Oil and gas reserves and resource quantification refers to the process of estimating the quantities of hydrocarbons present in subsurface accumulations and assessing the portion that can be economically recovered. In the petroleum industry, a distinction is made between resources, which represent the total estimated volume of hydrocarbons in place, and reserves, which are the quantities expected to be commercially recoverable under existing economic, technological, and regulatory conditions.
Estimates are based on geological, engineering, and economic data and are inherently uncertain, typically expressed using probabilistic methods. As additional information becomes available or as economic and technological conditions change, estimates may be revised. Standardized classification systems, such as the Society of Petroleum Engineers Petroleum Resources Management System (PRMS), are used to categorize reserves and resources according to their level of certainty and commercial viability.
Quantification
As with other mineral resource estimation, detailed classification schemes have been devised by industry specialists to quantify volumes of oil and gas accumulated underground (known as subsurface). These schemes provide management and investors with the means to make quantitative and relative comparisons between assets, before underwriting the significant cost of exploring for, developing and extracting those accumulations. Classification schemes are used to categorize the uncertainty in volume estimates of the recoverable oil and gas and the chance that they exist in reality (or risk that they do not) depending on the resource maturity. Potential subsurface oil and gas accumulations identified during exploration are classified and reported as prospective resources. Resources are re-classified as reserves following appraisal, at the point when a sufficient accumulation of commercial oil and/or gas are proven by drilling, with authorized and funded development plans to begin production within a recommended five years.SPE (2018), Op. Cit., p7
Reserve estimates are required by authorities and companies, and are primarily made to support operational or investment decision-making by companies or organisations involved in the business of developing and producing oil and gas. Reserve volumes are necessary to determine the financial status of the company, which may be obliged to report those estimates to shareholders and "resource holders" at the various stages of resource maturation.
Currently, the most widely accepted classification and reporting methodology is the 2018 petroleum resources management system (PRMS), which summarizes a consistent approach to estimating oil and gas quantities within a comprehensive classification framework, jointly developed by the Society of Petroleum Engineers (SPE), the World Petroleum Council (WPC), the American Association of Petroleum Geologists (AAPG), the Society of Petroleum Evaluation Engineers (SPEE) and the Society of Economic Geologists (SEG). Public companies that register securities in the U.S. market must report proved reserves under the Securities and Exchange Commission (SEC) reporting requirements which shares many elements with PRMS. Attempts have also been made to standardize more generalized methodologies for the reporting of national or basin level oil and gas resource assessments.
Reserves and resource reporting An oil or gas resource refers to known (discovered fields) or potential accumulations of oil and/or gas (i.e undiscovered prospects and leads) in the subsurface of the Earth's crust. All reserve and resource estimates involve uncertainty in volume estimates (expressed below as Low, Mid or High uncertainty), as well as a risk or chance to exist in reality, depending on the level of appraisal or resource maturity that governs the amount of reliable geologic and engineering data available and the interpretation of those data. TABLE I:Classification summary featuring volumes uncertainty (low, mid or high) with increasing chance for an accumulation to exist and be commercial upwards reflecting greater resource maturity RESOURCE CLASS LOW MID HIGH Reserves 1P 2P 3P Contingent Resources 1C 2C 3C Prospective Resources 1U 2U 3U Estimating and monitoring of reserves provides an insight into, for example, a company's future production and a country's oil & gas supply potential. As such, reserves are an important means of expressing value and longevity of resources.
In the PRMS, the terms 'Resources' and 'Reserves' have distinct and specific meaning with respect to oil & gas accumulations and hydrocarbon exploration in general. However, the level of rigor required in applying these terms varies depending on the resource maturity which informs reporting requirements. Oil & gas reserves are resources that are, or are reasonably certain to be, commercial (i.e. profitable). Reserves are the main asset of an oil & gas company; booking is the process by which they are added to the balance sheet. Contingent and prospective resource estimates are much more speculative and are not booked with the same degree of rigor, generally for internal company use only, reflecting a more limited data set and assessment maturity. If published externally, these volumes add to the perception of asset value, which in turn can influence oil & gas company share or stock value.McMichael and Young (2001), Op. Cit., p112 The PRMS provides a framework for a consistent approach to the estimation process to comply with reporting requirements of particularly, listed companies. Energy companies may employ specialist, independent, reserve valuation consultants to provide third party reports as part of SEC filings for either reserves or resource booking.
