Probabilistic Reserves Addition Within a Project
Authors: Morales E.. , Lee W.J.. J. 
Published: October 2014

The SPE-Petroleum Resources Management System (2007) (SPE-PRMS) is a project-based system in which the project definition and its treatment play key roles in the estimation and categorization of reserves and resources and their range of uncertainty. This is key to capturing the potential downside and upside of the project and the commercial opportunities that may exist. Wrongly defining the project may result in an improper ring-fencing of the elements that one must consider in reserves and resource estimation and in improper risk assessment, with potential for missed opportunities or failure as an outcome.

The SPE-PRMS is clear on the type of aggregation that one can use within a field, a property, or a project, with probabilistic addition allowed within each of these entities. However, despite this clarity, and on the basis of information provided in 10-Ks, 20-Fs, and annual reports, most companies in the oil-and-gas industry have not yet adapted their methods to reflect these best practices in external disclosures.

The technical literature has devoted significant effort to address technical and commercial issues in probabilistic reserves and resource estimation of a field or incremental activity (e.g., drilling wells). However, very little effort has been devoted to the proper definition of a “project,” its attributes, ring-fencing, uncertainty-assessment approaches for the fields within the project, and in the categorization and aggregation of reserves or resources within the project.

Furthermore, downside project economics should capture the true project's downside (or the true P90 of the project) rather than an overly pessimistic estimate of its proved reserves calculated with arithmetic additions within the project.

To describe a simple approach to a project's reserves estimates, this paper uses an actual liquefied-natural-gas (LNG) project and its reserves estimates, estimated by different companies, with the arithmetic aggregation approach and the probabilistic aggregation approach. This example highlights different interpretations of the existing standards and regulations among joint venture (project) partners within the same project. This paper also highlights the overall impact that the two types of proved-reserves-aggregation methods (arithmetic and probabilistic) may have. In the specific example presented in this paper, the difference between the two methods can account for up to 15% of the project's proved reserves. One can also use the approach described in other types of projects (e.g., a project with satellite developments by use of common facilities) or resources estimates (e.g., projects in contingent resources), to properly capture the downside risk and realistic upside, uncertainty ranges, and project business opportunities, truly reflecting the project's reasonable certainty at the P90 level. Gas projects are preferred to illustrate this approach.

For gas-commitment purposes, many buyers require the LNG project's proved (P90) reserves to be independently certified before contractual commitments can be finalized. Underestimation of the project's true proved reserves may result in loss of opportunities and/or in an overly pessimistic assessment of the proved reserves not reflecting reasonable certainty.

Requirements from regulatory bodies [e.g., NARA (SEC) 2009; ESMA 2011] and their linkages to reserves aggregation within a project are also addressed in this paper. In the project analyzed, this underestimation is between 12 and 15% of the project's proved reserves, depending on the year of disclosure.