Definitions for remaining recoverable reserves of oil, gas, and NGL have changed but vary among countries and depend on purposes of the estimates.

Definitions from the Society of Petroleum Engineers (SPE) and the World Petroleum Congress (WPC), published in March 1997, were revised to include the acceptance of probabilistic evaluations. But reserves published by other sources do not necessarily conform to these definitions.

In the US, commonly published reserves numbers, such as those found in public company annual reports and 10K reports, follow the US Security and Exchange Commission (SEC) accounting rules for proved reserves. The Canadian Institute of Mining, Metallurgy & Petroleum (CIM) has published its own reserves definitions and drafted a summary guideline. The UK`s Oil Industry Accounting Committee (OIAC) has another set of reserves definitions, published as Statements of Recommended Practice (SORPs) for UK oil and gas accounting procedures.

Russia and a number of other countries have other classification systems that do not conform to other standards.

In 1999, the SPE oil and gas reserves committee was developing supplemental guidelines to assist in interpreting the approved SPE-WPC definitions, as well as defining resource definitions that aim to complement but not change the reserves definitions. Participating in this endeavor were observers from the WPC, American Association of Petroleum Geologists (AAPG), Society of Petroleum Evaluation Engineers (SPEE), and US Energy Information Administration (EIA).

Most guidelines require classifications such as proved, probable, and possible reserves to be assigned only to known hydrocarbon accumulations, penetrated by a wellbore. Potential hydrocarbon accumulations, not penetrated by a wellbore, are usually classified as undiscovered resources, even when advanced seismic interpretation indicates a good likelihood of their existence.

Proved reserves also have the requirement that process facilities and transportation systems are operational or are expected to be installed, with reasonable certainty. Proved undeveloped reserves are those requiring significant expenditures before they can be produced.

For unproved reserves the SPE-WPC definitions allow the inclusion of future economic conditions different from the current. The effects of improvements in economic conditions and technological developments are then allocated to either the probable and possible classifications.

Accounting rules

Accounting rules, such as required by the SEC, require companies to periodically review the booked value of their oil and gas properties. Under the SEC rules, capitalized costs for proved reserves may not exceed the present value of estimated future net revenues from those proved reserves, determined with a 10%/year discount and unescalated prices in effect at the end of the reporting period.

If prices are low, the rules require a write-down of proved reserves, even if a company plans to continue producing them.

Proved reserves estimates depend on geological assumptions, estimated quantities in the ground, producing rates, future prices, timing, capital expenditures, and operating expenses. All these factors vary over time.

For the proved undeveloped category, the general assumption is that significant capital expenditures and drilling required to bring these volumes to surface will be successfully made.

Technical definitions

Unlike the US accounting definitions that deal with proved developed and undeveloped reserves, technical definitions by the WPC and SPE also include possible and probable reserves categories, along with subcategories for producing, nonproducing, etc. (see box).

Reserves estimates involve uncertainty, which depends on the reliability of available geologic and engineering data. Because of this uncertainty the SPE-WPC definitions place reserves into two main groups, proved and unproved. Unproved reserves are broken down further as probable and possible to denote increasing uncertainty.

Neither the SPE nor WPC recommends public disclosure of reserves classified as unproved.

Definitions, such as those by the SPE-WPC, assess reserves anticipated to be commercially recovered from known accumulations from a given date forward and depend on estimating a recovery factor.

Oil recovery efficiencies in various rock, deposition types, and drive mechanisms are highly variable. For instance, a deltaic clastic reservoir under a water drive or waterflood could reach 80% recovery, whereas a deltaic reservoir that depends only on solution gas drive would be expected to recover only about 20% of the oil in place.

The major change in the new SPE-WPC definitions is the inclusion of probabilistic calculations. Previously, SPE-WPC definitions considered only deterministically determined reserves.

In the US, deterministic methods remain the most common because they satisfy SEC proved reserves definitions for such cases as:

- Honoring lowest-known hydrocarbon limit in the absence of a known hydrocarbon-water contact.

- Preventingincreasedproved reserves by simply changing the upside potential.

- Preventing inclusion of untested fault blocks that might be dry when drilled.

In Canada, likewise, most reserves are still based on deterministic methods, although, unlike the US, Canadian securities regulators allow companies to publish probable reserves numbers.

