SPE 90241

Can You Have Probable Without Proved Reserves?

John R. Etherington, PRA International, SPE; Elizabeth J. Hunt, Hunt Wallace & Associates, SPE

Copyright 2004, Society of Petroleum Engineers Inc.

This paper was prepared for presentation at the SPE Annual Technical Conference and
Exhibition held in Houston, Texas, U.S.A., 26–29 September 2004.
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Abstract
One of the unresolved issues in reserves evaluations is the
continuing practice of assessing probable reserves for projects
where no proved reserves have been claimed.
The practice typically arises in the early delineation stage.
The initial assessment of best estimate recoverable quantities
(proved plus probable (“2P”)) meets internal criteria
sufficiently to justify development. While the project is
potentially commercial, it may not meet all the criteria for
disclosure of proved reserves under regulatory guidelines. In
this paper, it is assumed that governing agency is the U.S.
Securities and Exchange Commission (SEC).
The issue is an interesting exercise in logic. Is probable a
discrete entity or is it merely the incremental volume beyond
proved in a 2P estimate? If no part of the accumulation meets
to reserves subdivided into parallel certainty categories of
proved (1P), proved plus probable (2P) and proved plus
probable plus possible (3P).
It may or may not be that simple; this paper critically
examines associated issues with examples.
Introduction
Petroleum resource classification systems have evolved
significantly over the last 10 years. The February 2000
resource classification (figure 1) published jointly by the
Society of Petroleum Engineers (SPE), World Petroleum
Congress (WPC), and American Association of Petroleum
Geologists (AAPG)1 (hereafter referred to as the SPE
classification) is now accepted as an industry standard
framework for characterizing hydrocarbon assets and
opportunities.
When applied in combination with the underlying
SPE/WPC 1997 reserves guidelines2, the classification allows
categorization that separately recognizes technical and
commercial uncertainty. It further supplies a bridge between
deterministic and probabilistic analyses in that, if probabilistic
techniques are applied, the 1P (Proved), 2P (Proved +
Probable) and 3P (Proved + Probable + Possible) volumes
should not exceed P90, P50, and P10 respectively.
PRODUCTION
DISCOVERED PETROLEUM-INITIALLY-IN-PLACE

COMMERCIAL

the proved reserves criteria, then can the total 2P estimate be 1P 2P

RESERVES 3P
classified as probable reserves?
TOTAL PETROLEUM-INITIALLY-IN-PLACE

PROVED +
PROVED + PROBABLE +
PROVED PROBABLE POSSIBLE
The resolution may lie in more careful application of the full
resource classification published by the Society of Petroleum CONTINGENT
SUB-COMMERCIAL

Engineers (SPE) in 2000. The SPE recognized that ambiguity RESOURCES

may exist between their definitions of uproven reserves and LOW BEST HIGH
ESTIMATE ESTIMATE ESTIMATE
contingent resources. While reserves are accumulations that
are recoverable under current conditions, this same UNRECOVERABLE

distribution of volumes would be classified as contingent PROSPECTIVE

INITIALLY-IN-PLACE

resources if technical and/or commercial risks prevent RESOURCES

UNDISCOVERED
PETROLEUM-

development commitment. The separation of risk and LOW BEST HIGH

ESTIMATE ESTIMATE
uncertainty in the assessment process is critical. ESTIMATE

UNRECOVERABLE

One solution is to initially classify volumes associated with Range of Uncertainty

