DAY 1 MORNING

DEFINITIONS & STANDARDS

PETROLEUM RESOURCE

Reserve / Resources Definitions & Standards

RESERVE/RESOURCE DEFINITIONS & CONCEPTS

Accounting

produced

Reserve Evaluation/Estimation G&G Assessment

Resources Assessment G&G Assessment Engineering YTF (yet to find) discovered

Engineering Commercial Budgeting/Filing

Reserve / Resources Definitions & Standards

RESERVE/RESOURCE DEFINITIONS & CONCEPTS

2004

Reserve / Resources Definitions & Standards

RESERVE/RESOURCE DEFINITIONS & CONCEPTS

Reserve / Resources Definitions & Standards

Common E&P Capital Investment Process

A TYPICAL E&P PROJECT BUSINESS CYCLE

CYCLE exploration appraisal/delineation primary production decline management abandonment CONTENT

risk/reward assessment

reserve progression filing

exploitation depletion planning

Development Drilling/Compl. Nodal Analysis GAP/MBAL

development optimization

base management

decommission

DESCRIPTION (RE tools)

Data collection Reservoir Size Fluids/PVT Hydrodynamics Producibility Contact Permeability Recovery Volumetrics Drives SCAL PEEP PTA

History Matching Decline Analysis Simulation Material Balance Reserve Valid. TDRM/VIP/GAS3D By-Passed Pay SCADA/RTA

divestment

profitability

forward funding

static description
Cash Flow

dynamic calibration

payout
Resource Assessment Reserve Estimation (downside & upside) Reserve Calibration Resource Upside Potential

Years
7 Reserve / Resources Definitions & Standards

FLOW CHART OF EXPLORATION PROCESS

Regional Study
depositional mapping seismic data cross-sections

Identify An Anomaly

Verify Source Rock

lab analysis analogy

Verify Trap
structural / stratigraphic seals

Verify Reservoir
quality size

too risk to drill

Viable Prospect

Farmout

Raise Fund for Lease/Drilling

Acquire Lease

Mature Resources

data consistent

data inconclusive

Drill Well

Farmout

Reserve / Resources Definitions & Standards

TIMELINE FROM EXPLORATION TO DEVELOP.

Activity Discovery
Year 1 Geological/Reservoir Year 2 Year 3 Year 4

First Year Production

year 5

Evaluation
AFEs Appraisal/Delineations Development Plans Facility Regulatory Royalty; environment; Production Facilities Development Wells Pipelines

Reserve / Resources Definitions & Standards

TWO PERSPECTIVES OF RESERVE/RESOURCES

A successful oilman remarked: I would never hire an exploration geologist who is not an optimist, or a petroleum engineer who is not a pessimist.
10 Reserve / Resources Definitions & Standards

UNKNOWNS AND UNCERTAINTIES

What is missing? Unknowns, Uncertainties!
Subsurface uncertainties
We thought we knew the size & the nature of the field We thought we knew its exact volumes We figured that it would deliver this production over some period

Operation and market conditions

Will China continue to buy our natural gas? Will the government nationalize the industry or levy hefty taxes? What is oil price in 2014? Anything else might happen?

Commercial and business case risks

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Reserve / Resources Definitions & Standards

KNOWNS ANDUNKNOWNS
As we known, There are known knowns, There are things we know that we know
We also know that There are known unknowns, That is to say there are things that we now know, we do not know But there are also unknown unknowns, There are things we do not know we don't know
12 Reserve / Resources Definitions & Standards

DYNAMIC RESERVE/RESOURCE EVALUATION

Resources (non-proved/2p/3p) -> PUD/PDP

Exploration

Appraisal

Development

Reservoir Management
A firm commitment of development

Reserves Estimate

P10

Cautious opportunity evaluation process; farm-out strategy: (1) Reduce risk (2) Increase certainty

Development Decision

P50

P90

A process full of uncertainties: Recognize key factors Attempt to narrow these uncertainties: Biggest mistake Manage Uncertainties THROUGH the process
13 Reserve / Resources Definitions & Standards

Reserve/Resource Definitions & Standards

WHY RESERVE EVALUATION STANDARDS

E&P business case & capital investment process
Educated understanding of the size of the prize we are trying to capture, in order to attract investment capitals & funding Careful execution of a full-cycle cash flow project toward realizing the valuation of the early investment

