REVISIONS MAY PACE '89 OIL RESERVES

Aug. 13, 1990
G. Alan Petzet Exploration Editor It appears 1989 may have been another big year for large positive revisions of oil reserves in existing fields in the U.S. Nationwide 1989 reserves figures won't be known until late summer, when the Energy Information Administration releases its annual report. EIA's report is the only comprehensive reserves account available, even though several analysts have published reports the past few months based on reserves of the largest companies.
G. Alan Petzet
Exploration Editor

It appears 1989 may have been another big year for large positive revisions of oil reserves in existing fields in the U.S.

Nationwide 1989 reserves figures won't be known until late summer, when the Energy Information Administration releases its annual report.

EIA's report is the only comprehensive reserves account available, even though several analysts have published reports the past few months based on reserves of the largest companies.

Some in the industry have charged that several years of above average oil reserve additions have occurred because individual companies are estimating reserves with more latitude than usual to look more attractive to investors.

Others find such upward revisions unlikely in view of relatively low capital spending and drilling levels of the late 1980s.

However, Oil & Gas Journal interviews with managers, petroleum engineers, consultants, government officials, and others revealed no evidence of manipulation of reserves but many plausible explanations for the increases.

The top posted price of West Texas intermediate crude in late December, on which most reserves analyses are based, was about $20/bbl in 1989 compared with about $15/bbl in 1988

A large portion of the country's reserves changed hands during the 1980s. Reservoir analyses are almost always performed by the buyer and sometimes by the seller as well.

And the sharp decline in drilling in the mid to late 1980s gave companies time to conduct more detailed reservoir studies. They also scrutinized prospects much more intensely.

Those studies assigned recoveries based on lower oil prices since 1986 and vastly improved seismic, drilling, logging, completion, stimulation, and production technologies.

UPWARD REVISIONS

Upward revisions of reserves previously reported in existing fields have buoyed U.S. crude oil reserve the past several years. At the same time, additions from new fields, new reservoirs in old fields, and extensions have been relatively low.

In 1988 reserve additions from new fields, reservoirs, and extensions were 553 million bbl, 20% lower than in 1987 and the second lowest ever reported to EIA. The lowest was 48 million bbl in 1986.

Crude oil reserve revision increases exceeded 3 billion bbl in 1984, 1985, and 1987. They were 2.684 billion bbl in 1988, 2.724 billion bbl in 1986, and 2.810 billion bbl in 1983.

From 1977 through 1988, discoveries exceeded the net of revisions and adjustments in only 2 years: 1977 and 1982.

An EIA spokesman declined to provide advance figures but said 1989 will be the first year for significant upward revisions due to horizontal drilling.

"This year horizontal drilling has made some startling impacts on individual reservoirs," he said.

Large companies that report reserves to EIA represent 92-93% of U.S. oil reserves and are required by law to include a footnote on any field whose reserves increased or declined by 10% or more.

WHAT HAPPENED

Part of the dilemma in reserves is that additions held up during a time when capital and exploration spending plummeted.

For example, 1988 reserve additions and net revisions of the top 20 oil companies covered in a survey by Shearson Lehman Hutton, New York, were 4.51 billion bbl of oil equivalent, up 8% from 4.17 billion BOE added in 1985. Worldwide spending for exploration and development by those companies was 34% lower in 1988 than in 1985 in the midst of a downturn in the total industry's drilling activity.

"The sharp fall in expenditures and in working rigs was not matched by a proportionate decline in reserves added," Shearson Lehman said.

Two drilling trends also may have been precursors of the upward revisions.

Various statistics show a trend that development drilling made up a far larger percentage of total drilling during the 1980s than the 1970s, and infill drilling's share of total drilling grew markedly in the 1980s over the 1970s.

American Petroleum Institute well completion data show the trend toward development drilling.

API figures show development drilling was only 72-74% of total drilling in the early 1970s. That grew to 77-79% of total drilling in the late 1970s.

Development drilling expanded to 80.7-81.9% of total drilling in the early 1980s and peaked at 82.7% in 1985. Figures for more recent years are not final because wells completed during those years--back to 1986, for example--are still being reported.

Some in the industry point out that reserve estimation is by the "honor system" and neither the Department of Energy nor any other agency audits company estimates.

ESTIMATION PROCESS

No changes have occurred in the reserve estimation process that could account for large upward revisions, petroleum engineers say.

Shearson noted that a more precise definition of proved reserves might be desirable but probably is impractical.

"Inevitably, an element of subjectivity is involved since reservoir engineers have a certain degree of latitude in deciding what reserve quantities are economically recoverable," Shearson said.

U.S. statistics covering the last 50 years and more show that 1 bbl of oil discovered in a given year becomes more than 7 bbl 30 years later when the field likely is near depletion, notes Jean Laherrere, director of exploration techniques division, Total Cie. Francaise des Petroles, Paris.

Shearson concluded in a report earlier this year that oil and gas reserve disclosures of the 20 largest oil companies are consistent.

The company said the data are useful only if the same basic standards of reserves estimation and reserves accounting are used by all companies.

For instance, proved reserves must be recoverable with existing technology at oil price levels at the time the estimate is made.

MORE REASONS

A U.S. consultant active in property evaluations during the 1980s says several factors help explain the positive revisions.

He says some operators are extrapolating volumetric estimates to reservoir fringes and running secondary recovery feasibility studies and including the indicated reserves, even if undeveloped. There's nothing sinister about the practices, he adds.

"This doesn't mean they are rigging reserve values. They're just taking everything they can identify," he said.

