RESERVES DEFINITIONS-CLARIFYING THE UNCERTAINTIES

H. JUNG

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-Reserves Definitions-Clarifying the Uncertainties+ H. Jung Gilbert Laustsen Jung Associates Ltd. Abstract Reserve definitions generally used in North America are vague, allowing for a range of interpretations of the definitions themselves and resulting reserve estimates. There has to-date been little progress in moving to definitions which provide a clearer description of the uncertainties. This paper looks at current industry practise and the complex issues around adoption of reserves definitions which address probabilistic analysis methods. Introduction Reserve estimates underpin all
aspects of the oil and gas business, including exploration and development, transmission, regulation, financing and investment. These reserve estimates always involve some degree of uncertainty, and while these uncertainties may be well understood by the estimator, they are seldom well-defined for the end user. The degree of risk-aversion may vary considerably between users of these estimates (for example, debt financing typically focuses on high probability figures only, while strategic planning may also consider low probability data). This necessitates a range of reserve estimates with
differing associated probabilities. The evolution of reserves determination and reserves definitions has been related in large part to the quantity and quality of data available to those preparing reserves estimates. Methods of sampling, measuring, testing and recording data and interpretations have become increasingly sophisticated, aided by the relatively recent explosion in computer technology. Reserve definitions have not kept pace with these advances. Many of the reserves definitions in use today still use terms such as reasonable certainty. What does this term really mean? The
interpretation of this term is dependent on who performs the reserves determination, their experience level, the method or the approach taken in the reserves determination and the end use of the resulting reserves estimates. The objectives of the standing Committee on Reserves Definitions of The Petroleum Society (hereinafter referred to as the CIM Reserves Committee) in its May 1993 report (DeSorcy et al.)(1) were to narrow the interpretations; clarify the uncertainties associated with reserve estimates; and provide definitions suitable for use with deterministic and probabilistic methods.
The report proposed the following probability ranges for reserve categorization: Proved: 80% or greater* Probable: 40 to 80% Possible: 10 to 40% The intent of the report was not to require that probabilistic methods be used for estimating reserves, but to promote the understanding that, even for deterministic estimates, there is an implicit probability level involved. The selection of these probability ranges was a compromise intended to provide a more precise guide to defining reserves
(compared to existing definitions which relied on terminology such as reasonable certainty) but not to materially change industry practise. A fundamental issue that the definitions were attempting to address was quantification of probabilities associated with each reserve category. However, by including these probabilities in the definitions certain questions arise: ¥ Given that summation of a number of uncertain events probabilistically is not equal to an arithmetic summation (excepting the mean), where is the proved 80% certainty to be
achieved-at the entity level or field level or the corporate total? ¥ How does one achieve roughly these desired probability levels using deterministic methods? This paper will focus primarily on proved reserve estimates. The results of a survey sent by The Petroleum Society Reserves Committee to industry regarding the subject definitions suggested that these issues were not generally understood and those who understood the issues did not have a clear resolution to these problems. Deterministic vs. Probabilistic Estimates A number of papers
have provided comparisons between reserve estimates prepared using deterministic and probabilistic methods(2,3,4). Discussions have typically been focussed at the entity level with the deterministic estimates of proved reserves reflecting reasonable certainty (or similarly worded) criteria. There is a range of opinion as to how these estimates generally compare and it is safe to say that there is no definitive answer. The relationship between deterministic and probabilistic estimates is a function of the type of reservoir, the amount and quality of data available, evaluator experience,
reserve definition terminology, etc. There is also a range of opinion as to what probability level should be associated with proved reserve estimates to meet the reasonable certainty criteria in definitions. Current typical individual entity proved reserves estimates prepared for reserve
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"Reserves Definitions-Clarifying
I the Uncertainties"
1 H. JUNG
Gilbert Laustsen Jung Associates Ltd.

