Oil and Gas Reserves Estimating --  We Have Met the Enemy, And He is Us

Rose, Peter R.

Rose & Associates, LLP, Austin, Texas

The presentation will commence with several audience exercises contrasting deterministic estimating with probabilistic estimating, as the foundation of the body of the paper.

Regardless of whether predictions are expressed deterministically (single-number forecasts) or probabilistically (as ranges of forecasts corresponding to perceived probabilities), they are still estimates, subject to vagaries of nature, human error, and various biases.  But probabilistic estimating has five important advantages:

1. Forecasting accuracy can be measured;

2. Use of statistics improves estimates;

3. Reality checks can pre-detect errors;

4. It is faster, more efficient, avoids false precision; and

5. It promotes better communication of uncertainty to decision-makers and investors.

However, using prevailing practices that have evolved through decades of engineering practice, reinforced by SEC-approved standards, “Proved Reserves” is a deterministic number that refers to a specified volume (or more) of hydrocarbons that the estimator is “reasonably certain” will be recovered from a well, property, field, or district.  Even so, it is actually a probability statement, except that no confidence-level (= probability) is specified.  It is up to the individual reserves appraiser to sense his/her “reasonable certainty”, and in fact, experience indicates that individual “reasonable certainty” ranges widely.  Accordingly, proved-reserves estimators cannot be accountable.  Reserves estimates are also susceptible to bias because appraisers may be aware that larger proved-reserves estimates may benefit the value of their own shares, annual bonuses, repeat business, or organizational status.  On the other hand, various negative career and legal consequences may ensue if the “reasonably certain” estimate turns out to be larger than the actual outcome.  To say that all of this constitutes a self-made, illogical, and insupportable professional conundrum is a severe understatement!

Today, Petroleum E&P is a divided industry:  during the late 1980’s and early 1990’s, Exploration adopted probabilistic methods as best-suited for estimating recoverable volumes of oil and natural gas from drilling prospects and plays, given discovery.  But the Production side of E&P generally remains stuck in the old rut of deterministic methodology, even though it is demonstrably inferior. 

A simple remedy would facilitate the transition to probabilistic methods for the entire E&P Industry:  for members of all professional geotechnical and engineering societies to specify that when they use the term “proved”, they are explicitly affirming 90% confidence in their estimates, regardless of outmoded and illogical SEC definitions.  This would immediately allow measurement and accountability, and would lead eventually to the adoption of full probabilistic methods throughout the E&P industry.  Such assertive leadership has yet to emerge from the professional associations, however.

Ill-defined reserves standards, as well as misaligned corporate incentive schemes, organizational coercion, and motivational bias, all tend to encourage unethical behaviors in reserves estimating.  Constant focus by individuals and companies on recommended practices, professional standards, and personal ethics are essential for consistent and reliable results.