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18/08/2014

Hydrocarbon Resource Assessment and


Portfolio Management

Prof. Anirbid Sircar

www.globalenergytalent.com | +91 124 472 9200

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Reference Materials …
• SPE/WPC/AAPG/SPEE Petroleum Resources
Management System
• 2001 Guidelines for Evaluation of Reserves/
Resources
• Standards Pertaining to the Estimating and Auditing
of Oil and Gas Reserves Information
• SPE Oil and Gas Reserves Committee (OGRC)
Mapping Subcommittee Final Report, December
2005

• All from www.spe.org/industry/reserves/prms.php

Welcome
Introductions:

Why this course?

• Manage Resources
• Consistency
• Reporting

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Issues to be covered
• Resource Assessment Framework:
• The Project [SPE-PRMS 1.2]
• Commerciality [SPE-PRMS 2.1.2]
• Classification and Categorization [SPE-PRMS 2.0]
• Terminology – PR, CR and 3P vs. CR [SPE-PRMS 2.1.3]
• Incremental Projects [SPE-PRMS 2.3]
• Unconventional Resources [SPE-PRMS 2.4]
• Commercial Evaluations [SPE-PRMS 3.1]
• Economic Limit, Fuel Gas, PSCs, Entitlement, Contract Limit
• Estimating Methods [SPE-PRMS 4.0]
• Deterministic and Probabilistic,
• Volumetric, DCA, Simulation
• Aggregation
• Portfolio Optimisation and Management

International Efforts in Standardisation


1965 SPE Definition of Proved Reserves
1972 McKelvey Box
1987 SPE Definitions for Proved and Probable
1990s UNECE starts work on UNFC
1997 SPE & WPC joint definitions
2000 AAPG, SPE & WPC joint classification system
2001 Joint Guidelines published
2007 SPE/WPC/AAPG/SPEE publish Petroleum
Resources Management System (PRMS)

• SPEE -Society of Petroleum Evaluation Engineers


• WPC - World Petroleum Council
• AAPG - American Association of Petroleum Geologists
• SPE - Society of Petroleum Engineers

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[SPE-PRMS 1.1]
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Resources are … [SPE-PRMS 1.0]

• All quantities of petroleum occurring on or within the Earth’s


crust
• Discovered and undiscovered
• Recoverable and unrecoverable
• Including quantities already produced
• All types, whether currently considered “conventional” or
“unconventional”

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Reserves are … [SPE-PRMS 1.1]


• Those quantities anticipated to be commercially
recoverable by application of development projects to
known accumulations from a given date forward under
defined conditions
• They must satisfy 4 criteria:
• Discovered
• Recoverable
• Commercial
• Remaining
• Reserves are a subset of Resources

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Contingent Resources are … [SPE-PRMS 1.1]


• Those quantities estimated, as of a given date, to be
potentially recoverable from known accumulations, but the
applied project(s) are not yet considered mature enough for
commercial development due to one or more contingencies
• Contingencies might be, for example, no currently viable
market, technology still under development, or evaluation
insufficient to clearly assess commerciality
• For each CR, there is a risk that the accumulation will not be
developed within a reasonable time frame

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SPE PRMS

 The Project … what does this mean, and why is it so


important?
 R&U Concepts
 Classification and Categorization
 Commercial Considerations

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The Project is … [SPE-PRMS 1.2]

• A set of investments, committed to at about the same time,


applied to a specific reservoir development, to generate a
unique production and cash flow profile
• One project may include one or many wells, associated
production and processing facilities
• One project may develop many reservoirs, or many projects
may be applied to one reservoir

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A Discovery is … [SPE-PRMS 2.1.1]


• A Discovery is one petroleum accumulation, or several
petroleum accumulations collectively, for which one or several
exploratory wells have established, through testing, sampling
and/or logging the existence of a significant quantity of
potentially movable hydrocarbons
• When discovered, an accumulation is referred to as “known”
• Question … how does this work with unconventional
“pervasive” accumulations?

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Commerciality means … [SPE-PRMS 2.1.2]


• The entity (company) claiming commerciality has demonstrated
firm intention to proceed with development and such intention is
based on all of the following criteria:
• Evidence to support a reasonable timetable
• A reasonable assessment of the future economics meeting
defined investment and operating criteria
• A reasonable expectation of a market
• Evidence that the necessary production and transportation
facilities are, or can be made, available
• Evidence that legal, contractual, environmental and other social
and economic concerns will allow for the actual implementation
of the recovery project

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Project-Based Resource Assessments


The Project is the Primary element in this resources
classification, representing the link between the petroleum
accumulation and decision making process.
A Project maybe a single reservoir or an incremental
development for a producing field or several fields and
associated facilities with common ownership.
The Project represents the level where a decision to
proceed or not is made and there should be an associated
range of recoverable quantities.

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Project-Based Resources Assessments


The Development Plan associated with the Project or
Projects allows assignment of recoverable resources.
• There may be major uncertainties, particularly at the
early stages
• There may also be issues concerning commercial
viability
• The recoverable volumes are estimated at the point of
sale or custody transfer

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SPE PRMS

 The Project … what does this mean, and why is it so


important?
 R&U Concepts
 Classification and Categorization
 Commercial Considerations

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Risk and Uncertainty … [SPE-PRMS 2.0]

• Risk (Chance) is the probability of a discrete (generic)


event occurring

• Uncertainty captures the full range of possible


outcomes, if that discrete (generic) event occurs.

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Concepts of Risk and Uncertainty

• There is a chance that we will beat Liverpool twice in the


League this season (and therefore a risk that we won’t)

• And we are uncertain what the goal difference will be, if


(when) we do beat them

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Risk Measures

• Three commonly used discrete events …


• Discovery (CoD) is prospect producing at least measurable volumes of
hydrocarbons to surface;
• Development (CoD) is contingent resource producing revenues;
• Commerciality (CoC) is any resource producing revenues

• So all Prospective Resources have some risk (i.e. <100% chance of


discovery) … and all Contingent Resources have some risk (i.e.
<100% chance of development or commerciality)

• And CoC = CoD x CoD

There is a chance that we


will beat Liverpool twice this season

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So the concept of risk relates to:

Is it going to work? Will the project mature to revenue


generating status?

Chance of Discovery/Commerciality?

Probability of success?

binary issue … CoC = (1-CoF)

% chance of “success”

“success” = revenue generating status

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And the concept of uncertainty relates to …

• if the project works,

• what is the EUR?

• what is the project NPV at a reference date?

• continuum, probability distribution answer

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Important point about Chance or Risk

• Quoting a Net Present Value is meaningless unless the


applied discount rate is also given (and also the reference
date)

• Likewise quoting a Chance or Risk is meaningless unless


the event being risked is also given

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From: Rose, 2001, Risk Analysis and


Management of Petroleum Exploration
Ventures, AAPG

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Rules of thumb …

From Otis and Schneidermann, 1997

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Example, major company scheme …


Trap & Seal
Confidence level based on
quality & quantity of relevant data

HIGH
Multiple wells 0.1 – 0.3 0.8 – 1.0
Good quality seismic (mainly 3D)
Petroleum system well understood
CONFIDENCE

MODERATE
Some wells 0.2 – 0.3 0.5 – 0.7 0.7 – 0.9
Variable quality seismic (mainly 2D)
Knowledge of petroleum system

LOW
Regional knowledge; trendology 0.3 – 0.4 0.3 – 0.5 0.4 – 0.6
Evaluation uses analogues

LOW MODERATE HIGH


CHANCE
Low Moderate High
Complex, poorly defined trap, Moderately complex; mainly structural Simple, well defined trap,
mainly stratigraphic/structural traps; some stratigraphic component. mainly structural.

Thin, discontinuous seal Thin, continuous seal Thick, continuous seal

Multiple, intersecting faults – Some fault seal concerns Simple fault pattern – fault
fault leakage seal

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Uncertainty
• Can be assessed either:
• Probabilistically … full range of uncertainty calculated
statistically, either by Monte Carlo simulation, or by the
Parametric method, or
• Deterministically, through evaluation of discrete cases to
represent low, best and high cases
• In principle, low should approximate P90 (ie 90% chance
that actual value will equal or exceed estimate), best
should approximate P50, and high should approximate
P10

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SPE PRMS

 The Project
 R&U Concepts
 Classification and Categorization, on the basis of the
Project and R&U
 Commercial Considerations

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Classification and Categorisation … [SPE-PRMS 2.0]

• Projects are described on the basis of estimates of their


associated risk and uncertainty
• Risk (or better, Chance) is the probability of a defined event
(such as discovery, or commerciality) occurring
• Uncertainty is the range of possible outcomes (such as
volume or value) if that defined event occurs

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Classification … [SPE-PRMS 2.1]


• A Project is first “classified” on the basis of its status
(maturity) and the associated risk (Chance of
Commerciality)
• Thus, if the project relates to an undiscovered accumulation, the
accumulation is not yet “known”, and it is classified as a Prospective
Resource
• If the project relates to a known, but not yet commercial accumulation,
it is a Contingent Resource
• If the project relates to a known accumulation that is commercial, then
it is a Reserve
• Each major class (Reserves, CRs and PRs) may be
subdivided, as the evaluator sees fit

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Categorization … [SPE-PRMS 2.2]


• Each class or subclass is then subdivided into 3
categories, on the basis of the range of uncertainty as
to the volumes addressed by the project, that range
being characterized by three values
• If the assessment is performed deterministically, then
the three values will be the low, best and high estimates
• If the assessment is performed probabilistically, then
the three values will be the P90, P50 and P10, where
Pxx is the probability that the quantities actually
recovered will equal or exceed xx

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[SPE-PRMS 1.1]
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Terminology … [SPE-PRMS 2.2.2]

• For Reserves, the categories are 1P (Proved), 2P (Proved


plus Probable) and 3P (Proved plus Probable plus Possible)
• Note that the incremental quantities “Probable” and “Possible” cannot
be estimated in isolation, and if needed, they have to be derived
arithmetically, 2P-1P and 3P-2P respectively
• For CRs, the categories are 1C, 2C and 3C
• For PRs, the categories are Low Estimate, Best Estimate
and High Estimate

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Proved Reserves … [SPE-PRMS 2.2.2]


Proved Reserves are those quantities of petroleum, which,
by analysis of geoscience and engineering data, can be
estimated with reasonable certainty to be commercially
recoverable, from a given date forward, from known
reservoirs and under defined economic conditions,
operating methods, and government regulations. If
deterministic methods are used, the term reasonable
certainty is intended to express a high degree of confidence
that the quantities will be recovered. If probabilistic methods
are used, there should be at least a 90% probability that the
quantities actually recovered will equal or exceed the
estimate.

