Determination Of Reserves And Values And Application Of Risk
Authors: Robinson J. Glenn 
Published: March 2010

Historically, engineers and geologists have estimated hydrocarbon reserves and classified these as proven, probable, and possible as a means of indicating the risk associated with the recovery and economic realization. During recent decades, new developments have added complexities in estimating hydrocarbon recovery andeconomic value. Improved technology has led to increased recovery through miscible displacement and thermal recovery processes. Hydrocarbon discoveries in frontier areas have added further complexities. Uncertainties in economic criteria, especially in forecasts of product prices and government royalty and lax levies, have added significant risks in evaluating reserves.

In addition to the oil and gas companies and the consumers of their products, there are many other stakeholders concerned with the estimates and evaluations of hydrocarbon reserves. Government agencies are constantly concerned with tallying up the nation's energy sources to determine future supply. Securities commissions scrutinize reserve estimates in policing the investment community. Accounting firms use these figures in preparing and auditing financial reports. Lending institutions rely on reserve evaluations in determining the amount of production loans and to assess the value of the supporting collateral. Financial advisors must consider this data in mergers of oil and gas companies, and also in divesting of oil and gas assets.

It is imperative that the evaluators understand all of the needs for which the reserve evaluation will be used. Equally important, is that the users of the reserves evaluations must be aware of the methods employed in preparing the reports, and in particular, the determination and application of risk. Establishment of a standardized system of reserve definitions and evaluation procedures is a necessity to restore confidence in the material which is being presented.

Introduction

There appears to be as many "definition of reserves" as there are evaluators, oil and gas companies, financial agencies, securities commissions and government departments that are involved in the oil and gas industry. Definitions have been developed and adopted by each individual group for their own specific purposes; however, when attempts are made to use these specific reports for other reasons, confusion and misunderstanding develops and in many cases, some of the stakeholders get "short-changed ",

There is little doubt that the intent of each group is to categorize reserve estimates according to the risks associated with the development and economic realizations of these reserves. There is usually little problem in dealing with reserves that have little or no risk; however, once risk is introduced, a great deal of variance occurs in the methods used in presenting the reserves and the respective values. In the majority of cases, when uncertainty and confusion exists, it is human nature to back away from thesituation, and thus, from an investment point of view, little or no value is assigned to these reserves.

The intent of this paper is to review the methods used in estimating reserves and values, to suggest a method of incorporating risk, and to identify the problems in some of the current definitions.