Much more engineering data have become available to reserves estimators in recent years, and better technology is being used in the field, he points out.

He cites refinements in log interpretation and improved pressure transient analysis methods.

He also said operators are applying advanced recovery technology earlier in the lives of fields.

Shearson says major oil companies tend to be conservative, erring on the low side in their reserve estimates.

The practice leads to a discernable pattern of upward revisions of proved reserves from producing fields over time.

The company views reserves estimating and reporting as far from exact sciences but says Securities and Exchange Commission reserve disclosure requirements provide a basis for meaningful comparisons among major finders and producers.

OWNERSHIP CHANGES

About one third of the U.S. proved reserve base changed ownership in the 1980s, according to a journal published by Wisener & Associates, Arvada, Colo.

Wisener says 11 of the most significant reserve acquisitions were DuPont-Conoco, USX-Marathon, Occidental-Cities Service, Phillips-General American, Chevron-Gulf, Texaco-Getty, Mobil-Superior, Royal/Dutch Shell-Shell Oil Co., USX-Texas Oil & Gas Corp., British Petroleum-Standard Oil Co. (Ohio), and the sale of Tenneco Oil Co. properties to many buyers.

Exxon Corp. has spent about $7 billion worldwide since 1984 to purchase nearly 2 billion BOE of proved and probable reserves at a cost of $3.80/bbl. About 75% of the reserves are proved, and the purchases are comparable to buying the proved reserves of the 10th largest U.S. oil company.

DETAILED STUDIES

Detailed engineering studies, undertaken for individual company reasons, are turning up reserves in old fields.

National Fuel Gas Co. undertook detailed engineering studies of Sespe field, Ventura County, Calif.

The company's West Coast reserves climbed to 12.2 million bbl of oil and 21.6 bcf of gas as of Sept. 30, 1989, from 9.8 million bbl of oil and 16.1 bcf of gas a year earlier.

The increase reflects new behind pipe proved reserves identified in the studies and identification of two new proved undeveloped locations after drilling step-out wells.

As oil prices increased in 1989, more reserves were realized through new development wells that became economic to produce. The productive lives of existing wells were lengthened due to the improved economics.

Southwestern Energy Co., with net proved developed reserves of 252.9 bcf of gas and 745,000 bbl of oil as of Dec. 31, 1989, conducted an extensive field study of its Arkoma basin gas reserves.

The result, announced in late May 1990, was identification of 152.4 bcf of net proved undeveloped, probable, and possible gas reserves, of which 65.1 net bcf is proved undeveloped.

The study also identified more than 200 drilling locations holding proved undeveloped reserves.

Southwestern has been active in the Arkoma basin since 1943 but never fully developed its acreage due to lack of access to markets in other areas. It began the extensive geological evaluation in 1987, the same year it signed a 10 year transportation agreement with Arkla Energy Resources Co..

GAS RECOVERIES

Upward revision figures for gas reserves through most of the 1980s have not been nearly so large as for oil reserves, but large potential is thought to exist to increase gas recovery factors by infill drilling.

Thomas J. Woods, an energy analyst with Gas Research Institute in Washington, D.C., concluded that a substantial gas resource potential remains to be recovered in known Lower 48 fields as a result of the in creased recovery of oil or gas via infill drilling.

The incremental gas resource associated with increased oil recovery appears to be mostly in carbonate reservoirs, Woods said. The potential in sandstone reservoirs appears to be more modest.

Gas recovery in high permeability reservoirs might still be 80-90% of the gas in place within the radius of drainage of a well, but that radius--due to reservoir heterogeneities--might be far less than the usual 640 acre spacing.

INFILL POTENTIAL

GRI's Woods said recovery factors from high permeability gas reserves were traditionally thought to be quite high--80-90%--leaving a negligible volume of gas in place for possible reserve additions.

More recent evidence, such as submittals for infill drilling in Kansas Hugoton gas field, implies ultimate recovery of only about 55% of original gas in place.

With the approval of Kansas Hugoton infill drilling, the state's gas reserves were revised upward in 1986 by nearly 2 tcf.

A 1989 GRI study of the San Juan basin found an estimated infill drilling potential of 6.86 tcf of gas from seven Cretaceous producing intervals as of yearend 1985.

Greatest remaining infill potential is associated with the Dakota and Mesaverde, followed by Pictured Cliffs. Best per-completion recoveries are expected from Mesaverde, Gallup, and Dakota.

Costs in 1987 dollars to achieve a 10% after tax rate of return were $1.37-2.89/MMBTU. The analysis supported 160 acre spacing and indicated that at least two intervals, Pictured Cliffs and Chacra, can be drilled more densely than 160 acres.

GRI is studying the infill potential of other U.S. basins.

OUTLOOK

The pace of revisions has slowed since 1987, notes C.J. Lawrence, Morgan Grenfell Inc., New York. Revisions by the 17 company group it follows replaced 61% of production in 1987, 41% in 1988, and only 35% last year.

"The drop in positive revisions might signal a slowdown in the progress of enhanced recovery techniques and other technological developments--another indication that dependency on OPEC oil is likely to increase," writes Frederick P. Leuffer, senior oil analyst at the firm.

One consultant said U.S. gas reserves may have a more difficult time holding up if demand surges during the next few years. Many companies shut in gas wells for several months during the past few years, and the lower production made year to year reserves declines for those wells smaller.

Total's Laherrere said anyone who attempts to gain a coherent image of world reserves is up against an impossible task in the absence of a standard based on a probabilistic approach and one that is universally accepted.

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