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Probable Reserves … [SPE-PRMS 2.2.2]


Probable Reserves are those additional Reserves which analysis of
geoscience and engineering data indicate are less likely to be recovered
than Proved Reserves but more certain to be recovered than Possible
Reserves. It is equally likely that actual remaining quantities recovered will
be greater than or less than the sum of estimated Proved plus Probable
reserves (2P). In this context, when probabilistic methods are used, there
should be at least a 50% probability that the actual quantities recovered
will equal or exceed the 2P estimate.

Note that “Probable” is an abstract concept that does not exist as a separate
entity in nature. We can estimate “Proved, 1P” and “Proved plus Probable,
2P”, but can only derive “Probable” by subtraction (ie 2P-1P)

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Possible Reserves … [SPE-PRMS 2.2.2]


Possible Reserves are those additional reserves which analysis
of geoscience and engineering data suggest are less likely to
be recovered than Probable Reserves. The total quantities
ultimately recovered from the project have a low probability to
exceed the sum of Proved plus Probable plus Possible (3P)
Reserves, which is equivalent to the high estimate scenario. In
this context, when probabilistic methods are used, there should
be at least a 10% probability that the actual quantities
recovered will equal or exceed the 3P estimate.

Note that “Possible” is an abstract concept that does not exist


as a separate entity in nature. We can estimate “Proved plus
Probable, 2P” and “Proved plus Probable plus Possible, 3P”,
but can only derive “Possible” by subtraction (ie 3P-2P)

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Incremental Projects … … [SPE-PRMS 2.3]

• The initial resource assessment is based on the application of


a defined development project
• Incremental projects are designed to increase recovery
efficiency and/or to accelerate production, through making
changes to wells or facilities, infill drilling, compression or
improved recovery
• Such projects should be classified, separately, according to
the same criteria as initial projects

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Deterministic or Probabilistic Methods? …


[SPE-PRMS 4.2]
• Each is acceptable
• For Deterministic, great care should be taken in selecting
and characterising the low, best and high scenarios
• Probabilistic methods are well accepted for in place
volumes … correlations and dependencies should be
modelled rigorously
• We recommend then treating the P90, P50 and P10 in
place volumes as discrete scenarios, and deriving most
likely recovery factors for each, deterministically
• More on this when we discuss methodologies in detail,
later

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Unconventional Resources … … [SPE-PRMS 4.2]


• Conventional resources … discrete accumulations related
to localised structural feature or stratigraphic condition, in
a reservoir which is significantly affected by hydrodynamic
influences
• Unconventional resources … pervasive throughout a
large area and not significantly affected by hydrodynamic
influences
• Assessment of each may require different techniques
• But resources definitions, together with the classification
system, will be appropriate for each

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Definitions … [SPE-PRMS 2.1.3]

• CoDisc is the probability of a Prospective Resource


maturing into a Contingent Resource
(CoDisc is the Chance of Discovery)

• CoDev is the chance of a Contingent Resource maturing


into a Reserve

• CoC is the probability of a Prospective or Contingent


Resource maturing into a Reserve

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Project-Based Resources Evaluations and


Risk Approx CoDisc %

100

100

100

100

100

100

10-50

0-15

N/A

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Risk, Uncertainty and Resources


[SPE-PRMS 2.1.3.1]

CoDev

CoC

CoDisc

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Other terms you might see used, but not by many …

RESERVES STATUS [SPE-PRMS 2.1.3.2]


Developed Reserves
Expected Quantities to be recovered from existing wells
and facilities
Developed Producing Reserves – expected to be
recovered from completion intervals open at present time
Developed Non-Producing Reserves – includes shut-
in and behind pipe reserves
Undeveloped Reserves
Expected to be recovered from future investments

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And …
[SPE-PRMS 2.1.3.3]
ECONOMIC STATUS
Marginal Contingent Resources – technically feasible
projects either currently economic or projected to be so

Sub-Marginal Contingent Resources - technically


feasible projects which are not economic and unlikely to be
so under reasonably forecasted improvements in commercial
conditions

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… and an example of some that shouldn’t be used,


and things that shouldn’t be done with them
• “Remaining proved, probable and contingent net reserves in
existing fields are xx mmboe”
Reserves Overview:

Field A B C Total
Proved 30.1 3.3 4.6 38.2
Probable 10.5 1.1 3.2 14.7
Contingent 21.7 6.6 1.4 29.5
Total 61.5 10.9 9.3 82.0

And …
Estimated Resource Review

Area X Y Z Total
Proved 30.1 3.3 4.6 38.2
Probable 10.5 1.1 3.2 14.7
Low Risk 35.2 7.6 44.2 87.1
Exploitatio
n
Enhanced 40.4 0 123.5 170.0
Exploration
Total 126.5 9.0 175.3 310.4

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SPE PRMS
 The Project
 R&U Concepts
 Classification and Categorization
 Commercial Considerations

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Commercial Evaluations … [SPE-PRMS 3.1]

• Investment decisions (commerciality) based on “entity’s”


view of future commercial conditions and the projected
production/cash flow of the project
• Assumptions on various conditions :
• Financial (costs, prices, fiscal terms, taxes)
• Marketing
• Legal
• Environmental
• Social
• Governmental

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Economic Limit … [SPE-PRMS 3.1.3]


• The production rate beyond which the Project’s net
operating cash flows are negative for the last time
• For the assessment of resources, it is assumed that
production is stopped at this point
• Opex to be estimated on the same basis as price
forecasting
• Opex should include only those costs that are
incremental to the project
• Opex may be reduced through time, to reflect lower
production rates and/or various cost-reduction and
revenue-enhancement approaches

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Non-hydrocarbon components … [SPE-PRMS


3.2.4]
• Reported quantities should reflect the agreed specs of the
product
• If sold with non-hydrocarbons included, the reported
volumes should include the non-hydrocarbon components,
and the (lower) sales price used for economic tests
• If non-hydrocarbons are extracted before sale, they should
also be excluded from the reported volumes, the cost of
their extraction included in Opex, and the (higher) sales
price used for economic tests

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PSCs and Entitlement … [SPE-PRMS 3.3.2]

• Producers have an entitlement (often called “net


entitlement” or “net economic interest” and, as a result of
the terms of the PSC, not equal to “working interest”)
• Formula calculating entitlement incorporates payment to the
producer to compensate for project costs (cost oil) and
some share of the profits (profit oil)
• Volumes to which producer is entitled depend, therefore, on
the oil price
• Perhaps counter-intuitively, the higher the oil price, the less
oil is needed to cover those costs, and hence the lower the
volumes to which the producer is entitled

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Contract Limits … [SPE-PRMS 3.3.3]


• Reserves should not be claimed for those volumes that will
be produced (perhaps by others) beyond the ending date of
the current agreement, unless there is a reasonable
expectation that an extension, a renewal, or a new contract
will be granted
• Claim will have to be based on historical precedent
• Otherwise, those volumes to be produced beyond licence
expiry are CRs

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Effect of ELT and Contract Limit …

Contract Limit
120

100

80

Production Rate (MB/D) 60

40

20

Economic Limit
0

1 3 5 7 9 11 13 15 17
Time (years)

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Example, Company A
• Has had, for many years, a single licence to produce fields
in country O
• Licence due to expire in 2016, but cordial discussions
ongoing to extend
• A decides, internally, that up to 2006 (i.e. 10 years from
expiry), it has reasonable expectation of extension, and so
books post-2016 production as reserves
• At year end 2006, with discussions still ongoing, it re-
classifies country O volumes as contingent resources
• Is this correct? What effect should this have on investment
community from 2005 to 2006?

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CR versus 3P …
• There is sometimes unnecessary confusion as to whether a
project has Contingent Resources or 3P Reserves
• Confusion is unnecessary, because the criteria that a Project
has to satisfy to become a Reserve are clear, and generally
hinge on “commerciality” … if the project is commercial, it is
a Reserve, if not, it isn’t
• The confusion arises from an old (misguided) onshore US
practice of assessing Proved, Probable and Possible
Reserves independently, called the incremental or risk-based
method.
• PRMS makes this clear … but, question, does it work for
unconventionals?