Estimating reserves

The new SPE-WPC definitions allow both deterministic and probabilistic methods for determining reserves. Deterministic methods provide a single best estimate of reserves, based on geological, engineering, and economic data. Probabilistic methods generate, also with geological, engineering, and economic data, a range of estimates and their associated probabilities.

Probabilistic estimates identify reserves as proved, probable, and possible based on their probability of being recovered. But because each classification has a different uncertainty, aggregating different reserves classes is not a simple arithmetic addition. Probabilities of individual reserves may be significantly different from probabilities of aggregated reserves estimates.

Probabilistic estimates, as with deterministic methods, require an evaluator`s judgment in preparing ranges and distributions of input parameters and therefore also depend on subjective interpretation.

Probabilities associated with each reserves class are as follows:

- Proved reserves-90% probability.

- Probable reserves-50% probability.

- Possible reserves-10% probability.

Reserves may be attributed to either natural energy or improved recovery methods such as pressure maintenance, fluid cycling, waterflooding, thermal methods, chemical flooding, and miscible and immiscible fluid floods.

The three general categories of analysis typically used include volumetric, material balance, and decline analysis. These estimates are not static but change as more geologic or engineering data become available or as economic conditions change.

Volumetric methods calculate reservoir rock volume and hydrocarbons in place and estimate recoverable hydrocarbons. Rock volume takes into account geological characteristics, reservoir fluid properties, and expected drainage area based on geological, geophysical data, and pressure depletion or boundary conditions determined from well tests.

If fluid contacts (gas-oil, gas-water, or oil-water) are not seen in wells, the pay interval for proved reserves estimates is typically restricted to the lowest known structural occurrence of hydrocarbons shown by well logs, core analyses, or formation testing (Fig. 1). For updip fluid, compositional changes should be considered. Below fluid contacts, reserves are usually classified in one of the unproved categories.

The recovery factor can be derived based on analysis of a reservoir`s production behavior or by analogy with other producing reservoirs. In estimating recovery factors, the evaluator needs to consider factors such as rock and fluid properties, drilling density, future changes in operating conditions, depletion mechanisms, and economic factors.

Material balance methods involve analyzing the pressure behavior as reservoir fluids are withdrawn. The method requires knowledge of rock and fluid properties, aquifer characteristics, and average reservoir pressure. Although accurate in simple cases, the method can lead to incorrect results in complex reservoirs involving water influx, multiphase behavior, multilayering, or low permeability.

Computer modeling is a sophisticated form of material-balance analysis.

Production decline methods analyze production behavior as reservoir fluids are withdrawn. The method requires a sufficient period of stable operating conditions, and the evaluator needs to be aware of such factors as rock and fluid properties, transient vs. stabilized flow, changes in operating conditions, and depletion mechanism.

Reserves aggregation

The CIM draft guidelines for applying oil and gas reserves definitions indicate that with the exception of mean estimates, arithmetic summation of probabilistic estimates will result in an aggregate value with a different probability. The arithmetic summation of high probability estimates results in a higher probability total and conversely low probability values sum to a lower probability total. Therefore, probabilistic methods should include rigorous treatment of the parameter and estimate dependence.

The guidelines also express that the method of aggregation should be clearly stated.

For deterministic estimates, the draft guidelines indicate that these have inherent, if indeterminate, associated probabilities and are subject to the same aggregation issues as probabalistic methods. But because these probabilities are not known precisely, the draft guidelines indicate that any approach other than arithmetic aggregation is indefensible.

The draft guidelines propose general rules for arithmetically summing of several independent estimates that basically state that:

- Proved reserves for an accumulation should normally be in the 60-90% range. Reserves estimates for large accumulations must be in the higher end of the probability range, while small accumulations may be in the lower portion of this range.

- Proved plus probable reserves for an accumulation should have 50% probability. Means are accepted in some cases.

- Possible reserves for an accumulation are in the 10-50% probability range.

RESERVES CATEGORIES

The SPE/WPC definitions recognize the following reserves categories:

Proved reserves

- Developed

- Producing

- Non-producing

- Undeveloped

Unproved reserves

- Probable

- Possible

Note: Definitions for the term "resources" are not included in these definitions but might be developed in the future.