Corporate governance and transparency to investors

Protection of public & national interest Transparency to the common procedure and methodologies of the business model Publicly disclosed oil/gas resources/reserves are used are used by the investors, the public, regulators, and accountants to make important decisions

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Reserve / Resources Definitions & Standards

RESERVE EVALUATION/CLASSIFICATION
Reserve evaluation is a professional exercise following the standard practice of reserve evaluator community with rules, judgment & code of conduct

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Reserve / Resources Definitions & Standards

RESERVE/RESOURCE DEFINITIONS
WHAT ARE OIL AND GAS RESERVES?
CUM (MBOE)

Oil and gas reserves are really the cumulative production of a reservoir/field until it is completely developed
Jean Laherrere

TIME

If we know oil price & volumes, we then know the reserves

Reserves = (hydrocarbon in place x Recovery factor) - Cumulative Production

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Reserve / Resources Definitions & Standards

RESERVE DEFINITION BACKGROUND

BACKGROUND HISTORY
1936: API reserve definition with proved reserves 1961: API-AGA: proved=beyond reasonable doubt 1964: API,SPE: reserve must bear reasonable certainty 1975: USGS McKelvey classification of reserve/resources 1978: SEC: proved reserves=with reasonable certainty 1979: Khalimov: Russian classification of reserve/resources 1980: SPE, AAPG, API adopted SEC proved reserve definition 1983: WPC proved reserve probabilistically at 90% 1983-1991: various individuals proposed probabilistic definition 1991: SPE refused probabilistic definition

1991-1997: continued effort of probabilistic definition

18

Reserve / Resources Definitions & Standards

RESERVE DEFINITION BACKGROUND

BACKGROUND HISTORY (continued)
1994: NPD accepted probabilistic definition for North Sea 1994: PDVSA quoted probabilistic definition for Venezuela 1995-1997: SPE/WPC opened discussions of adopting both deterministic and probabilistic definitions 1997: SPE/WPC reserve/resource definition draft document; recommending both deterministic and probabilistic definitions 2000: SPE/AAPG officially definitions of reserve, resources (contingent & prospective) 2001-2003: ASC/PS-CIM/SPEE(Calgary)/APPEGA adopted NI50-101; adopted proved, probable and possible reserves, plus SPE resources 2005-2006: New SPE draft of reserves/resources definition 2008: SEC proposed to amend its 1978 proved reserve definitions
19 Reserve / Resources Definitions & Standards

CLASSIC STANDARD: US Securities & Exchanges

SEC (1978, Rule 4-10a of Regulation S-X)
Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and cost as of the date the estimate is made. Proved reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under economic condition, operating methods, and government regulations.

SEC definitions are a lot about tank model conception

20 Reserve / Resources Definitions & Standards

CLASSIC STANDARD: US Securities & Exchanges

US SEC Categories: Proved
Proved Developed Producing (PDP) Proved Developed Non-Producing (PDNP)

Proved Undeveloped (PUD)

Evaluation Methods Deterministic

Volumetric (single set of input matrix) for early booking Arps decline for future prediction and late booking Other performance data will be reconciled to volumetric

Vintage Issues
How to achieve the certainty in the practice How technology evolutions affect the certainty & practice
21 Reserve / Resources Definitions & Standards

SPE/WPC/AAPG JOINT DEFINITIONS

Discovered Petroleum-Initially-in-Place SUBCOMMERCIAL

PRODUCTION
Producing

PETROLEUM-INITIALLY-IN-PLACE

RESERVES
Proved (1P) Proved + Probable (2P)

Being developed Proved + Probable + Possible (3P) Development planned Technology proved Technology not proved Non commercial

CONTINGENT RESOURCES Best Low Estimate High Estimate Estimate Unrecoverable PROSPECTIVE RESOURCES Best Low Estimate High Estimate Estimate Unrecoverable

Undiscovered Petroleum-Initiallyin-Place

PROSPECT
LEAD PLAY

22

Reserve / Resources Definitions & Standards

RESERVE/RESOURCE DEFINITIONS
RESOURCES DEFINITION (SPE/WPC/AAPG, Feb 2000)
Discovered Unrecoverable Resources
Contingent Resources
Technically Recoverable but UNECONOMIC

