and financial institutions have introduced ever more complex terminologies for the classification of petroleum reserves. In addition, the evolution of technology has yielded more precise engineering methods for reserve evaluation and has intensified the need for an improved nomenclature to achieve consistency among professionals working with petroleum reserves terminology. In recognition, the Society of Petroleum Engineers (SPE) and the World Petroleum Council (WPC, formerly World Petroleum Congresses) developed a set of petroleum reserves definitions which were presented to the industry in March 1997. These represented a major step forward in their mutual desire to improve the level of consistency in reserves estimation and reporting on a worldwide basis. As a further development, the SPE and WPC recognized the potential benefits to be obtained by supplementing those definitions to cover the entire resource base, including those quantities of petroleum contained in accumulations that are currently sub-commercial or that have yet to be discovered. These other resources represent potential future additions to reserves and are therefore important to both countries and companies for planning and portfolio management purposes. In February 2000, the two organizations in conjunction with the American Association of Petroleum Geologists (AAPG), developed resources definitions that encompassed the entire range of petroleum reserves and resources.
To access these terms, go to Glossary Petroleum Reserves Resources Definition
The reserve reporting of oil and gas companies is the greatest truth they can tell. But, getting there is a complicated combination of estimations and calculations governed by rules and regulations. Reserve reporting is not the same the world over and information is not always made public. Production is the causal result of reserves and is an important measure of performance since it determines gross revenue, and when combined with costs, the cash flow and profitability of a property. Operators control production and generally produce at rates to maximize return on investment, but differences arise in how oil and gas is produced depending on location and level of production and market conditions. At the field level, production and reserves are not strongly correlated because production depends on the life cycle stage of the asset.
Dynamic Reserves Definitions - Life Cycle
Primary, Secondary, & Tertiary recovery
1P Primary recovery is the extraction of petroleum from reservoirs utilizing only the natural energy available in the reservoirs to move fluids through the reservoir rock or other points of recovery.
2P Consists of inducing an artificial drive into the formation to replace the natural drive - water flooding involves injecting water under pressure into the formation to drive the oil to the wellbore.
3P Involves the use of enhanced recovery methods to produce oil - injection of chemicals, gas, or heat into the well to modify the fluid properties and thereby enhance the movement of the oil through the formation.
1P - When a well is first completed, the reservoir pressure is at its highest, which helps drive the oil to the well. As reservoir pressure drops, due to field production, the natural flow rates will diminish until the well reaches its economic limit under the original production scheme. On average, this primary production accounts for only a small fraction of the original oil in place.
2P - Secondary recovery programs, such as waterflooding, can be used to recover more oil and extend the life of the field. This process is carried out by drilling additional wells, into which water is injected. The water displaces the oil in the formation and pushes it toward the production wells.
3P - Tertiary recovery, such as carbon dioxide injection, is used in the final stage of the field’s production when feasible to recover an additional amount of the original oil in place.
Injecting a miscible gas, such as carbon dioxide, into an oil pool causes a number of changes in the crude to increase its recoverability. Among the most important are:
- A reduction in crude oil viscosity, which makes the oil less resistant to flowing,
- A swelling of the crude which, as the oil expands, pushes the oil out of the rock toward the extraction well, and
- An increase in gas pressure, which also pushes the oil to the well.
The Original Oil In PLace (OOIP) is always the reference volume. The estimated ultimate recovery (EUR) is them systematically redefined and re estimated depending on the recovery method.
(Figure modified by: Raymond Pierson)
(Figure constructed by: Raymond Pierson)
Keeping all the above in mind - OOIP is initially based on the following: Volumetric analysis is a technique that employs geological observations and information to estimate original fluids-in-place. It is often referred to as a "static method” as it primarily sources its data from core samples, wireline logs, and geological maps. Volumetric calculations are typically used prior to production to estimate reserves, and after considerable production to determine the efficiency of recovery, the areal extent of the reservoir, and as a basis for advanced studies such as reservoir simulations.
A comprehensive geologic study of the prospect is necessary to increase the confidence and reliability of determined reservoir properties such as volume, porosity, and fluid saturations. In calculating the volume of the reservoir, accurate determinations of the areal extent and thickness must be made with respect to the geological structure and depositional environment. The use of isopach maps in combination with planimetering is a commonly used method in the determination of reservoir volume. Conclusions drawn concerning lithofacies and depositional settings are used to provide an assessment of porosity, while wireline log and core data provide the analyst with measurements of fluid saturations.
Oil Reservoir Calculations
Gas Reservoir Calculations Historically, in a gas reservoir, only free gas-in-place was considered. Because of this, only one name was required: OGIP. However, with the increasing use of adsorbed gas reservoirs in the industry, Fekete has adopted the name “OGIPF” to define the gas-in-place for a free gas reservoir. Likewise, the name “OGIPA” is used to define the gas-in-place in an adsorbed reservoir. The name OGIP has been retained to describe the total original gas-in-place.
Adsorbed Gas Equations – Shale Reservoirs Shale gas reservoirs usually contain much more adsorbed gas than free gas. Therefore, OGIP calculations for shale reservoirs should also account for adsorption. For shale reservoirs, the following equations are used to calculate Original Adsorbed Gas-in-Place (OGIPA).
OOIP & Gas Equations reference @ Volumetric Analysis
At a corporate level, however, production and reserves are expected to be more closely related because fields of many different sizes, types and ages are aggregated, which smooth out the production and life cycle variations of development.
So, what are Oil & Gas Company reserves? Carpenters and woodworkers use this wisdom: "measure twice - and cut once"
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