Redefining 'reserves'

Dec. 2, 2013
Booming development of unconventional oil and gas resources has complicated the US Securities and Exchange Commission's regulation of the unaudited reserves estimates publicly traded producers must attach to their financial statements.

Booming development of unconventional oil and gas resources has complicated the US Securities and Exchange Commission's regulation of the unaudited reserves estimates publicly traded producers must attach to their financial statements.

Production from shales and other continuous, low-permeability reservoirs began to climb at about the time SEC was adapting its rules to advances in technology, an essential element of reserves estimation.

The adaptations came in rules changes SEC adopted in 2008 and made effective in 2009. Among other things, they addressed two important nongeologic factors in reserves estimation: oil and gas prices and technology. They changed the price benchmark to a 12-month average from the yearend point value used before, and they broadened the range of reserves estimation methods.

The changes also allowed reserves estimates to include hydrocarbons from unconventional sources. And they in some ways relaxed tests for establishing proved, undeveloped reserves (PUDs).

Questions about PUDs

Questions remain about PUDs that are important to unconventional resource plays, which cover much more surface area than their conventional counterparts and require more time to fully develop.

John Lee, professor of petroleum engineering at the University of Houston and an SEC fellow at the time of the rules changes, recently identified four features of the new regulations that continue to generate discussion: 1. Changing the "certainty" criterion for PUDs to "reasonable certainty." 2. The ability to claim PUDs beyond one offsetting drilling unit if the "reasonable certainty" criterion is met. 3. Introduction of the "reasonable technology" concept facilitating the booking of PUDs beyond immediate offsets. 4. The "5-year rule" for booking and maintaining the booking of PUDs.

Lee discussed those points in presentations at two September conferences conducted by Ryder Scott and reported in the firm's Reservoir Solutions newsletter.

"SEC has only one system of reporting regulations, the same for all reserves, conventional and unconventional," Lee said. "To forecast for unconventional reservoirs, we are using reserves estimation practices developed during the last century for conventional reservoirs—based on empirical observation of production declines for over a century and modeling capabilities developed in the second half of the 20th century generally supporting simple decline models for estimating reserves."

SEC's relaxation of the criterion of "certainty" to "reasonable certainty" might not be an appropriate application for unconventional shale resources, Lee said. The key problem is that industry doesn't know enough about unconventional reserves and doesn't have tested modeling experiences.

It has, Lee said, "no experience of long-term declines, no way to validate models, simple or complex, no modeling approaches totally, uniquely applicable and relevant to physical processes involved." Those processes include long-duration transient flow, unlike those of conventional resources; unknown contributions from hydraulic fractures and reopened fractures; and unknown physical mechanisms that may control multiphase-flow characteristics.

Lee noted that SEC has not objected to a computational technique proposed in a Society of Petroleum Evaluation Engineers document (Monograph 3) for estimating unconventional PUDs possibly beyond immediate offset locations. So SEC's "reliable technology" concept might provide opportunities for unconventional resources through the introduction of more advanced computational techniques.

Lee noted that SEC has taken a rigid stance against booking onshore North American PUDs unlikely to be drilled within 5 years of the initial booking date and against retaining booked PUDs more than 5 years without justification by "specific circumstances" such as time required for offshore or remote construction.

At country level

These questions make clear that the fast emergence of unconventional resource production necessitates refinement of methods for estimating reserves. The process always has been interpretive, the results never as precise as wanted. Changes might be in order not only in how reserves are assessed but also in how the term is defined.

While they sort through those complexities, country-level assessments change in interesting ways, as the Worldwide Report (p. 30) shows.