all new discoveries as contingent resources with its internal
certainty categories (low/best/high estimates) until such time
as the SEC proved reserves criteria are satisfied. As
contingencies are removed, volumes would then be transferred
Fig. 1 - SPE/WPC/AAPG Resource Classification
Thus, it is surprising that many companies still retain a
practice that allows estimates of probable (and possible)
2 SPE 90241
without associated proved reserves. This may be due to a
combination of factors:
1. influence of historical risk-based reserves assessment
approach.
2. conflicting criteria and objectives in “SEC/SPE hybrid"
classifications.
3. lack of consistency in assessing commercial risk and
uncertainty.
It appears that the industry may have a lack of understanding
of, and a cultural bias against, fully utilizing, the contingent
resource category.
Assessment Methods
In the SPE supplemental guidance on resource definitions
(chapter 2)3, J. Ross summarizes two fundamentally different
philosophies in applying the deterministic approach to
reserves estimation: one is risk-based and the other is
uncertainty-based.
Historically, many North American assessments utilized a
“risk-based” approach to reserves classification wherein the
reserves quantities for each category (Proved, Probable, and
Possible) were estimated deterministically as a discrete
volume.
Possible
Probable
Risked Risked
Proved Probable Possible
Fig. 2 – Risk-Based Reserves Assessment
No uncertainty is implied in the reserve quantity assigned as
probable and possible. Instead, there is an associated risk
assigned (figure 2). The risk may apply to the presence of the
petroleum, the likelihood of the necessary development
proceeding and being successful in recovery of the estimated
marketable products quantities, or some combination of these
risks. This approach attempts to capture both volumetric
uncertainty and commerciality risk in a single system.
Some analysts claim that this approach justifies estimating
probable reserves where no proved reserves are defined.
Others maintain that probable reserves are those volumes “in
addition to proved” that are reasonably probable to recover;
thus probable cannot exist without proved reserves.
The uncertainty-based approach is derived from the
probabilistic evaluation method in which the recoverable
hydrocarbon estimates are a range of outcomes with
increasing associated uncertainty.
When applied using deterministic methods, the continuous
probabilistic distribution is replaced by three scenarios: a low,
best, and high estimate that are consistent with 1P, 2P and 3P
assessments. Whether using deterministic scenarios or a full
probabilistic distribution (figure 3), probable cannot exist in
isolation but is a portion of a continuous range of estimates. In
this approach, commercial uncertainty is handled separately.
1.0
CF1 = 0.95
0.9
X 1P scenario
Cumulative Probability of “X” or greater
0.8
0.7
Proved
0.6
X 2P=scenario
EV 52
0.5
0.4
Probable
0.3
0.2 Possible
0.1 X
3P scenario
0.0
0 20 40 60 80 100 120 140
Estimated Ultimate Recoverable (EUR)
Fig. 3 – Uncertainty-Based Reserves Assessment
While both approaches are valid for reserves estimation, the
uncertainty-based approach is more commonly applied due to
several advantages:
- it accommodates both deterministic and probabilistic
estimation methods.
- it allows the application of uncertainty tracking over
time.
- it clearly separates technical and commercial
uncertainty.
- it better aligns risk and uncertainty as applied within the
portfolio planning processes.
SEC/SPE Hybrids
For those companies listed on US stock exchanges, disclosure
of reserves is governed by Security and Exchange
Commission (SEC) regulations. The SEC proved reserves
guidelines are similar to those of the SPE; however, some
criteria may be more restrictive. A prime example is the
evidence for establishing a new exploration discovery. Except
in very special circumstances in the Gulf of Mexico, the SEC
requires demonstration of productivity through a well test that
flows at commercial rates. While the SPE prefers a flowing
well test, proved reserves may be assigned, in certain cases, on
the basis of well logs/and or core analysis that indicate the
subject reservoir is hydrocarbon bearing and is analogous to
reservoirs in the same area that are producing or have
demonstrated the ability to produce on formation tests.
When obligated to disclose proved reserves under SEC
criteria, most companies utilize the SPE classification for
internal project planning. The objectives of the two systems
are quite different. SEC proved guidelines are designed to
yield a very conservative estimate of future recoveries; the
criteria constraints are designed to promote consistency in
reporting to support company asset comparisons by investors.
It is rare that a company would base its future investment
strategies solely on SEC proved reserves. The SPE
classification is designed to characterize the full range of
potential outcomes for consideration by management in
making project investment decisions. If asked for a single
number to represent the best estimate of ultimate recoverable
volumes, most technologists will quote the proved plus
SPE 90241 3

probable (2P) estimate (but emphasize that their management Discovered

should also consider the low (1P) and high (3P) estimates and 1P

Commercial
P1d 2P
their associated economic indicators). P1u 3P
Reserves

Total Petroleum-Initially-In-Place
COMMERCIAL UNCERTAINTY
P2 P3

Many companies are listed both on the US and their home- Commerciality Chance (Pct)
country stock exchanges (in some cases, they are listed on