Reserves Reserves reporting of discovered accumulations is regulated by tight controls for informed investment decisions to quantify differing degrees of uncertainty in recoverable volumes. Reserves are defined in three sub-categories according to the system used in the PRMS: Proven (1P), Probable and Possible. Reserves defined as Probable and Possible are incremental (or additional) discovered volumes based on geological and/or engineering criteria similar to those used in estimating Proven reserves. Though not classified as contingent, some technical, contractual, or regulatory uncertainties preclude such reserves being classified as Proven. The most accepted definitions of these are based on those originally approved by the SPE and the WPC in 1997, requiring that reserves are discovered, recoverable, commercial and remaining based on rules governing the classification into sub-categories and the declared development project plans applied. Probable and Possible reserves may be used internally by oil companies and government agencies for future planning purposes but are not routinely or uniformly compiled.
Proven reserves
Proven reserves are discovered volumes claimed to have a reasonable certainty of being recoverable under existing economic and political conditions, and with existing technology. Industry specialists refer to this category as "P90" (that is, having a 90% certainty of producing or exceeding the P90 volume on the probability distribution). Proven reserves are also known in the industry as 1P. Proven reserves may be referred to as proven developed (PD) or as proven undeveloped (PUD). PD reserves are reserves that can be produced with existing wells and perforations, or from additional reservoirs where minimal additional investment (operating expense) is required (e.g. opening a set of perforations already installed). PUD reserves require additional capital investment (e.g., drilling new wells) to bring the oil and/or gas to the surface.
Accounting for production is an important exercise for businesses. Produced oil or gas that has been brought to surface (production) and sold on international markets or refined in-country are no longer reserves and are removed from the booking and company balance sheets. Until January 2010, "1P" proven reserves were the only type the U.S. SEC allowed oil companies to report to investors. Companies listed on U.S. stock exchanges may be called upon to verify their claims confidentially, but many governments and national oil companies do not disclose verifying data publicly. Since January 2010 the SEC now allows companies to also provide additional optional information declaring 2P (both proven and probable) and 3P (proven plus probable plus possible) with discretionary verification by qualified third party consultants, though many companies choose to use 2P and 3P estimates only for internal purposes.
Probable and possible reserves Probable additional reserves are attributed to known accumulations and the probabilistic, cumulative sum of proven and probable reserves (with a probability of P50), also referred to in the industry as "2P" (Proven plus Probable) The P50 designation means that there should be at least a 50% chance that the actual volumes recovered will be equal to or will exceed the 2P estimate.
Possible additional reserves are attributed to known accumulations that have a lower chance of being recovered than probable reserves. Reasons for assigning a lower probability to recovering Possible reserves include varying interpretations of geology, uncertainty due to reserve infill (associated with variability in seepage towards a production well from adjacent areas) and projected reserves based on future recovery methods. The probabilistic, cumulative sum of proven, probable and possible reserves is referred to in the industry as "3P" (proven plus probable plus possible) where there is a 10% chance of delivering or exceeding the P10 volume.(ibid)
Resource estimates Resource estimates are undiscovered volumes, or volumes that have not yet been drilled and flowed to surface. A non-reserve resource, by definition, does not have to be technically or commercially recoverable and can be represented by a single, or an aggregate of multiple potential accumulations, e.g. an estimated geological basin resource. There are two non-reserve resource categories:
Contingent resources Once a discovery has been made, prospective resources can be reclassified as contingent resources. Contingent resources are those accumulations or fields that are not yet considered mature enough for commercial development, where development is contingent on one or more conditions changing. The uncertainty in the estimates for recoverable oil & gas volumes is expressed in a probability distribution and is sub-classified based on project maturity and/or economic status (1C, 2C, 3C, ibid) and in addition are assigned a risk, or chance, to exist in reality (POS or COS).
Prospective resources Prospective resources, being undiscovered, have the widest range in volume uncertainties and carry the highest risk or chance to be present in reality (POS or COS). At the exploration stage (before discovery) they are categorized by the wide range of volume uncertainties (typically P90-P50-P10).SPE (2018), Op. Cit., p3 In the PRMS the range of volumes is classified by the abbreviations 1U, 2U and 3U again reflecting the degrees of uncertainty. Companies are commonly not required to report publicly their views of prospective resources but may choose to do so voluntarily.
Estimation techniques