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COMMON GREY AREAS in SPE-PRMS

• Approvals – evidence to qualify as commitment - do you


need them all or can you be reasonably certain?
• Analogues & Pilots, particularly for WI.
• ELT and licence issues
• Definition of the Project … eg Kashagan?

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Aggregation … [SPE-PRMS 4.2.1]


• Reservoirs to field, fields to regions, regions to corporate
• It is mathematically incorrect, and totally misleading, to
sum P90s, P50s and P10s arithmetically. It only works for
means
• For internal purposes, all aggregation should be
probabilistic, with appropriate correlations and
dependencies
• PRMS (and SEC) allow probabilistic aggregation only to
the “field, property or project level”, and require arithmetic
aggregation beyond that

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Aggregation 2 …
• In general, Reserves, Contingent Resources and
Prospective Resources should not be aggregated with each
other, as there are significant differences in Chance of
Commerciality between them
• The same argument is true, of course, for the subclasses of
CRs … in theory, each CR project should be risked,
individually, before a total CR for a region, or corporate, is
calculated
• We are not (yet) good at risking CRs so, aware of these
shortcomings, we sum unrisked CRs within each
subcategory

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SPE-PRMS Checklist … part 1


• Is accumulation “known”?
• if yes, then CR/R, if not, PR
• Has project been defined?
• Is timeframe reasonable?
• Have economics been defined, and are they positive?
• Does a market exist, or is it reasonably certain that it will exist?
• Is there reasonable certainty that facilities will exist?
• Is there reasonable certainty that all consents will be obtained
• Has government approved the plan and have partners
committed to it?
• If no to any of these, then CR; if yes to all, then reserves

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• For contingent resources, use volumetric / analogue methods


• For Reserves, are there sufficient production performance data
to establish decline trends or demonstrate good history match?
• if not, use volumetric / analogue methods
• if yes, use DCA, simulation or P/Z
• If using volumetric methods (some reserves and all CRs), use
probabilistic methods to in place, extract P90, mean and P10,
and then assume most likely development plan (via best
analogue) to get RF
• Multiplication of P90, mean, P10 by most likely RFs gives 1C,
2C, 3C, or 1P, 2P, 3P.
• If using production performance methods, select low, best and
high cases (to approximate P90, mean and P10) deterministic
cases, to give 1P, 2P and 3P.

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So, to recap, Resources are …

• All quantities of petroleum occurring on or within the Earth’s


crust
• Discovered and undiscovered
• Recoverable and unrecoverable
• Including quantities already produced
• All types, whether currently considered “conventional” or
“unconventional”

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Reserves are …
• Those quantities anticipated to be commercially
recoverable by application of development projects to
known accumulations from a given date forward under
defined conditions
• They must satisfy 4 criteria:
• Discovered
• Recoverable (by the project, within contractual limits)
• Commercial
• Remaining
• Reserves are a subset of Resources

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Commerciality means …

• The entity (company) claiming commerciality has demonstrated


firm intention to proceed with development and such intention is
based on all of the following criteria:
• Evidence to support a reasonable timetable
• A reasonable assessment of the future economics meeting defined
investment and operating criteria
• A reasonable expectation of a market
• Evidence that the necessary production and transportation facilities
are, or can be made, available
• Evidence that legal, contractual, environmental and other social and
economic concerns will allow for the actual implementation of the
recovery project

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Example, Company B … commitment


• Has a large stranded gas discovery
• Tested gas at high (presumably commercial) rates
• Multi tcf volumes recoverable
• No local market
• Proposal to build LNG plant
• Partners all have board approval for investment
• Local community supportive
• Government promises support, but has yet to approve
environmental protection plan, and hence overall
development plan
• Does B have reserves?

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Example, Company C … commitment

• Has a Southern North Sea discovery


• Many appraisals, flowed at commercial rates
• C generated a development plan in 1996 which was
commercial, and submitted to UK DTI
• In 1997, C submitted revised development plan, before
UK DTI had responded on the original
• In 1998, C submitted a further revised plan
• In 1999, C requested audit approval of reserves filing to
SEC, claiming corporate commitment to develop, based
on order placed for FPSO
• Would you agree?

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Example, Company D … remaining

• Has longstanding operations in SE Asia … hundreds of low


rate, old wells, with very low decline rates
• Small staff, fully occupied with workovers, etc … very low
capital investment, no new technical work
• One global reserves evaluator
• Submits regional aggregate proved reserves filing to SEC
that includes unchanged volumes for SE Asia operations, for
several years in a row
• Is this right?

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Example, Company E … phased project


• Company has a strong equity position in a very large
offshore project, under development, but prior to first oil
• Approved plan is to develop by phases … only Phase 1,
essentially the currently Proved volumes, is approved
• Involves Capex of $x … first platform, drilling, and pipeline
capable of taking full field peak production rate
• Phase 1 projected revenues are $y, where y<x
• As soon as Phase 1 production shows projected rates are
reasonable, Phase 2 will start
• What reserves should E report?

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SEC

Note … references in the following slides are to:

§ 210.4-10 Financial accounting and reporting for


oil and gas producing activities pursuant to the
Federal securities laws and the Energy Policy and
Conservation Act of 1975.

See http://www.sec.gov/rules/final/2008/33-8995.pdf

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Summary of Major SEC Changes, 2010


1. Pricing Mechanism
2. Reserves Categories
• Proved – mandatory disclosure
• Probable and Possible – optional disclosure
• Developed plus Undeveloped
3. ‘Certainty’ criterion replaced by ‘Reasonable
Certainty’ for Proved Undeveloped
4. Use of New Technologies
5. Non-traditional Resources
6. Disclosure Requirements

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Major Change: 12-Month Averaging

• Replace single-day (year-end) price with 12-month


average [S-X 210.4-10(a)(23)(v)]
• Reduces effects of short-term volatility
• Reduces effect of
seasonality in prices
• Uses first-day-of-
month prices to
determine average

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Definitions Modified: Reserves Categories

• Proved reserves [4-10(a)(22)]


• ‘Reasonable certainty’ clarified
• Much more likely than not; 90% probability
• Probable reserves [4-10(a)(18)]
• Proved plus Probable are likely as not; 50% probability
• Possible reserves [4-10(a)(17)]
• Proved plus Probable plus Possible, not likely; 10%
probability

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Reasonable Certainty
• If deterministic methods are used, it means there is a high
degree of confidence that the quantities will be recovered.
• If probabilistic methods are used, there should be at least a
90% probability that the quantities recovered will equal or
exceed the estimate.
• High degree of confidence means it is much more likely to
be achieved than not and, as new data are acquired and
evaluated, a “reasonably certain” EUR is much more likely to
increase or remain constant than to decrease.

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Major Change: Use of new Technologies


• Permit use of new technologies to estimate proved
reserves [4-10(a)(25)]
• No longer prescribe specific technologies
• Allows emerging technologies proven in practice to
lead to correct conclusions

74

Reliable Technology

• Covers technologies (including computational methods)


that have been field tested and demonstrated to provide
“reasonably certain” results with consistency and
repeatability in the formation being evaluated or in an
analogous formation (which is not defined).

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75

Major Change: Nontraditional Resources

• Nontraditional resources to be included in


oil and gas reserves
[4-10(a)(16)]
• Oil (tar) sands
• Oil shales from
mining operations
• Synthetic oil, gas
from mined coal

(from www.eia.doe.gov/)

76

Other reporting systems: NPD, UNFC,


Russian, Canadian …

Learning Objective – to understand the way that descriptive


terms used in other systems map into those of SPE-PRMS

See SPE Oil and Gas Reserves Committee, Final Report of the
Mapping Subcommittee, 2005

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77

NPD Guideline to classification of the


petroleum resources
The Norwegian Petroleum Directorate
classification of resources, is designed
to provide the following:

Resource management by the


authorities
Business process management by the
oil companies
Standardized information to
shareholders to allow a fair comparison
of investment options

78

NPD Classification of Petroleum Resources

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79

UNFC to SPE-PRMS

80

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81

Russian mapping to PRMS

82

Canadian NI51-101 COGEH system

The overall classification is identical and the reserves definitions are very similar to those of
the SPE-PRMS.

Also, COGEH updated in 2007 for unconventional resources.

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83

Estimation Methods

• Probabilistic vs Deterministic
• Tools … analogues, volumetrics, DCA, material balance
and simulation

84

Deterministic vs Probabilistic

• Is Petroleum (or any other kind of) Geology an exact


science?
• So Resources=GRV*N/G*Por*Shc*Re/FVF with single
values is pretty meaningless
• So need to input ranges for each value
• Can manipulate via Monte Carlo simulation, which
computes range of outputs by random sampling over
many (1000+) trials

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85

Deterministic Calculation
- Proved

• Commercial Producibility

• Delineated by Drilling or Geological/Engineering


data

• Lowest Known Hydrocarbons

• Facilities to Process and Transport

86

Deterministic Calculation
- Common Abbreviations

• 1P = Proved (=approx P90)

• 2P = Proved + Probable (=approx P50)

• 3P = Proved + Probable + Possible (=approx P10)

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87

Deterministic Calculation
1P 2P 3P
Area (sq kms) 40 50 70
Thickness (m) 15 20 25
Porosity (%) 12 15 18
Oil saturation (%) 65 70 75
FVF 1.30 1.20 1.10
Rf (%) 25 30 40
RESERVES (MMBbl) 57 165 540

88

Probabilistic Calculation
- Mathematical Basis
• Uncertainty in each parameter defined by
distribution

• Parameters (at least partially) independent

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89

Reserves Distribution
- Probability Density Function

MIN ML (MODE) MAX


P(50)
P(90)
MEAN
P(10)

0 100 200 300 400 500 600


RESERVES (MMBbls)

K080 V5-39

90

Relationship Between Probabilistic and


Deterministic Approaches

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91

Input Parameters

LOW ML HIGH
Area (sq kms) 40 50 70
Thickness (m) 15 20 25
Porosity (%) 12 15 18
Oil saturation (%) 65 70 75
FVF 1.30 1.20 1.10
Rf (%) 25 30 40

92

Comparison of “Proved” Reserves

Output
(MMBbls)
96
Probabilistic P(90)
57
Deterministic Low

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93

Arguments Presented in Favour


of Deterministic Approach
• Simple to apply

• Easy to audit

• Based on specific criteria

• Conservative at proved level ?