Sub-Commercial
Low Est
exchanges in multiple countries). In many cases, these non-US Best Est Contingent
High Est
exchanges require disclosure of 2P reserve estimates that Resources
utilize either their national criteria, or in the case of Canada, Unrecoverable Hydrocarbons
companies have the option to use the SPE classification. Prospect Chance (Pg)
Undiscovered

-Potentially-In-Place
Most companies internally accommodate the SEC Low Est Prospective

Total Petroleum
Best Est
definitions by substituting SEC for SPE proved but retaining High Est
Resources
all other SPE resource classes. In the uncertainty-based
Unrecoverable Hydrocarbons
approach, probable reserves then become the 2P estimate TECHNICAL UNCERTAINTY
minus SEC proved. Since the SEC only defines proved
reserves, its criteria become the definition of reserves in
general. Based on this logic, if the accumulation does not meet Fig. 4 – Modified SPE/WPC/AAPG Resource Classification
SEC proved criteria, there are no reserves of any uncertainty
class. Another approach to achieve consistency in the treatment of
commerciality is the use of project maturity categories. Project
Commerciality Modifiers represents the link between the petroleum accumulation and
The distinction between commercial and sub-commercial the decision-making process, including budget allocation.
known accumulations (and hence between reserves and Figure 5 illustrates the ”data model relationship” of project to
contingent resources) is of key importance in ensuring a the operational entities (well/completion zone, facility)
reasonable level of consistency in reserves reporting. On the ownership entities (leases and associated fiscal terms) and to
basis of the SPE classification system, it is clear that the the geotechnical resource entities (field, pool, zone). The
accumulation must be assessed as commercial before any resource entity we are assessing is the intersect of several
reserves can be assigned. The SPE recommends that, if the entities; in this case well zones can be grouped as lease zones.
degree of commitment is not such that the accumulation will Project is a business entity and may constitute the
be developed and placed on production within a reasonable development of a single reservoir or field (or well), or an
time frame, the estimated recoverable volumes for the incremental development of a producing field, or the
accumulation should be classified as contingent resources. A integrated development of a group of several fields. Projects
reasonable time frame for the initiation of development may be “nested” with sub-projects and may be dependent on
depends on the specific circumstances but, in general, should other projects. Projects and their associated lease-zone
be around 5 years3. resources can be aggregated to the business unit, country, or
corporate level for both internal assessments and regulatory
Thus, commerciality is more than meeting economic disclosures.
hurdles! Other contingencies that must be satisfied may
include internal and external approval of plan of development
(including satisfaction of environmental issues), Field Resource Business
Corporation
Entities Entities
demonstration of technical feasibility, confirmation of markets
Fiscal
(e.g. a gas contract), or approval of construction of a key Terms Country
Pool
facility (e.g. a gas pipeline). What is not clearly defined by /Reservoir
either the SEC or the SPE are the exact financial instruments Lease Well
lease-zone
required to demonstrate commerciality. For example, is /Property
Project
confirmation of a gas sale signified by a Letter of Intent, a Zone
well-zone Completion
Memorandum of Understanding, or does it require a final Facility
signed delivery contract?
Fig. 5 – Project Entity Relationships
Several companies have modified the SPE classification
In general, an individual project will represent the level at
scheme4 (figure 4) to specifically treat contingencies as risk
which a decision is made whether or not to proceed and is thus
factors. In this case “Pct” is the chance the contingency will
a key factor in establishing commitment. The project status
be satisfied within a reasonable timeframe and is analogous to
categories are independent of the uncertainty associated with
the geologic risk factor (Pg), that is, the chance that an
the range of potentially recoverable volumes. As the
exploration prospect will be successful in finding significant
accumulation moves to a higher level of maturity, there will be
recoverable hydrocarbons.
a higher probability (lower risk) that the accumulation will
achieve commercial production.
4 SPE 90241
The project status categories illustrated in figure 6 are those
currently utilized by the Norwegian Petroleum Directorate
(NPD)5 . The project maturity is illustrated as a continuous
distribution. Annual assessments then focus on the progress in
improving project maturity towards “on production” status.
1 On Production
Reserves 2 Approved Development
3 Plan Approval Pending
4 Planned for Development
Project Maturity
Contingent 5 Recovery Likely
Resources 6 Recovery Unlikely
7 Being Evaluated
8 Prospect
Prospective
Resources
9 Lead
