The American Association of Petroleum Geologists president promotes wider reliance than exists now on probabilistic methods of estimating oil and gas reserves.
Oil and gas reserves calculations can be presented as a single number (deterministic) or ranges (probabilistic), explained AAPG Pres. Peter R. Rose, founder and senior associate of Rose & Associates LLP, a Houston risk analysis consultancy. Probabilistic analysis involves Monte Carlo simulations, which attach probabilities to values in the range.
Deterministic and probabilistic estimates are not necessarily separate. A deterministic estimate is a single value that theoretically fits on a range that could be derived by a probabilistic analysis.
Professional societies working to establish international reserves standards are focused on technical definitions and engineering details rather than on probabilistic vs. deterministic methods, Rose said.
The Society of Petroleum Engineers reserves definitions and guidelines allow for both methods to be applied, depending upon the evaluator and the circumstances.
The US Securities and Exchange Commission requires publicly traded companies to annually proved reserves. SEC rules define proved reserves as quantities estimated with “reasonable certainty” to be commercially recoverable from the reporting date forward.
Reserves estimates are “subject to vagaries of nature, human error, and various biases,” Rose said, calling reasonable certainty “the enduring fatal flaw in responsible oil and gas reserves reporting.”
Reasonable certainty
With probabilistic methods, Rose said, geotechnical and engineering societies could specify 90% confidence in a proved reserves estimate.
Currently, proved reserves values are presented by a deterministic single number-even though substantial uncertainty may be involved.
“That is one of the insidious aspects of deterministic reserves,” Rose said. “They convey a false sense of certainty, and thereby may encourage investors, bankers, accountants, government officials, and the general public to perceive certainty where substantial uncertainty is much more appropriate.”
Adjustments are normal in reserves reporting, but large reserves writedowns concern stakeholders and regulators. Royal Dutch Shell PLC reclassified its reserves estimates five times in a little over a year during 2004-05 (OGJ, Feb. 21, 2005, Newsletter).
“Reserves writedowns are not only embarrassing to the E&P companies, but they reflect badly on the profession,” Rose said.
Writedowns can stem from technical surprises, snags with contract schedules, vague or differing definitions and standards, a reserves evaluator’s mistakes, or ethical lapses by executives, he said, adding that there are few examples of the last source of problems. “I believe that a substantial number of reserves problems-certainly not all, or perhaps even most, but many-are ultimately related to a fundamentally flawed definition of proved reserves as an estimate that the evaluator is reasonably certain will be produced or exceeded,” Rose said.
But he noted that reasonable certainty implies a probability statement, although no probability value is designated for proved reserves.
“Because the confidence is not specified, estimators cannot be accountable,” Rose said. “And this basic technical unaccountability seeps into and infects the whole theater of reserves estimating.”
Probabilistic estimating
During the 1990s, exploration geoscientists and engineers began to express their technical expectations by standardized confidence levels (probabilities) in specified recoverable volumes.
“A geotechnical exploration team might be 90% sure that, if discovered, a certain prospect would contain at least 2 million recoverable bbl, 50% sure that it would contain 10 million bbl or more, and think there was a small chance (10% confidence) that it would contain 50 million bbl or more,” Rose said. “The average (or mean) of the distribution, the single best representation of all outcomes is, in this case, about 20 million bbl. This methodology has now been adopted by most exploration companies, public as well as private, around the world.”
Rose lists the following advances of probabilistic methodology over deterministic methods:
• Estimating accuracy can be measured so estimators can be accountable.
• Use of statistics improves estimates.
• Predrill reality checks can detect errors before drilling.
• It is faster, more efficient, and avoids false precision.
• It promotes realistic communication of uncertainty to decision-makers and investors.
• Results are immediately usable for overall asset management.
Rose urges that proved reserves be equated with 90% confidence as an industry standard.
“But the actual confidence-level chosen-90%, 95%, 97%, 99%-is not as critical as the fact that world professionals agree on a standard and commit to its use as a necessary best practice,” he said. “If that happens, corporations, governments...even the US SEC can only follow.” ✦