• Avoids misleading pseudo-accuracy

94

Outputs, and the Central Limit Theorem …


• Probabilistic calculations that are additive (addition and
subtraction only) generate symmetrical outputs (e.g.
normal distributions), regardless of the shape of the input
distributions
• Product-type calculations (multiplication and division)
generate asymmetrical (e.g. log normal or beta) output
distributions

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95

Correlations and dependencies …


• Certain parameters depend, to some extent, on each other
• For example, it might be reasonable to expect that, if a
porosity is selected from the high end of the uncertainty
range, then a saturation from the high end of its range
should also be chosen
• These kinds of dependencies can be modelled in Crystal
Ball
• See Carter and Morales, SPE 50113, for details of the
method

96

Risk and Uncertainty

• Risk (Chance) is the probability of a discrete (generic)


event occurring

• Uncertainty captures the full range of possible


outcomes, if that discrete (generic) event occurs.

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97

Combining Risk and Uncertainty


Risk Uncertainty

is it going to work? if it works,

chance of success? how big is it?

(“success” = measurable what is it worth?


hydrocarbons present)
continuum, probability
probability of success? distribution answer

binary issue

% chance of “success” X range of volumes/values -> risked value

98

From: Rose, 2001, Risk


Analysis and
Management of Petroleum
Exploration
Ventures, AAPG

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99

Uncertainty
• Can be assessed either:
• Probabilistically … full range of uncertainty calculated
statistically, either by Monte Carlo simulation, or by the
Parametric method, or
• Deterministically, through evaluation of discrete cases to
represent low, best and high cases
• In principle, low should approximate P90 (ie 90% chance
that actual value will equal or exceed estimate), best
should approximate P50, and high should approximate
P10

100

Uncertainty - Examples

time

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101

Sources of Uncertainty
“Reserve Information is imprecise due to the inherent
uncertainties in, and the limited nature of, the database upon
which the estimating and auditing of Reserve Information is
predicated”

“Methods and data used … are often necessarily indirect or


analogical in character rather than direct or deductive”

“persons estimating [reserves] are required … to make


numerous judgments based upon their educational background,
professional training and professional experience”. This alone
renders imprecision.

102

Uncertainty thru’ Time


Estimates of Recovery Factors thru' Time

Statfjord-New Forecast

Statfjord-Old Forecast +46%

Forties - New Forecast

Forties - Old Forecast +67%

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103

104

Uncertainty makes resource volume estimates ambiguous


Measured

What we
observe at
in wells …

Low case? High case?

… can lead to very different interpretations

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105

More Uncertainties that make resource


volume estimates ambiguous
Mapping/Gross Rock Volume
Hydrocarbon fluid contact levels
Net sand ratio, porosity, HC saturation
Reservoir drive mechanisms
Recovery techniques, Recovery Factors
Development Scheme, Infrastructure
Market availability (Gas)
Oil and gas prices, fiscal terms, etc.
Oil and gas evacuation infrastructure

106

Estimation Tools - Analogues

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107

SPE Definition of Analogous Reservoir …


[SPE-PRMS 4.1.1]
An analogous reservoir is comparable to the subject reservoir
regarding reservoir and fluid properties … defined by features
including, but not limited to, approximate depth, pressure,
temperature, reservoir drive mechanism, original fluid content,
reservoir fluid gravity, reservoir size, gross thickness, pay thickness,
net-to-gross ratio, lithology, heterogeneity, porosity, permeability and
development plan … reservoirs formed by the same, or very similar,
processes with regard to sedimentation, diagenesis, pressure,
temperature, chemical and mechanical history, and structural
deformation.
While reservoirs in the same geographic area and of the same age
typically provide better analogs, such proximity alone may not be the
primary consideration.

108

Analogues
UKCS Oil Production
Selected Fields

8000

7000

6000
Rate (bpd)

5000

4000

3000

2000

1000

0
1986 1988 1990 1992 1994 1996 1998 2000
Year

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109

Well Productivity Analogues


• In similar reservoirs in the same field
• Based upon a combination of electrical and other types of logs
and core analyses, which in case of proved reserves provide
overwhelming support of commerciality
• Pass the “same as or better” tests

110

Additional parameters … checklist


• Fluid properties, including; oil gravity, initial solution GOR, oil
viscosity and initial mobility ratio
• Average well spacing
• Reservoir pressure
• Oil viscosity
• Initial solution GOR and bubble point (alternatively CGR and
dew point)
• Mechanical completion/operational elements (horizontal,
vertical, artificial lift)
• Poro-perm distribution
• Thickness and continuity
• Hydrocarbon saturation
• Maturity of analogue reservoir
• End point mobility ratio

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111

Estimation Tools – Volumetric


Methods

112

Estimating Procedures …

• Depend on the maturity of the Project


• If no, or little, production performance history, then have to
use analogue or volumetric methods
• If at least 2 years of production, or 10% of EUR, and if a
reasonable history match can be obtained, then
performance methods (material balance, simulation, decline
curve analysis) can give better assessments of remaining
volumes

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113

Volumetric Method 1600


1700
1500
1400 1 600

1300 1 5 00
1400
1200

2 0
30 15
12 W
C
C O
GO

20
15
C
W
O

Top Reservoir Map Base Reservoir Map


GOC

OWC OWC gas


Pore
oil
Schematic Cross Section A-A' spac
e water
Ultimate Recovery =
GRV x N/G x Ø x Shc x (1/Bo) x RF
Net/gross ratio porosity saturation FVF recovery factor

114

Vertical extent of hydrocarbon column


Attic volumes above OUT :
For gas-oil contact use PVT or pressure
Well gradient derived levels
Penetration
Otherwise:
GOC? Assume as hydrocarbon bearing but
Oil-Up-To (OUT)
assume filled with lowest value
hydrocarbon e.g. usually gas
Oil-Down-To (ODT)

OWC?
HWC – Hydrocarbon Water Contact
For water contact can use seismic or
pressure gradient derived levels

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115

Upstream Oil Industry ... reserves assessment


Prospect Assessment Uncertainty re
resource size GRV
*
N/G
[Remember that units are tricky ... GRV is *
measured in acre ft, and reserves are quoted in Por
barrels, so use the conversion factor of 7758
barrels per acre foot.]
*
Shc
*
Issues: Re
Types of input distribution *
Dependencies and their levels FVF
Recoverable Resources
100 1000

.750 750

.500 500
Recoverable
.250 250

Resources
0 0

0.00 200.00 400.00 600.00 800.00

MBO

116

Monte Carlo Analysis

• Probabilistic calculations can be handled through Monte Carlo


statistical analysis, performed by Excel add-ons such as Crystal
Ball or standalone software, such as GeoX or REP
• Each input distribution is sampled randomly, once per iteration,
and a single calculation is performed
• Many thousands of iterations generate many thousands of
different answers which, when plotted, generate an output
distribution, whose properties can be measured

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117

Input Distributions …

118

Estimation Tools - Decline Curve Analysis

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119

Performance Based Reserves Estimation


• If sufficient production data available
• Decline Curve Analysis (DCA)
• p/Z plots (Material Balance)
• History matched simulation
• Reality checks for DCA
• Need to understand the physics
• Need to explain why decline can be reliably used for prediction
• Forecast (prod rate vs time) should seamlessly match historical prod trends
• Remaining field life duration must be realistic
• Can deal with uncertainty
• Conservative extrapolation of trends for Proved reserves
• When aggregating wells/reservoirs, be aware of the compounding effect
• Arithmetically adding together many conservative DCA’s, will give an extremely
conservative aggregated value.
• Cross-check with field-level data, compare historical annual decline with predicted, and
check for inconsistencies

120

Decline Curves

• When more than one type of decline is supported by the


data, the high confidence approach must be used for
Proved reserves; use of other decline functions requires a
compelling case supported by all of the following:

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121

Requirements for Decline Curve

• Trend of historical data


• Declines seen in other, more mature wells in the same
reservoir (based upon poorer performing wells)
• An understanding of the physics of the reservoir behavior
• Care must be taken to ensure that operational activities do
not mask an underlying or more appropriate trend

122

Background and Overview


History
 Analysis involves projection of existing Forecast

production trends into the future Trend

 The basic assumption of all DCAs is that


Oil Rate

whatever controlled the trend of production in


the past will continue to govern the trend in the
future.
 Its simplicity and transparency is responsible
for its widespread usage and adoption from
regulatory agencies like the SEC. Cumulative Oil Produced