Fig. 6– NPD Project Maturity Categories
The NPD (and the SPE) may be willing to accept estimates
as reserves where, although the equity partners have judged
the project as economic and have allocated funding, the
regulatory authorities have not yet approved a development
plan. For example, the SPE3 requires only reasonable certainty
(greater then 90% chance) that the project will proceed.
However, the SEC proved definition appears to require a fully
approved development plan.
Examples
The following hypothetical examples critically examine
scenarios in which some companies’ internal reserve
assessments have included probable (and possible) but no
proved quantities.
Example 1: A successful wildcat and five appraisal wells
confirm a major gas discovery in the onshore area of the
Mackenzie Delta in northern Canada. Each well has tested
high quality gas at commercial flow rates. A gas water contact
has been penetrated; both pressure and seismic data indicate
continuity of reservoir over the mapped closure. This
discovery is one of several in the area, which on a combined
basis can support a 1220 km. pipeline to connect to southern
gas markets (figure 7) and still yield an excellent rate of
return.
Fig. 7 – Pipeline Project Contingency
Results of a detailed volumetric assessment for this field
are: lowside 600 billion cubic feet of gas (bcf), best estimate
1200 bcf and highside 1600 bcf. With current well control,
300 bcf would meet SEC criteria as “technically proved”.
The major contingency is the chance that the pipeline will
be built and operational such that gas production may be
initiated within a 5-year time frame. While the economics are
robust and third party companies are prepared to build the
pipeline, the project lacks full regulatory approvals from the
federal, territorial and local governments. Additional
environmental studies may cause significant delays. As a
further complication, there is potential for a competing project
to deliver gas from Alaska into the same northern Alberta hub
thus saturating southern pipeline capacity and causing the
Mackenzie Delta projects to be deferred until excess capacity
is restored. Thus, there is a significant risk that this gas field
will not be on production within 5 years.
There are two opinions on characterizing this asset’s
resources:
- Zero proved, 1200 bcf Probable and 400 bcf Possible
reserves.
- No reserves but only contingent resources with a
volumes assessment range of low estimate 300 bcf, best
estimate 1200 bcf, and high estimate 1600 bcf.
Using hybrid SEC/SPE guidelines, this would appear to be a
clear case for categorization as contingent resources until such
time as gas pipeline and marketing contingencies have been
resolved; once resolved the contingent resources “flip” to 1P,
2P and 3P reserves. In this case, the low estimate has been
adjusted to SEC guidelines and the Probable would be the
2P/best estimate minus SEC Proved.
Example 2: A successful well and two appraisals confirm a
major oil discovery in the ultra-deep water offshore West
Africa. All of the wells have a full suite of logs, cores, and
detailed wireline test data. A high-resolution 3-D seismic
survey clearly defines the limits of the discovered reservoirs.
No conventional flowing well tests were conducted due to
cost and environmental concerns However, the wireline tests
can be directly compared to those conducted in analog fields
where commercial production has been established.
Results of a detailed volumetric assessment for this
discovery are: lowside 150 million recoverable barrels of oil
(mmbo), best estimate 450 mmbo and highside 1400 mmbo.
With current well control, 100 mmbo would meet SEC criteria
as “technically proved”.
The partners have agreed on a development plan utilizing a
floating production facility. Economics are robust and
contracts for facilities construction have been awarded. All
regulatory approvals have been obtained.
While SPE guidelines would accept the discovery evidence,
the SEC currently requires a conventional well test flowing at
commercial rates to confirm a discovery and the existence of
reserves. Thus, even though a project has been funded and is
being implemented, no SEC proved reserves may be disclosed
until facilities are installed and the first production well has
SPE 90241
been tested. In the interim, the owners have two options for
internal assessment;
- zero proved, 450 mmbo probable, and 950 mmbo
possible
- no reserves but only contingent resources with a range of
lowside 150 mmbo, best estimate 450 mmbo and a high
estimate of 1400 mmbo.
In this case the contingency is not significant, it appears to
be a disclosure delay until such time as the SEC “commercial
flow test” requirement has been met. Given the commitment
to facilities construction, the chance of project failure is
minimal and the Pct would approach 100%; however, it
should still remain in contingent resources until a flowing well
test is obtained.
Other examples include:
- a major gas discovery offshore Australia meets all the
technical criteria for SEC proved reserves but the LNG
sales is only supported by a letter of intent from buyers.