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Abstract .' Proved: 80% or greater*
Probable: 40 to 80%
Reserve definitions generally used in North America"are Possible: 10 to 40%
i vague, allowing for a range of interpretations of the,defini~ons The intent of the report was not to require that probabilistic
themselves and resulting reserve estimates. There has, to-date methods be used for estimating reserves, but to promote the
: been little progress in movi~g to defmitions whibh provide,a understanding that, even for detenninistic estimates, there is an
: clearer description of the uncertainties. Thi~'paper:looks ili:ci!r- implicit probability level involved. The selection of these proba-
~ rent industry practise and the complex issues around adoptioii bf 1 bility ranges was a compromise intended to provide a more pre-
(reserves defini'tions which' addre~s' PfPoabiIistic ,ahalisl~' cise guide to defining reserves (compared to existing definitions
, methods. " _ which relied on terminology such as reasonable certainty) but not
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I to materially change industry practise.

A fundamental issue that the definitions were attempting to
address was quantification of probabilities associated with each
Introduction
reserve category. However, by including these probabilities in the
Reserve estimates underpin all aspects of the oil and gas busi- definitions certain questions arise:
ness, including exploration and development, transmission, regu- • Given that summation of a number of uncertain events prob-
lation, financing and investment. These reserve estimates always abilistically is not equal to an arithmetic summation (except-
I involve some degree of uncertainty, and While these uncertainties
may be well understood by the estimator, they are seldom well-
defined for the end user. The degree of risk-aversion may vary
ing the mean), where is the proved 80% certainty to be
achieved-at the entityt level or field level or the corporate
total?

II II
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considerably, between users of these estimates (for' example, debt
financing typically focuses on high probability figures only, while
strategic planning may also consider low probability data). This
necessitat~s a range of reserve estimates with differing associated
• How does one achieve roughly these desired probllbility lev-
els using detenninistic methods? This paper will focus pri-
marily on proved reserve estimates.
The results of a survey sent by The Petroleum Society Reserves
probabilities. Committee to industry regarding the subject 'definitions suggested
I The evplution of reserves determination and reserves defini- that these issues were not generaliy understood and those who
tions has been related in large part to the quantity· and quality of understood the issues did not have a clear resolution to these
data available to those preparing reserves estirp.ates. Methods of problems.
sampling, measuring, testing and recording d!!ta and interpreta-
tions have b'ecome increasingly sophisticated, aided by the rela-
tively recent explosion in computer technology. Reserve defini-
tions ha~e not kept pace with these advances: Many of the Deterministic VS. Probabilistic Estimates
reserves defmitioI1l' in use today still use tenns such as reasonpble A number of papers have provided comparisons between
certainty. What does this tenn really mean? The interpretation of reserve estimates prepared using detenninistic and probabilistic
this tenn is dep!!ndent on who perfonns the reserves deterI11ina- methods<2.3,4}. Discussions have typically been focussed at the
tion, their experience level, the method or the approach taken in entity level with the detenninistic estimates of proved reserves
the reserves determination and the end use of the resulting reflecting reasonable certainty (or similarly worded) criteria.
reserves estimates. There is a range of opinion as to how these estimates generally
The objectives of the standing Committee on Reserves compare and it is safe to say that there is no definitive answer.
Definitions of The Petroleum Society (hereinafter referred to as The relationship between deterministic and probabilistic estimates
the elM Reserves Committee) in its May 1993 report (DeSorcy et is a function of the type of reservoir, the amount and quality of
al.)(l) were to:n\u'row the interpretations; clarify the uncertainties data available, evaluator experience, reserve definition terminolo-
associated with reserve estimates; and provide definitions suitable gy, etc. There is also a range of opinion as to what probability
for use with deterministic and probabilistic methods. The report level should be associated with proved reserve estimates to meet
proposed the following probability ranges for reserve the reasonable certainty criteria in definitions. Current typical
categorization: individual entity proved reserves estimates prepared for reserve
.,.
* meaning that 80% of the time proved reserve estimates should be equalled or exceeded.
t the lowest level at which reserves are determined-may be a well, group of wells, pool, etc.

26 The Journal of Canadian Petroleum Technology