Clear decline trend

History History
Forecast 1 Forecast 1
Trend 1 Trend 1
Forecast 2 Forecast 2
Trend 2 Trend 2
Oil Rate
Oil Rate

Cumulative Oil Produced Cumulative Oil Produced

2 similar decline trends can be observed 2 different decline


trends

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123

Equations and Nomenclature


qi
Governing equation: qt  1
(1)
History

1  b  d i  t  b 
Forecast
Trend

qt - production rate at time t History Forecast

Oil Rate
qi - initial production rate at (t = 0) qi
b - hyperbolic exponent qt
di - nominal decline factor

Integrating the governing equation between 0 di b


and t
yields cumulative oil produced (Nt) Date

qi   1

 1  1  b  d i  t  b  
1
Nt  (2)
d i 1  b   

DCA aims to determine qi, di and b from historical production data

qi - selected to ensure smooth transition from history to forecast

di - major parameter determined from historical data and used in the forecast

b - varies between 0 and 1, (determines the shape of the decline at late times),
two special cases: b  0 (exponential decline) b  1 (harmonic decline)

124

Exponential Decline
Equation: qt  qi e  dit when b0 (3)
qt  t (4)
Exponential decline is also referred to as constant decline function:  e di t
qt
qi  qt (5)
Similarly the cumulative oil produced is expressed Nt 
as: di
Equation (3) can be expressed as: ln qt   ln qi   d i  t (6)

In logarithmic expression, equation (6) can be rewritten as: log10 qt   log10 qi   Ci  d i  t (7)

Equation (5) can be expressed as a straight line equation: qt  q i  d i  N t (8)

Equations (7 and 8) are straight line expression that forms the basis of exponential decline analysis

Notes:

 Exponential declines are used for 1P reserve estimates (high confidence case)
 Exponential trends declines rapidly at late times as a result of the small value of hyperbolic exponent.

 Straight line trends on plots of oil rates vs. cumulative production (linear axes – equation 8) and oil rate vs.
time (semi-logarithmic axes – equation 7) are commonly used for analysing exponential declines

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125

Harmonic Decline
qi
Equation: qt  when b 1 (9)
1  d i  t 
qi qi (10)
Integrating equation (9), with respect to time to yield N t: Nt  ln
d i qt
di
Equation (10) can be rearranged to give: ln qt   ln qi    Nt (11)
qi
Ci  d i  N t (12)
In logarithmic expression, equation (11) can be rewritten as: log 10 qt   log 10 qi  
qi

Equation (12) is a straight line expression when oil rate is plotted against cumulative production on
semi-logarithmic axes

Notes:

 Harmonic declines are used for 3P reserve estimates (low confidence case)
 Harmonic declines exhibit elongated tail at late times as a result of the high value (approaching 1) of the
hyperbolic exponent.

126

Hyperbolic Decline
 Hyperbolic declines results when 0  b  1 there are no straight line trends associated with this plot

 The ratio between the rate at the start of a time step and the rate at the start of the preceding time step is a
declining function of t.

. The degree of conservatism of a hyperbolic function is inversely proportional to the value of b. Low values of b
gives more conservative forecast than high values of b and are more likely to be used to support proved reserves

Diagnostic Plots
 The easiest trend for the human eye to identify is a straight line, as such when doing DCA straight line trends are
often as diagnostic plots.

 A preference for straight lines trends limits prospective analyses to either exponential or harmonic decline since there
are no simple plots that result in straight lines for hyperbolic functions.

 Straight line trends on logarithmic scales are effective in creating the illusion of a straight line which can
oftentimes be misleading, logarithmic scales also tend to “de-sensitize” data which may lead to an erroneous
selection of a representative decline trend.

 For the purpose of reserves reporting, the use of straight line plots is strongly recommended.

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127

Diagnostic Plots
1. Oil rate vs. Time (linear-axes)
 It is rare to use this plot for the purpose of DCA because
downtimes create gaps in the historical data.

 It is often difficult to see through the “downtime noise” to


the underlying reservoir related trend that determines
History
decline parameters. Forecast
Trend
 This plot is mostly used as a “final check” plot and for
quality control purposes. History Forecast

Oil Rate
 It is essential that this plot should include information such smooth transition
as historical production rates, the trend(s) fitted into the
license
historical data, the forecast(s) and truncation points. expiry
economic
 Points to consider when using this plot for quality control rate

are;
Date
 Transition from history into forecast

 End of the license period and life of facilities

 Economic oil rates

 Comparison of length of forecast to the length of


time used in selecting the trend.

128

Diagnostic Plots
2. Oil rate vs. Time (Semi-logarithmic axes)

 This plot is often used for DCA downtime


gaps
rate
 Straight line on this plot corresponds to an History Forecast
exponential decline; this plot suffers from
the adverse effect of downtimes. smooth
Oil Rate

transition
 Downtimes exists as gaps in the historical
data, it also suffers from the limitations
discussed previously on logarithmic plots.
economic
 This plot can be used to support other History
rate license
types of plots, its is advised that this plot Forecast
expiry
should not be used solely as the analytical Trend
tool in DCA
. Date

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129

Diagnostic Plots
3. Oil rate vs. Cumulative production (linear-axes)
 This is one of the simplest and most useful plots for
DCA.

History
 It reduces (but does not totally eliminate) the adverse Forecast
downtime
effects of downtime experienced with rate vs. time plots. Trend
point

 Gaps in the production data during the periods of no History Forecast


production disappear. However some problems relating
to downtimes still persist with this method when

Oil Rate
determining whether to use “calendar-day rates” or
“producing-day” rates. smooth
transition
 For the vast majority of oil wells, this plot is very useful Economic
and is strongly recommended that this plot should be rate
made whenever DCA is being done.

license
 In this plot as well as other plots the influence of Cumulative Oil Produced expiry
hyperbolic exponent b becomes more pronounced later
on while early on, the curve is dominated by the nominal
decline factor di.

130

Diagnostic Plots

4. Oil rate vs. Cumulative production (semi-logarithmic axes)

Downtime
 Straight line trends on this plot results in highly point
optimistic reserves (3P). History Forecast
Smooth
 This plot is rarely used for the determination of 1P transition
reserves unless compelling arguments can be
Oil Rate

provided to justify it.

 This plot suffers from the limitations of typical


logarithmic plots discussed earlier.
History
Forecast
 In this plot as well as other plots the influence of Trend
hyperbolic exponent b becomes more pronounced
later on while early on, the curve is dominated by
Cumulative Oil Produced
the nominal decline factor di.

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131

Diagnostic Plots
5. Water cut vs. Cumulative production (linear axes)
 This is the classic plot for a well whose oil
production rate is declining as a consequence of
increasing water-cut. Common in mature active
water-floods or natural aquifer influx. 8.0 1.0

Wcut (Frac)
Smooth
Transition
 Extrapolation of a water-cut trend can lead to 6.0 Economic
0.8

unreliable results if the trend is not well water cut

Liquid Rate
established. This plot should therefore be used as 0.6
the primary analysis tool when the water cut has 4.0 Actual Liq Rate
reached high values. 0.4 Forecast Liq Rate
Actual WCut
Forecast WCut
 This plot is only recommended when it is 2.0
Trend
0.2
established that water-cut development is the History Forecast
License
expiry
cause of declining oil rates.
0.0 0.0

 A major limitation of this plot is that it does not Cumulative Oil Produced

lead to an oil rate vs. time forecast (DCA’s main


objective).

 In order to estimate reserves using this plot a


forecast of liquid rates vs. time is needed. Often,
constant liquid rates is assumed.

 Straight line trend on this plot is exponential


decline.

132

Diagnostic Plots

6. WOR vs. Cumulative production (semi-logarithmic axes)

 Straight line trends on this plot indicates Smooth


harmonic decline Economic Transition
WOR
 One of the major advantages of this plot is
that the upper limit of WOR is effectively Actual Liq Rate
Liquid Rate, WOR

infinite and this alleviates some of the Forecast Liq Rate


compression that occurs in a water-cut plot. Actual WOR
Forecast WOR
 This plot is particularly useful at high WOR Trend
History Forecast
values.

 As with the water cut plot, an assumption License


must be made concerning liquid rates in expiry
order to use this plot for reserves estimation.
Cumulative Oil Produced
 One of the limitations of this plot is that
straight line trends only become visible at
high WOR values. .