Unrecoverable Resources
Neither Technically Recoverable Nor Economic

Undisclosed Resources
Undiscovered Recoverable Resources = Prospective Resources
Technically Recoverable and economic

Undiscovered Unrecoverable Resources

Neither Technically Recoverable Nor Economic

23

Reserve / Resources Definitions & Standards

RESERVE/RESOURCE DEFINITIONS
RESERVES DEFINITION (SPE/WPC/AAPG, Feb 2000)
Discovered Resources, that are:
Known Quantities

+ Reservoir penetrated by a well bore

Technically Recoverable

Economically Recoverable
+ Either forecast prices and costs Or constant prices and costs

Known Quantities that are Technically Recoverable but Uneconomic= Contingent Resources

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Reserve / Resources Definitions & Standards

RESERVE/RESOURCE DEFINITIONS
PROVED RESERVES (SPE/WPC/AAPG, Feb 2000)
Proved Reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated proved reserves. This definition applies at the lowest level at which reserves are normally evaluated, e.g. the well level.

25

Reserve / Resources Definitions & Standards

RESERVE/RESOURCE DEFINITIONS
DEVELOPMENT AND PRODUCTION STATUS
DEVELOPED RESERVES Developed Reserves are those reserves that are expected to be recovered from:
Existing wells and installed facilities If facilities are not installed, that would involve a low expenditure (e. g. when compared to the cost of drilling a well) to put the reserves on production.

DEVELOPED PRODUCING
DEVELOPED NON-PRODUCING

26

Reserve / Resources Definitions & Standards

RESERVE/RESOURCE DEFINITIONS
DEVELOPED PRODUCING (PDP)
Proved Developed Producing (PDP) are those reserves that are expected to be recovered from completion intervals open at the time of the estimate. (Many operators report PDP reserves only after the well is flowing) These reserves may be currently producing or, if shut-in, they must have previously been on production, and the date of resumption of production must be known with reasonable certainty.
Reserve certainty is within 1 calendar quarter of the estimated date of resumption of production of production with no required capital after the evaluation date.

27

Reserve / Resources Definitions & Standards

RESERVE/RESOURCE DEFINITIONS
DEVELOPED NON-PRODUCING (PDNP or PNDP)
Developed non-producing reserves are those reserves that either have not been on production or, have previously been on production, but are shut in, and the date of resumption of production is UNKNOWN.
e.g. many operators consider a pay zone behind casing (evaluated with core, logs, WFT, and analog data in an known formation) as PDNP or PNDP. UNKNOWN can be considered to be outside 1-calendar quarter of the estimated date of resumption of production with low capital expenditure after the evaluation effective date.

28

Reserve / Resources Definitions & Standards

RESERVE/RESOURCE DEFINITIONS
UNDEVELOPED RESERVES (PUD)
Undeveloped Reserves are those reserves expected to be recovered to be from known accumulations where a significant expenditure (e.g. when compared to the cost of drilling a well) is required to render them capable of production, e.g. a well needs gas-lift pump in order to be on production. They must fully meet the requirements of the reserves classification (proved, probable, possible) to which they are assigned.
KNOWN ACCUMULATION is considered to be infill or single offset stepout drilling. SIGNIFICANT EXPENDITURE can be considered to be approximately equal to or greater than 25% of the cost of drilling a well.

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Reserve / Resources Definitions & Standards

RESERVE/RESOURCE DEFINITIONS
PROBABLE RESERVES (SPE/WPC/AAPG, Feb 2000)
Probable Reserves are those additional reserves that are less certain to be recovered than proved reserves. It is equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated Proved + Probable reserves. This definition applies at the lowest level at which reserves are normally evaluated, e.g. the well level.

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Reserve / Resources Definitions & Standards

RESERVE/RESOURCE DEFINITIONS
POSSIBLE RESERVES (SPE/WPC/AAPG, Feb 2000)
Possible Reserves are those additional reserves that are less certain to be recovered than probable reserves. It is unlikely that the actual remaining quantities recovered will exceed the sum of the estimated proved + probable + possible reserves. This definition applies at the lowest level at which reserves are normally evaluated, e.g. the well level.

