OIL AND GAS RESERVES ESTIMATING

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OIL AND GAS RESERVES ESTIMATING WE HAVE MET THE
ENEMY, AND HE IS US Peter R. Rose Senior
Associate, Rose Associates, LLP., and
President AAPG Austin, Texas
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RULES OF THE GAME

• Write your name on the form
• Follow instructions
• Try hard to answer objectively
• Write your answers down
• No joint ventures -- work independently
• P90 is a small number P10 is a large number

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DETERMINISTIC ESTIMATE
A single number (best guess) among a wide range
of possible real outcomes. Low confidence in
being precisely correct. Amount of uncertainty
affects willingness to invest in your estimate.
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UNCERTAINTY CONFIDENCE
?
?
FOR 20, HOW MUCH ARE YOU PREPARED TO BET THAT
YOUR BEAN-ESTIMATE IS EXACTLY CORRECT?
10? 5? 2? 1? 50? 20? 10
? 5?
Chance of estimating the exact number of
beans? !REMOTE!
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EXPRESSING CONFIDENCE I

• Traditional Engineering Convention -- 10?
• Ranges of Numbers Corresponding to Confidence

Confidence (,gt)
Confidence (,gt)
fairly high low very, very low
gt 10 beans gt 100 beans gt 1,000 beans
gt 200 beans gt 2,000 beans gt 20,000 beans
very, very high high moderate
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EXPRESSING CONFIDENCE II
LET US SPECIFY
High Confidence 90 sure , gt P90
value Low Confidence 10 sure , gt P10
value 50/50 Confidence 50 sure , gt P50
Median
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Superiority Of Probabilistic Method . . . still
just estimates cloaked in probabilities?
Advantages

• Measure our estimating accuracy by comparing
  probabilistic forecasts against actual outcomes
• Use statistical principles to make better
  estimates (lognormal expectation, calculate mean
  of distribution, defined low-side high-side
  criteria

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PRACTICAL ATTRIBUTES OF KEY PARAMETERS
P1 Geologically possible but extremely unlikely
P10 Reasonable Maximum P50 Half below, Half
above, the Median P90 Reasonable
Minimum P99 As small as it could be . . . Yet
detectable
Boundary Conditions
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Superiority Of Probabilistic Method . . . still
just estimates cloaked in probabilities?
Advantages

• Measure our estimating accuracy by comparing
  probabilistic forecasts against actual outcomes
• Use statistical principles to make better
  estimates (lognormal expectation, calculate mean
  of distribution, defined low-side high-side
  criteria
• Reality-checks -- natural limits, unrealistic
  extremes, analog distributions
• Faster, more efficient

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20 PAYOFF
? Compare your original best estimate (circled
number, item 2, colored form) with your neighbor
Does anyone in the audience have a circled number
that is EXACTLY
843?
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104
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Estimating based upon "REASONABLE CERTAINTY"
Another bean slide . . . New confidence-level
"Reasonably Certain" in X beans or more
NOTE REASONABLE CERTAINTY ? BEST GUESS
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I am Reasonably Certain that there are ________
beans or more.
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NOTE THIS IS A PROBABILITY STATEMENT, ALTHOUGH
NO PROBABILITY ( CONFIDENCE LEVEL) IS SPECIFIED
WHAT IS YOUR REASONABLE CERTAINTY? 50? 67?
75? 80? 90? 95? 99?
HOW CAN YOU MEASURE YOUR ESTIMATING ABILITY USING
AN UNDEFINED CRITERION?
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64
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COMPLICATIONS

• A larger estimate may be in your personal
  interest
• Your boss may prefer larger to smaller estimates
• Possible consequences if actual result is less
  than your estimate
• Negative Press
• Employer Disciplines
• State Penalizes