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133

Typical examples of DCA plots


Low water cut:
Well 1 15.0

15.0 1.0 History


 Well has low water cut as 12.0 1P Forecast
1P Trend

Oil Rate(Mstb/d)
such water cut diagnostic 12.0 Actual Liq Rate 0.8
Actual WCut

Wcut (Frac)
plots are unsuitable 9.0

QL (Mstb/d)
9.0 0.6

6.0

 Historical plot shows good 6.0 0.4

3.0
decline trend 3.0 0.2

0.0
0.0 0.0

0 20 40 60 80 100
Same initial oil rates were 0 20 40 60 80 100 Np (MMstb)

used for all the profiles, thus Np (MMbbls)

Low water cut Good decline trend; 1P Plot, Qo vs. Np


all the profiles start at the
same point
100.0

History
15
History
 Since no straight line trends 1P Forecast 1P
1P Trend 12 2P
are hyperbolic, 2P forecasts
Oil Rate (Mstb/d)

10.0 3P
were determined as the

Oil Rate
9

arithmetic mean of the 1P


6
and 3P values 1.0

 Reserves at 2050 are: 0


0.1
1P: 14.2 MMstb 0 20 40 60 80 100 Jan-70 Jan-90 Jan-10 Jan-30 Jan-50

Date
2P: 20.3 MMstb Np (MMstb)

3P: 26.4 MMstb 3P Plot, Log Qo vs. Np 1P, 2P and 3P Forecasts till
2050

134

Typical examples of DCA plots


Low water cut:
Well 2 1.5 1.0 1.5

Actual Liq Rate


History
1.2 Actual WCut 0.8 1.2
1P Forecast

 Well has low water cut as


Wcut (Frac)

1P Trend
Oil Rate (Mstb/d)
QL (Mstb/d)

0.9 0.6 0.9


such water cut diagnostic
plots are unsuitable 0.6 0.4 0.6

0.3 0.2 0.3


 Historical plot shows good
decline trend 0.0 0.0 0.0
0 1 2 3 4 5 6 0 2 4 6 8
Np (MMstb) Np (MMstb)

 Same initial oil rates were Low water cut Good decline trend; 1P Plot, Qo vs. Np
used for all the profiles, thus 10.0
all the profiles start at the 1.5
History
same point 3P Forecast History
1.2 1P
3P Trend
2P
Oil Rate (Mstb/d)

1.0
Oil Rate (Mstb/d)

3P
 Economic cut-off rate of 50 0.9

stb/d is reached at year 2047


0.6
before the end of the license 0.1

period - 2050 0.3

0.0
0.0
 Reserves at 2050 are: 0 2 4 6 8
Jan-70 Jan-90 Jan-10 Jan-30 Jan-50
Date
Np (MMstb)
1P: 1.5 MMstb
2P: 1.8 MMstb 3P Plot, Log Qo vs. Np 1P, 2P and 3P Forecasts till economic cut
3P: 2.1 MMstb off rate of 50 stb/d is reached

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135

Typical examples of DCA plots


Low water cut:
Well 3 8.0 1.0
Actual Liq Rate 5.0
Actual WCut 0.8 History
6.0 1P Forecast
4.0

Wcut (Frac)
QL (Mstb/d)
1P Trend

Well has low water cut as


0.6

Oil Rate (Mstb/d)


4.0 3.0

such water cut diagnostic 0.4

plots are unsuitable 2.0


2.0

0.2
1.0

 Historical plot shows good 0.0 0.0

decline trend
0.0
0 5 10 15 20 25 30 35
Np (MMstb) 0 10 20 30 40
Np (MMstb)

Low water cut Good decline trend; 1P Plot, Qo vs. Np


 Same initial oil rates were
used for all the profiles, 100.0
5.0
thus all the profiles start History History

at the same point 3P Forecast 1P


4.0
10.0 2P

Oil Rate (Mstb/d)


3P Trend
3P
Oil Rate (Mstb/d)

3.0

 Reserves at 2050 are: 1.0


2.0
1P: 10.4 MMstb
2P: 11.6 MMstb 0.1 1.0

3P: 12.8 MMstb 0.0


0.0 Jan-70 Jan-90 Jan-10 Jan-30 Jan-50
0 10 20 30 40 Date
Np (MMstb)

1P, 2P and 3P Forecasts till economic cut


3P Plot, Log Qo vs. Np off rate of 50 stb/d is reached

136

Typical examples of DCA plots


High water cut:
Well 4
1P - (WCut vs. Np)

Well shows high and


7.0 1.0 3P - (Log WOR vs. Np)
 100.00

established water cut


6.0
0.8

trend, good decline trends 5.0


Wcut (Frac)

QL (Mstb/d), WOR (stb/stb)

10.00

are also observed on the oil


QL (Mstb/d)

0.6
4.0

plots 3.0
0.4
1.00
Actual Liq Rate
Actual Liq Rate

 Reserves from the two


Forecast Liq Rate
2.0 Forecast Liq Rate
Actual WOR
0.10

methods (water cut and oil


0.2 Actual WCut
Forecast WOR
1.0 Forecast WCut
Trend

plots)
Trend
0.0 0.0
0.01
0 5 10 15 20

Comparison of reserves
0 5 10 15 20 25
 Np (MMbbls) Np (MMbbls)

(MMstb) at license expiry


Established water cut trend; 1P – WCut vs. 3P Plot: Log WOR vs. Np
for the two methods are: Np
100.0

Res. WCut Oil-Plot 6.0


History
1P 3.1 1.7 5.0
History 3P Forecast
10.0
Oil Rate (Mstb/d)

1P Forecast 3P Trend
2P 3.6 2.6
Oil Rate (Mstb/d)

1P Trend
4.0

3P 4.2 3.5
3.0 1.0

 WCut plot reserves are


higher than oil plots
2.0

 WCut reserves are 1.0 0.1


0 5 10 15 20
preferred because longer 0.0
Np (MMstb)

period (6 – 13 MMstb) were 0 5 10 15 20


3P Plot: Log Qo vs. Np
projected from history into Np (MMstb)

forecast 1P Plot: Qo vs. Np

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Typical examples of DCA plots


High water cut:
Well 5
1P - (WCut vs. Np) 3P - (Log WOR vs. Np)

 Well shows high and 5.0 1.0


100.00

established water cut 4.0 0.8

trend, good decline trends

QL (Mstb/d), WOR (stb/stb)


10.00

Wcut (Frac)
are also observed on the oil

QL (Mstb/d)
3.0 0.6

plots
1.00 Actual Liq Rate
2.0 0.4 Forecast Liq Rate
Actual Liq Rate Actual WOR
Forecast Liq Rate 0.10 Forecast WOR
1.0 0.2 Trend

Reserves from the two


Actual WCut
 Forecast WCut

methods (water cut and oil


Trend
0.0 0.0 0.01
0 2 4 6 8 0 2 4 6 8

plots) Np (MMbbls)
Np (MMbbls)

 Comparison of reserves
(MMstb) at license expiry 5.0 100.0
History
for the two methods are:
History
3P Forecast
4.0 1P Forecast
3P Trend
1P Trend
Oil Rate (Mstb/d)

Res. WCut Oil-Plot


10.0

Oil Rate (Mstb/d)


3.0
1P 1.5 0.4
2.0
2P 1.8 1.0 1.0

3P 2.1 1.6 1.0

0.1
0.0 0 1 2 3 4 5 6
 WCut plot reserves are 0 1 2 3 4 5 6 Np (MMstb)

higher than oil plots as Np (MMstb)


observed in Well 4

138

80
Typical examples of DCA plots 1P (Qg vs. Gp)
History
1P Forecast
Gas Fields: 60
1P Trend
Gas Rate (MMscf/d)

Well 1
40

 This example is from a North Sea gas field


20

 Same methodology as with oil fields, diagnostic plot is:


Cumulative gas produced (Gp in Bscf) vs. Gas rate (Qg 0
in MMscf/d). 100 130 160 190 220 250
Gp (Bscf)

 Water-Gas plots are not used here because there are


no water production historical data. 1000
3P (Qg vs. Gp)
History
 Refer to the provided spreadsheet for full analysis 3P Forecast
3P Trend
100
Gas Rate (MMscf/d)

 The table below shows the calculated 1P, 2P and 3P


reserves.

Res. Bscf 10

1P 15
2P 38
3P 61
1
100 130 160 190 220 250
Gp (Bscf)

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Typical examples of DCA plots


Gas Fields: 300
Well 2 1P (Qg vs. Gp)

250 History
1P Forecast
 This example is from a North Sea gas field 200

Gas Rate (MMscf/d)


1P Trend

 Same methodology as with oil fields, diagnostic plot 150

is: Cumulative gas produced (Gp in Bscf) vs. Gas rate 100
(Qg in MMscf/d).
50

 Water-Gas plots are not used here because there


are no water production historical data. Also there
0
0 200 400 600 800
are fluid ratio conversion challenges associated with Gp (Bscf)

water-gas diagnostic plots.


1000

 Refer to the provided spreadsheet for full analysis 3P (Qg vs. Gp)
History
3P Forecast
3P Trend
 The table below shows the calculated 1P, 2P and 3P 100

Gas Rate (MMscf/d)


reserves.

Res. Bscf
10
1P 59
2P 134
3P 213 1
0 200 400 600 800
Gp (Bscf)

140

Typical examples of DCA plots


Gas Fields: 50
1P (Qg vs. Gp)
Well 3
History
40
1P Forecast

 This example is from a North Sea gas field 1P Trend


Gas Rate (MMscf/d)

30

 Same methodology as with oil fields, diagnostic plot 20


is: Cumulative gas produced (Gp in Bscf) vs. Gas rate
(Qg in MMscf/d).
10

 Water-Gas plots are not used here because there


are no water production historical data. Also there
0
0 10 20 30 40 50 60
are fluid ratio conversion challenges associated with Gp (Bscf)
water-gas diagnostic plots.
1000
 Refer to the provided spreadsheet for full analysis 3P (Qg vs. Gp)
History
3P Forecast

 The table below shows the calculated 1P, 2P and 3P 100


3P Trend

reserves.
Gas Rate (MMscf/d)

Res. Bscf
10

1P 4.3
2P 13.6
3P 22.9 1
0 10 20 30 40 50 60
Gp (Bscf)

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Conclusions
 DCA is the most widely used tool in reserves estimation and production
forecasting

 It is best to estimate reserves at the lowest level possible (at the


completion or well level)

 Since the basic assumption underlying all DCA is that whatever governs
decline in the past will continue in the future, this assumption may not be
valid if DCA is carried out at the reservoir or field level especially is there
is changing well count.