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Reserve / Resources Definitions & Standards

CANADIAN COMPANIES COMPLAINING

SEC Compliant Proved Reserves
Perceived very conservative Do not care true investment value and growth potential for an E&P company Can be related to the liquidation value of the company

An Investors Dilemma
RESERVE CATEGORY COMPANY A COMPANY B

SEC PROVED RESERVE

SPE PROBABLE SPE POSSIBLE

1000 mboe
100 mboe 10 mboe

1000 mboe
1000 mboe 1000 mboe

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Reserve / Resources Definitions & Standards

MAJOR STANDARDS & PRACTICES

New Technologies
LWD/MDT in Deepwater 3D Seismic Multiple Leg/Horizontal Wells Slickwater Frac in Tight Gas (Low OPEX) Production Sharing Agreement/Contract Liberalized Global Gas Market Energy Policy Changes Environmental Policy Changes

Commercial Aspects

New Politicies
SEC proposed revisions on reserve reporting 2008

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Reserve / Resources Definitions & Standards

RESERVE/RESOURCE EVALUATION METHODS

SUMMARY
Resources quantitative count of hydrocarbons (fixed volume) Reserves expected to be produced and sold portion under market & operation condition for a profit, at least > $1 (variable quantity) Uncertainties with subsurface estimates & commercial conditions SEC Rules, SPE/WPC/AAPG recommendations, operators own guidelines Keys to gain confidence on the estimate of recoverable volumes or technical parameters to navigate an investment/business project

Operating guidelines of classification, disclosures, progression

Protection of national interest, supply/demand, market/investors

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Reserve / Resources Definitions & Standards

Reserve/Resource Evaluation Methods

RESERVE EVALUATION PROCESS

A Multi-Disciplinary Approach
Step 1: Gather Physical Parameters Step 2: Analyze Physical Parameters Step 3: Estimate Technical Volumes of Hydrocarbons Step 4: Apply Economics to Estimate Economically Recoverable Volumes Step 5: The Resulting Estimate is a Forecast of Future Outcomes

The Actual Outcomes May Differ Materially

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Reserve / Resources Definitions & Standards

RESOURCE/RESERVE EVALUATION METHODS

TYPICAL E&P CAPITAL INVESTMENT PROJECT BUSINESS CYCLE

probabilistic upper bound range of estimates

t
lower bound
volumetrics analogy/statistical arps decline

well test / production data / material balance / simulation

static assessment
less data & less certain, more scoping

dynamic performance
more data & certain, more details

37

Reserve / Resources Definitions & Standards

RESOURCE/RESERVE EVALUATION METHODS

E&P Capital Investment Process & Reserve Evaluation
Initial Initial Scoping Scoping Assessment Assessment $$ Resource/Reserve Resource/Reserve Evaluations Evaluations Reserve Reserve Statement Statement Sheet Sheet Project Project & & execution execution forward forward funding funding $$$$$
Depositional Environment & Common Risk Maps analogy volumetric Volumetric Hydrocarbon-in-place; Sales Recoverable Reserves (proved)
Monte Carlo

HIP
analogy

Seismic structural trout , porosity anomaly and PHI*H maps Fluid properties, API, viscosity, FVF, Pbubble, reservoir P & Temp; hydrodynamics Reservoir & formation petrophysics, height, Swir, FWL, limit

(hydrocarbon in place)

Product Descriptions (oil, gas, by-products)

decline analysis

RF
Proved Reserve Probable Possible

well test

Drilling & Development Depletion Plan (single & multiple wells productivity)

material balance

Production Forecast

Production Forecast, Lifecycle, Rate & Abandonment

numerical simulation

Economic Model & Cashflow Forecast

Lab Study, Simulation

$$$

Exploration right, market conditions, exporting options

Well Control

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Reserve / Resources Definitions & Standards

RESERVE/RESOURCE EVALUATION METHODS

PDP
fluid & PVT studies hydrostatic/hydrodynamics well test/PTA surveillance data reservoir simulation material balance operation

Recovery Factor

rate vs. time

30
30

rate vs. cum

Pressure Distribution Reservoir Effectiveness (drainage) Permeability/damage Drive mechanism External Energy (injection) Completion Method Operation Condition

25

25

20

20

rate

rate

15

15

10

10

0
10.10 10.73 11.34 11.96 12.57 13.17 13.75 14.30 14.87 15.47 15.93 16.36 16.87 17.38 17.90 18.39 18.85 19.27 19.73 20.14 20.55