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98?
90?
50?
75?
U.S. SEC REFUSES TO SPECIFY THE CONFIDENCE-LEVEL
OF REASONABLE CERTAINTY
99?
95?
67?
80?
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. . . BUT SEC will not specify confidence level
assigned to PROVED
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Proved Reserves
.sec.gov / divisions / corpfin / forms / regsx.
htm
www
. . . are the estimated quantities which
geological and engineering data demonstrate with
reasonable certainty to be recoverable. . .
reasonable certainty
This is the foundational statement of what we
think is an outdated (1978) system. Lets take
a look at the evolution of the wording
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Proved Reserves
Yergin and Hobbs, 2005 ogj
API
1936
Proved probable possible
Every reasonable probability
Capen SPE 5579
reasonable certainty
1964
1976
1981
1987
SPE
1997
Reasonable certainty
Revised def. for proved
Probabilistic methods guidelines published
1982
1978
US SEC
Proved w reasonable certainty
Year-end pricing
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DETERMINISM GETS INCREASINGLY COMPLEX

• Proved, Probable, Possible
• Developed Undeveloped
• Weighting schemes to account for uncertainty
• ? Applicability to Undrilled Prospects and
  Plays?

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PROBABILISTIC ESTIMATING COMES TO PETROLEUM
EXPLORATION ( 1985 ?)

• Exploration is a repeated-trials game of many
  uncertain ventures
• Statistical treatment is appropriate
• Statistics Language of Uncertainty
• Aids to Improved Estimating --
• Lognormality
• Reality Checks
• Project post-audits ? improved estimating skills
• Leads to Portfolio Management

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PROBABILISTIC ESTIMATING STANDARD EXPLORATION
PRACTICE

• Tipping Point mid-1990s
• SPE/WPC acknowledged in 1997, recognizing both
  Deterministic and Probabilistic approaches
• SPE/WPC recommendation
• Proved 90 Confidence

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Reserves Estimating A Divided Industry
Exploration Fully Probabilistic Production Most
ly Deterministic (Proved, Probable, Possible,
Developed, Undeveloped, etc.)
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TWO VIEWS OF EP WORK Deterministic
View Probabilistic View
? UNCERTAINTY ?
? UNCERTAINTY ?
TIME
P90
P50
P10
TIME
STOP!
Use this time to find other prospects
THE ANSWER (Determinism)
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Determinism Promotes Unaccountability
Attempts to represent highly uncertain parameters
with a single, precise number, and without
expressing how much uncertainty surrounds it.
Proved, Probable, Possible terms not defined
quantitatively, so impossible to measure and
calibrate estimating abilities objectively
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• So the Deterministic Method is unaccountable to
• Professionals
• Clients and Employers
• Investors
• General Public

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PROBABILISTIC METHODS PROMOTE ACCOUNTABILITY

• All possible outcomes are assigned likelihood of
  occurrence
• Compare estimates with outcomes
• Detects and measures bias
• Encourages learning and improved estimating
• Compatible with Portfolio Management
• Adaptable to considerations of Chance of Success
• Can be universally applied to all EP projects
• (Plays, Prospects, Developments, Workovers,
  EORs, etc.)

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WHY DOES DETERMINISM PERSIST?
? Resistance to change? ? Propped up by SEC? ?
Accountants cant deal with uncertainty? ?
Encourages false confidence? ? Desire to remain
unaccountable?
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DETERMINISM ENCOURAGES UNREALISTIC THINKING ABOUT
HIGHLY UNCERTAIN RESOURCE VALUES

• Executives, Board Members, Bankers, Analysts,
  Stockholders
• Enables Decision-makers to maintain unwarranted
  confidence
• Discourages realistic assessments of uncertainty
  and risk

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One Simple Remedy to Start Fixing the Problem

• A unified statement from the EP professional
  community that Proved 90 confidence.
• Imposed Definition on SEC
• Support of Professional Societies?
• Support of Influential Companies?

Industry professionals created this problem --
Why dont we, as responsible Professionals,
change it?
"We have met the Enemy, and He is Us"
(Walt Kelly, POGO)
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OIL AND GAS RESERVES ESTIMATING WE HAVE MET THE
ENEMY, AND HE IS US Peter R. Rose Senior
Associate, Rose Associates, LLP., and
President AAPG Austin, Texas