 Different diagnostic plots can give different results (Well 4 example), it is


recommended that appropriate criteria should be used in selecting the
suitable plot. For example diagnostic plots with better trends can be
used, the more the historical data projected into forecast the better the
estimated reserves

142

From Art Berman

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143

From Art Berman

144

Estimation Tools – P/Z plots & Reservoir


Simulation

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145

Gas Material Balance

G BGI = (G-GP) BG + WE – WPBW

Where G = Original Gas in place


GP = Cumulative Gas Production
BG = Current Gas formation volume factor
BGI = Initial Gas formation volume factor
WE = Water Influx
WP = Water produced
BW = Water formation Volume factor

146

Volumetric Reservoir

• Closed Reservoir with no aquifer drive (or water production)

• G BGI = (G-GP) BG and BG = 0.028 Z T / P

Where Z = Gas Deviation Factor


T = Reservoir Temperature
P = Reservoir Pressure (psia)

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Volumetric Reservoir (contd)


• Since reservoir temperature is constant with time then Ti=T
• G Zi / Pi = (G – GP) Z / P
• or P / Z = Pi / Zi – (GP/ Gi) (Pi / Zi )
so Plot P / Z versus GP gives a straight line

Pi / Zi

P / Z

Gi GP

148

Gas Reservoir Recovery Efficiency


• Select an abandonment pressure (PABD)
• Then RE = GP / G = (Pi/Zi) – (P/Z)ABD

Pi/Zi
= (BGABD – BGI)/ BGABD
• Once an abandonment pressure has been decided a
recovery factor can be derived.

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149

Gas Material Balance


P/z plot versus cumulative production
Pi / Zi

Reservoir Pressure
P / Z at End of Plateau
Abandonment
Reservoir Pressure
GP
GPP GR G
Where GP = Cumulative Gas Production
GR = Gas Reserves
GPP = Reserves Produced on Plateau
P = Reservoir Pressure
Z = Gas Deviation Factor

150

Shape of gas profile


A. Dependent on type of gas sales contract practised, i.e. Fixed period
normally 10-15 years (plateau length).
B. Plateau production rate
• Typically 5-7% reserves per annum
• Daily Contract Quantity = Reserves/5000 or 30 MMSCF/D in
Holland
C. Other Practices
- Reserves produced on plateau typically 60-80%.
- Facilities should be designed (and wells) to cater +50% of
plateau rate for seasonal demand.
D. Other Constraints
- Market situation for gas sales
- Abandonment rate
E. Decline Phase - Assume exponential decline from plateau to
abandonment rate.

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151

Gas production profile


Typical Gas Profile
Build-Up Plateau Decline

Production
Rate/Year

TIME
Build Up Period - Affected by drilling rate and number of
wells to achieve plateau.
Plateau Production period - Affected by sales contract.
Decline Phase - Once wells are unable to meet/maintain
plateau rate.

152

Well requirements and phasing

Total development wells required


Determine
A. Reservoir pressure at end of gas plateau from P/Z
versus Gp plot.
B. Maximum gas well flowrate from inflow/tubing
performance at minimum WHFP
C. No. of wells required to maintain plateau
= Plateau production rate
Max. gas well rate at end of plateau
Well Phasing - Wells drilled evenly between initial well
requirements and final (end of plateau) well requirements .

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153

Requirement for compression


Compression allows a lower minimum WHFP and
A. Produce the reservoir to a lower abandonment pressure and better
recovery factor.
B. Achieve higher gas well flow rates at low reservoir pressure.
Therefore able to minimise well requirements.
ECONOMICS
 Compression facilities result in more recoverable reserves (gas) and
better well productivity.
 Usually more advantageous than additional wells dependent on size
and depth of reservoir.
 Compare cost of compression versus additional wells.
Timing for Compression Procedure
1. Determine abandonment pressure and minimum WHFP
prior to compression.
2. Determine if recovery factor is acceptable or if compression is required.

154

Effects of compression on
Recovery factor

Reservoir Pressure
P / Z Without Compression
P1

Reservoir Pressure
P2
With Compression

GP
GR1 GR2 G

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Effect of reservoir depth on


Recovery factor assuming similar
Abandonment conditions
P1/Z1
Deep Reservoir Pressure

P / Z Shallow Reservoir Pressure


P2/Z2

PABD

GP
GR1 GR2 G

156

Use Of Numerical Reservoir Simulation


• Simulation results are convincing only when the model is shown to have a
defendable history match consistent with analogues and DCA
• Be able to demonstrate the quality of the history match visually on all
the key parameters (production, GOR, water-cut, bottom & tubing
pressure, etc), at field and well/reservoir level
• Identify the key recovery mechanisms for that reservoir, how it is
modeled in the simulator and how it’s results match performance data
for mechanism
• Models representing both the Expectation case and the Proved case
should be provided

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Example, Company F – Assessment Method


• Large North Sea Field
• Main drive mechanism – water-drive
• Three years production history
• Water production evident in a few wells
• Field-level water cut < 2%
• History-matched simulation model exists
• Good match on timing of water breakthrough in wells with water
production
• Poorer match on water cut development in wells with water
production
• QUESTION: Is it justifiable to estimate Reserves using
performance-based estimates derived from the simulation
model results?

158

Summary
• What class?
• Reasonable production
history, or not?

Performance … DCA, sim, P/Z?

Volumetrics / Analogue

• Deterministic or
• Probabilistic?

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159

Commercial considerations

160

Generic Contract Styles


• Three main "headline" structures
• Tax/Royalty (Concession)
• Production Sharing (PSC)
• (Risk) Service
• Plus several variants or sub-sets
• Reconnaissance/Technical Evaluation
• Joint Venture
• Association
• Reactivation
• Style of contract usually not a material issue - identical economic
behaviours can be induced in range of contracts
• There are no “bad" contract styles
• Do they do the job required for opportunities and conditions offered ?

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161

Contract Drivers
• Ownership of resources
• In the ground/at wellhead
• At point of fiscalization/export
• Not at all
• Payment
• Disposal of hydrocarbons
• Cash
• Economic drivers
• Fully exposed to price risk
• Driven through amount of investment ("cost plus")
• Operational freedom
• All decision made by investor
• State as partner/approver of spending decisions

162

Generic Contract Parameters


Concession PSC Service

Ownership of In ground or at
Resources wellhead At export Not at all

Cash
Payment Hydrocarbon Hydrocarbon
fees/buyback
sales sales
arrangement

Economic Investment/fixed
Drivers Price Investment returns

Operational Subject to NOC


Freedom Generally high "partner" Generally limited

NOC, if it exists,
Govt. may be carried Generally carried
Participation or "heads up" through PSC Similar to PSC
partner structure

Ownership of Usually with IOC, NOC NOC


assets at least until (leasing (leasing
abandonment excepted) excepted)

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163

Concession Agreement
• Concessionaire has exclusive right to explore for and exploit
petroleum at its own risk
• Concessionaire owns production and can freely dispose of it
(though it may have an obligation to supply the local market or
be subject to government prices)
• Payments to host government:
• Royalties (cash or kind)
• Taxes (hydrocarbon, corporation)
• Rentals, bonuses
• The equipment and installations used for petroleum operations
usually belong to the Concessionaire
• May revert to State at cessation of activities

164

Production Sharing Contract


Key Features
• Contract company appointed as Contractor in specific Area
• Contractor operates at sole risk and expense but under control of host
country
• Production, if any, belongs to host country until export
• Contractor is entitled to recover its costs out of a proportion of
production revenue from Contract Area ("Cost Oil")
• After cost recovery, balance of production is shared on a pre-determined
percentage split between host country & Contractor ("Profit Oil")
• Contractor's income is taxable with tax often being paid from host
country share
• Equipment and installations are the property of the host country

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Association Contract
• A variant on Concession or PSC

• Typically one-time option to opt-in for the State upon payment


of some share of past costs

• Usually equal rights and obligations in accordance with


participation share

• Share may increase with profitability

• Host country will participate through commercially defined


organization (fully or partially state controlled)

166

Risk / Service Agreement


• A form of farm-out or subcontracted operation from a license
holder (usually NOC), with payment typically being in cash
rather than petroleum
• Spectrum of service and risk
• Classical service contract - Company drills well/performs
operation(s) for a fixed tariff – e.g. US$5 million
• "Alliance", "incentive" or "shared risk" contract - Company drills
well/performs operation(s) at/below market rate (e.g. US$4 million)
but gets bonus (e.g. US$2 million) if well is successful, nothing if its
not
• "Risk Service" - Company drills well/performs operation(s), and if
successful can recover costs plus profit on a per barrel basis from
resulting revenue stream

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167

"Buy-back" Contracts
• Developed for the introduction of private capital into the Iranian
oil sector
• Contractor funds all investments and develops field; NIOC assumes
operations post-development
• Short-term contract (7-8 yrs)
• Costs and profit remunerated via production from specified
maximum
• Provides a "guaranteed" rate of return - subject to reservoir and
cost performance
• Do not work in practice for exploration. Up until recently no
guarantee of link to development, and even now only partial
• Is a Risk Service contract, with contractor collecting returns in
oil of equivalent value
• Guarantees export market

168

Case study
Ormen Lange

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169

Ormen Lange Field


Ormen Lange
Field

0 10 20 km

LEGEND
Gas Field
Gas Pipeline
Proposed Pipeline
License Block

170

Ormen Lange
• 40km x 12km
• Nearly 500 sq kms but has only four 20cm holes
in it!