Without a firm sales contract, no proved reserves may be
attributed. It is recommended that the discovered
volumes be assessed using hybrid SEC/SPE technical
certainty categories but be classified as contingent
resources until such time as a binding sales contract is
in-place and the owners have committed to the necessary
processing and transportation facilities. Given the
number of competing LNG projects, the chance of
concluding a firm sales contract such that production
would commence within a 5-year period is significantly
less than 100%.
- A discovery and several appraisal wells combined with
high quality 3-d seismic in the Norwegian offshore
indicates a major gas discovery. Based on detailed
engineering studies, the owners have committed to field
development including pipeline access to European
markets. Although there are no disagreements, the host
government has not given final approval to the
development plan Thus the SEC will not accept proved
reserves attribution. Again, the prudent approach would
be to retain the volumes in contingent resources until
final government approvals are received. In this case the
Pct probably approaches 100%. There is an additional
caution that, once the plan is approved, the SEC will not
accept the 3-d seismic as evidence of proved extensions
beyond those areas tested by drilling and the resulting
proved volumes will be significantly less than those
estimated using SPE guidelines.
- A major gas field in South America has been discovered
and extensively appraised such that it meets all the
technical criteria for SEC proved. The current
assessment defines 400 bcf proved, 900 bcf probable and
400 bcf possible. A gas sales contract has been
concluded for 300 bcf only. Under our logic, the owners
may claim 300 bcf proved reserves with the remaining
100 bcf proved, 900 bcf probable and 400 bcf possible
still classified as contingent resources until additional
gas volumes are contracted for sale.
5
Reserves versus Contingent Resources
It is the authors’ opinion that claiming probable where no
proved reserves have yet been disclosed is not in line with the
logic underlying the 2000 SPE resource classification. The
classification is based on separation of technical and
commercial uncertainty. The technical uncertainty is a
continuous distribution of recoverable quantity estimates that
can either be derived from probabilistic analysis or
represented through multiple deterministic scenarios. These
scenarios incorporate deterministic criteria (e.g. lowest known
hydrocarbon limits) using SPE guidelines. Local regulatory
guidelines, for example, SEC proved criteria, can be
substituted within the overall framework. In this case the SPE
2P estimate is retained but the probable volume is now SPE 2P
minus SEC proved.
It is also the authors’ opinion that, if a company chooses to
use a SEC/SPE hybrid classification, then the SEC criteria for
proved must be satisfied before reserves of any uncertainty
class can be attributed to a project. If the project fails to meet
one of the SEC criteria, then the full range of recoverable
volumes associated with the project should be classified as
contingent resources.
Much of the confusion that gives rise to the ”probable
without proved issue” is due to poor implementation of
commerciality characterization. The 1997 SPE reserves
guidelines2 defined unproved reserves as those where
“technical, contractual, economic, or regulatory uncertainties
preclude such reserves being classified as proved”. The 2000
classification1 retained the underlying SPE reserves guidelines
but defined contingent resources as those volumes “not
currently considered to be commercially recoverable”. The
SPE recognized “that some ambiguity may exist between the
definitions of contingent resources and unproved reserves”.
Moreover, many companies have a bias towards classifying
volumes as “reserves”, even unproved reserves, as they are
perceived as having greater value than contingent resources.
This is especially true for dual-listed companies that disclose
2P reserves in their annual reports. While internal asset
aggregations could associate a modifying commercial risk
factor with the contingent resources, none of these quantities
could be included in asset disclosures to investors.
Other companies have embraced the 2000 classification as a
logical scheme to maintain an organized recording of an
asset’s technical and commercial status. Many European
organizations such as the NPD have recognized that the
commerciality is an attribute of the development project and
not directly of the resource entity. Thus, they have subdivided
the “y-axis of commerciality” into stages of project maturity
leading ultimately to production status. Other companies
prefer to characterize the commerciality axis as a discrete
rather than continuous function. There is a defined risk that the
contingencies that prevent classification as reserves will not be
resolved within a reasonable time frame. By combining the
commercial risk with technical uncertainty, these companies
create a single database that supports resource classification,
reserves disclosure, and portfolio management.
6 SPE 90241