0 Dec-02 May-03 Oct-03 Mar-04 Aug-04 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07

date

cum

VIN PLACE A H (1 Sw ) BFVF RF

Gas/Oil In-Place

PROVED RESERVES

PUD

Base Management Forecast Acquisition

Connected Pore Volume Porosity Distribution Water Saturation Net Pay /Net-Gross Pay Ratio Fluid Properties (FVF)

2D & 3D seismic mapping depth conversion top/bottom/side seals porosity expression reservoir size column height/crest/contact

geological modeling sedimentary burial environment structural maps rock studies (core, thin section) fault, fractures, pervasiveness

RESOURCE TO RESERVE PROGRESSION

analog cross sections integration of logs, cores, pays Petrophysical parameter distribution contributing factors

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Reserve / Resources Definitions & Standards

20.97

0.01

0.80

1.61

2.48

3.31

4.13

4.90

5.66

6.40

7.12

7.81

8.46

9.12

9.45

RESOURCE/RESERVE EVALUATION METHODS

Deterministic
Method required for filing and reporting Use a single value for each parameter in a reserve calculation (often volumetric calculation) Choose the most appropriate value for the corresponding reserves category

Probabilistic
Method used for resources evaluation Selects the full range of values for each parameter Generates full range of possible outcomes and their associated probability of occurrence

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Reserve / Resources Definitions & Standards

RESOURCE/RESERVE EVALUATION METHODS

Analogue
Correlation and Expectations

Volumetric (for initial filings)

Deterministic Based Probabilistic Assisted

Performance (for dynamic calibrations)

Production Decline Analysis (Arps, Fetkovich, Blasingame) Material Balance (pressure & cum volume history matching) Numerical Simulation (history matching with reservoir geometry)

R/P Benchmark
Commercial aspect (experienced analogy guide lump-sum)

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Reserve / Resources Definitions & Standards

COMMERCIAL CONSIDERATIONS
Price Forecast

Production profile

Net Cash Flow

Fiscal Model

Time Capex Expenditure

Opex Expense

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Reserve / Resources Definitions & Standards

CASH FLOW mm$

Net Production, mboe/d
-12 12 16 -8 -4 0 4 8
0 1 2 3 4 5 6 7

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NET PRODUCTION

CASH FLOW

20 0 20 6 0 20 8 1 20 0 1 20 2 1 20 4 1 20 6 1 20 8 2 20 0 2 20 2 2 20 4 2 20 6 2 20 8 3 20 0 3 20 2 3 20 4 3 20 6 3 20 8 4 20 0 4 20 2 4 20 4 4 20 6 4 20 8 5 20 0 5 20 2 54
20 0 20 6 0 20 8 1 20 0 1 20 2 1 20 4 1 20 6 1 20 8 2 20 0 2 20 2 2 20 4 2 20 6 2 20 8 3 20 0 3 20 2 3 20 4 3 20 6 3 20 8 4 20 0 4 20 2 4 20 4 4 20 6 4 20 8 5 20 0 5 20 2 54
0 2 4 6 8 10 12 14 16

Commercial Cashflow Summary

COMMERCIAL CONSIDERATIONS

Reserve / Resources Definitions & Standards

Year
Year
CAPEX mm$
10 0 5
12 16 20 24 28 32 0 4 8

OPEX mm$
15 20 25 30 35

Cum Prod Fuel PUD PDNP PDP

OPEX

CAPEX

20 0 20 6 0 20 8 1 20 0 1 20 2 1 20 4 1 20 6 1 20 8 2 20 0 2 20 2 2 20 4 2 20 6 2 20 8 3 20 0 3 20 2 3 20 4 3 20 6 3 20 8 4 20 0 4 20 2 4 20 4 4 20 6 4 20 8 5 20 0 5 20 2 54

20 0 20 6 0 20 8 1 20 0 1 20 2 1 20 4 1 20 6 1 20 8 2 20 0 2 20 2 2 20 4 2 20 6 2 20 8 3 20 0 3 20 2 3 20 4 3 20 6 3 20 8 4 20 0 4 20 2 4 20 4 4 20 6 4 20 8 5 20 0 5 20 2 54

Year

10

12

14

16

Year

Variable Cost Fixed Cost Opex $/bbl

PUD PDNP PDP

CLASS EXERCISE/BRAIN TEASING