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171

172

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173

Ormen Lange
Reserves Status

• Norwegian Petroleum Directorate (NPD)


Category 3F:
• “Recoverable, marketable and deliverable
quantities of petroleum which the licensees have
decided to recover, but the authorities have not
yet approved a Plans for development and
operation (PDO)..”

174

Ormen Lange
What is the Issue?
Gross 1P % of NPD MMbbl
Reserve Gross 1P
Mean Mean O.E./1%
NPD 2,500 NA NA 25.0
Shell Pre - 1,503 60.1 15.0
Shell Post - 528 21.1 5.3
Hydro - 1,859 74.4 18.6
BP - 2,021 80.8 20.2
Statoil - 625 25.0 6.2

NOTE: Table from Company Press Releases, Exxon have not released
a statement on their Ormen Lange reserves position. All companies
have stated they are not changing their position at present (March ’04)

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Ormen Lange
Available Data
• Well
• 4 wells drilled between 1997-2002
• 6305/5-1 Wildcat, 1997 – PA Gas Discovery
• 6305/7-1 Appraisal, 1998 – PA G/C Discovery. DST Gas
• 6305/8-1 Appraisal, 2000 – PA G/C Discovery
• 6305/4-1 Appraisal, 2002 – PA Gas Discovery. DST Gas
• All encountered gas
• 2 wells encountered condensate
• 1 well encountered oil leg
• Average well depth 10,000 ft TD
• Seismic
• 3D seismic covering the fields structural closure

176

Ormen Lange
Why did Shell downgrade?
“Shell has cut its estimates of Ormen Lange
reserves because it used 3D seismic data as the
basis for estimating volumes between well control
points. This is not sufficient according to the SEC’s
strict guidelines...”

Press, March 2004

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Ormen Lange
Comments from the Majors?
• Comments from the Press, March 2004..
• Shell
• “Shell will reduce its proven reserves from this field from 256 million
to 90 million boe...” Press
• Hydro
• “Norsk Hydro has not made any changes to the 336 million boe
reserves number it has placed with the SEC…” Press
• BP
• “BP is about four times as optimistic, with about 20 million boe
booked as proved per one percent..” Press
• “We are completely confident of the reserves we have booked…are
the standard set forth in the SEC regulations.” BP Press Statement

178

Ormen Lange Field- Possible Shell Original SEC 1P Reserves


Ormen Lange
Field

0 10 20 km

LEGEND
Proved Developed + Undeveloped
Other Reserves and/or Resources

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Ormen Lange Field – Possible areas in which


Shell Reclassified SEC 1P Reserves
Ormen Lange
Field

0 10 20 km

LEGEND
Existing well reserves
Offset locations
Other Reserves and/or Resources

Portfolio Analysis and Management


• Asset assessment
• Portfolio optimisation
• Portfolio Management

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Philosophy: Objective of business strategy is to …

 Maximise value of a portfolio by:


 Optimising, relative to goals and constraints, in terms of:
 Asset content and timing
 Identification, by product type, periods with greatest risk of missing
targets, within constraints
 Hence identify types of opportunities to be added to portfolio (oil / gas,
producing / prospect, acquisition or organic growth) to bolster
predicted performance
 “Value” of an asset is its incremental value to the portfolio

Process Summary

 Portfolio Management …

Asset Analysis … the state-of-the-art

Portfolio Analysis and Optimisation


… the key steps?

Strategy Formulation

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Portfolio Management Schematic


1 2 3 4

Standalone asset Decision making/


Portfolio Analysis Strategy
valuation
formulation

Robust, coeval, Full under- Generation Incorporation of


consistent, standing and and analysis insights gained into
technical & clear expression of feasible portfolio management
commercial of organisation’s portfolios: strategy formulation
analysis, goals, objectives, and implementation:
on asset by targets and
asset basis: constraints, and
project dependencies:

Volumetrics Metrics Optimisation Qualitative inputs


Dev Plng Risk measures Incremental Strategic thinking
Economics value/risk
Risk & Uncertainty
Options
Standalone value

Stage 1 … Asset Analysis

 For the purposes of this exercise, the analysis


has to be based on …
 “Full, risked, probabilistic value” …
of each asset that is in, or has the potential
to be in, the portfolio

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Asset Analysis … state of the art

 At least the following:


Full risk and uncertainty analysis – CoComm
CoDisc x CoDev, for prospects,
CoDev for undeveloped discoveries,
Range of probabilistic volumes
Discounted Cash Flow Analysis of scenarios to give
success case NPVs and failure case costs
 Generating “full, risked, probabilistic values” as input to
Portfolio Optimisation

Required inputs are …


 For each project (could be 100+ projects in a portfolio),
three or more scenarios, with associated probabilities,
each with:
Production profiles
Cost (capex, opex, abex) profiles
Price forecast(s)
Risk estimate(s)
Fiscal data
Discount Rate

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Stage 1 … Create Value Profiles

C ha nce

V a lu e

Chance and Uncertainty (SPE/WPC/AAPG/SPEE)

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Risk and Uncertainty??

Chance and Uncertainty


Chance (risk): is the probability of a discrete
(generic) event occurring.
• Discrete random variables can only take distinct
values (e.g., coin or dice)

Uncertainty: is the range of possible outcomes, if


that discrete (generic) event occurs.
• Continuous random variables can take on all values
between two extreme values (e.g., thermometer)

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The Absolute Range of Uncertainty Should Diminish,


as Project Proceeds (Arps, 1956)
Exploration Appraisal Development/production

High
Estimate
3C
Estimated Ultimate Recovery

3P

Range
Best
of
Estimate
Uncertainty 2C 2P
Field
Abandonment

1P

1C
Low
Estimate

Time (years)

HYDROCARBON VOLUMETRICS

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Volumetric Formula
Hydrocarbons in place Uncertainty

GRV (Gross Rock Volume)


*
N/G (Net reservoir to Gross rock ratio)
*
Ø (Porosity)
*
Shc (hydrocarbon saturation of pore fluids)
*
FVF (Formation Volume Factor)

Basis: correlation with nearby


wells/data

STRATEGIC PLANNING

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Stage 2 … From Senior Management/Strategy


Workshops: Objectives, Constraints, Options

• Overall objective … maximise value/volume?


• Other objectives/targets … oil/gas production profiles,
operator vs partner, desired equity level, capex / opex /
people / rig constraints, committed volumes, etc
• Policies …near/long term emphasis, geographic focus,
deep/shallow water, other niche strategies
• Metrics … EMV, IRR, RRR, finding costs etc
• Risk measure(s)

Strategy Development

External Regulatory, External Competitive


Fiscal & Political Environment &
Environment Success Analogues

A Realistic yet Portfolio Analysis


Aspirational Strategy and Optimisation

Unique Skills, Risk Appetite,


Knowledge Reward Analysis
& Relationships & Constraint Maps

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PORTFOLIO OPTIMISATION

Portfolio Optimisation??

• Portfolio optimisation
• An analytical / quantitative approach to
strategy formulation
• “Value” of an asset is its incremental
value to the portfolio

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Stage 3 … possible portfolios

• “All possible” mixes of assets, equities and


timings
• All possible portfolios tested against goals,
constraints etc
• “Passes” analysed in terms of value and risk, for
example via an efficient frontier plot
• Selected portfolios tested in terms of probability
of achieving targets, by product by year

Efficient Frontier Plot


Value Measure

Each point is
a possible
portfolio

Risk Measure

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Predicted Portfolio Performance Probability of achieving goal


Rate or Value Measure Goal “Do nothing” case

“Base Business”
Do nothing case

Time (Years)

Generic Method … Schematic


D ATA BASE PORTFOLIO
ECONOMICS
OPTIMISER

M o n te C a rlo
E c o n o m ics
Portfolio generation

IN OUT IN OUT

Risked ECONOMICS Possible portfolios


Chance of success ranked and optimised
Prod Profiles Value OUTPUT
Product prices Profiles
Chance e .g. V a lue
Capex
Opex +
Abex x x
Expl. cost Filters (eg “exclude x x
Tax prospects with RoR<x”) x
Inflation x x x x
Value
x x x
0 Goals (eg limit Expl spend E fficie nt frontie r
de fine s be st
per field/prospect per field/pros pect to a max of xx/yr)
F o r e a c h “e ffic ie n t
Rules (eg must Volume p o rtfo lio ”
drill x expl wells in this or
that area)

Objective (maximise or
minimise for eg prod rate Time
or NPV, or exposure)

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Stage 4 … Strategy Formulation

• Numeric analysis provides insights, identifies


generic opportunities to improve performance

• Strategic thinking then required to formulate


portfolio management strategies

Summary …
 Sophisticated portfolio analysis techniques can optimize and
identify strengths and weaknesses in current portfolio and hence
contribute significantly to portfolio management

 Portfolio analysis techniques are dependent on state-of-the-art


asset analysis methods

 Full benefits of portfolio analysis only realized if allied to rigorous


strategic thinking

 The “Value” of an acquisition or a divestment is its incremental


value to the portfolio … revealed only by this kind of analysis

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205

Wrap up and Finish


• Thank you, all of you, for your input

• Comments, additions very welcome

206

Thank You

103