Produced Discovered
Discovered
On Production
Commercial

Lower Risk
Pd Pud Prospective
Prob Poss Reserves Approved Development
Pvd Commercial Sub-commercial Resources
Plan Approval Pending
(Pct)
Sub-Commercial

Planned for Development

Contingent Resources

Project Certainty
Pvd Prob Poss Contingent Recovery Likely Reserves
Resources
Recovery Unlikely

Unrecoverable Hydrocarbons Being Evaluated

(Pg) 1P 2P 3P low est best est high est
Undiscovered

Prospect SEC

Low Best Prospective
Est Est Resources
High
Est
Unrecoverable Hydrocarbons
TECHNICAL UNCERTAINTY
Fig. 8 – Modified SPE/NPD Resource Classification
Figure 8 is an example of a modified SPE/NPD resource
classification schema that combines the two approaches to
defining commercial maturity. Note that contrary to SPE
guidance, the terms proved, probable, and possible are applied
both to reserves and contingent resources. This emphasizes to
staff that the technical criteria and inferred probability ranges
are the same but there is an associated contingency risk factor.
Once the contingency is satisfied, the contingent resource
“flip” to reserves with no change in technical certainty classes.
Higher Risk
Proved
Lead
Fig. 9 – Assessment Process Flow
Figure 9 illustrates the recommended assessment process
flow as an accumulation is sequentially tested against the
appropriate criteria, first as a geologic discovery and then as a
commercial discovery using SPE guidelines. Thereafter the
proved volumes are compared to SEC guidelines and adjusted
as necessary. In some cases, where the project does not meet
SEC commercial guidelines, the total project may be returned
the contingent resources category.
Implementing such a model will create a single inventory
that supports integrated asset assessment, reserves disclosures,
and project/portfolio management.

To further emphasize the commerciality hurdles, some References

companies initially classify all new discoveries as contingent 1. “Petroleum Resources Classification and Definitions”
resources. Reserves are not assessed until staff have approved by SPE, WPC, and AAPG, February 2000,
documented that all commercial contingencies have been published by SPE.
satisfied. 2. “Petroleum Reserves Definitions” approved by SPE and
WPC, March 1997, published by SPE.
Conclusions 3. “Guidelines for the Evaluation of Petroleum Reserves and
The guidelines of those agencies that require disclosure of Resources”, 2001, published by SPE.
reserves beyond proved do not specifically preclude reporting 4. Etherington, J.R., Hunt, E.J., and Adewusi, A.O.,
probable where no proved reserves have been claimed. Thus, “Aggregating Reserves and Resources for Portfolio
while the practice is not “illegal” it may be “illogical” and Management”, paper SPE 71424 presented at the 2001
distorts the orderly characterization of asset risk and SPE 76th Annual Technical Conference and Exhibition,
uncertainty. Key recommendations in the proposed model are: New Orleans, Louisiana.
5. “Guidelines to Classification of Petroleum Resources on
1. Utilize SPE/WPC/AAPG Petroleum Classifications the Norwegian Continental Shelf”, Norwegian Petroleum
and Definitions published in February 2000 as the Directorate, July 2001.
basis for internal resource management.
2. Adopt a project maturity categorization to characterize
commerciality and assign risk factors for “Chance of
Commerciality” (Pct) for each maturity stage.
3. Initially classify all new discoveries as contingent
resources until such time as contingencies are
resolved.
4. If a SEC/SPE hybrid classification is adopted, then:
the SPE proved volume must be adjusted to meet
SEC criteria.
the project must meet all SEC criteria for
commercial development.