Gas Reserves, Uncertainty, and Investment Decisions
Authors: Van Horn H. Glen 
Published: December 2007

Discussion of this paper is invited. Three copies of any discussion should be sent to the Society of Petroleum Engineers office. Such discussions may be presented at the above meeting and, with the paper, may be considered for publication in one of the two SPE magazines.

Abstract
Gas pipeline facilities are usually designed and the capital investment made when the gas reserve estimates are at least reliable. The design for these facilities is based on estimates of "proved" reserves, or perhaps "possible" or "speculative" reserves. The difference between these reserve estimates is the level of uncertainty associated with each estimate. This investment decision can be improved by quantifying the uncertainty of the reserve estimates.
The Monte Carlo simulation technique can be used to relate the probability of occurrence, the measure of uncertainty, with gas reserve estimates. Classifying reserve estimates according to uncertainty improves communication between the decision maker and the person estimating the reserves. A case study is presented to illustrate the calculations and the results. The technique is particularly applicable to total field reserve estimates made during early development.
The probability of gas reserve estimates is based on a probability frequency distribution for each variable in the reserve determination. A frequency distribution is selected that best describes the probability of occurrence of each value that the variable can assume. The triangular, normal, rectangular, and discrete frequency distributions are adequate for most reserve studies.
The investment in gas pipeline facilities is based on the reserves and the resulting cost of service at the level of risk that management is prepared to assume.
The Monte Carlo simulation is adaptable to many problems. Models for predicting potential reserves based problems. Models for predicting potential reserves based on gas buying history and on basin discovery history are two examples considered.

Introduction
Natural gas producers, distributors, pipelines, and the Federal Power Commission recognize that the industry is facing a critical gas supply problem. The immediate problem is not with the resource base, for it is generally accepted that vast quantities of natural gas remain to be discovered within the United States. The problem is that the discovery rate for natural gas reserves problem is that the discovery rate for natural gas reserves is not keeping pace with the rate of consumption.
The increased importance of gas reserve estimates in management decisions and competition for the purchase of new gas reserves require better gas reserve purchase of new gas reserves require better gas reserve estimates and better descriptions of those estimates so that the judgements of those making estimates can be communicated to those making decisions based on the estimates.
Gas reserve estimates are least reliable in the early stages of Field development. Most investment decisions are made during this period. These decisions are based on estimates of proved reserves plus, in most instances, an estimate of the potential of the area.