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The Geological Role in Reserve Acquisitions

TRUDEAU, STEVEN R., Consultant, Garland, TX

In the petroleum industry, reserves are quickly being recognized as a depleting asset. A company must replace the produced reserves or face going out of business. There are three general ways to acquire additional reserves: (1) through exploration, (2) by production development activities, and (3) by acquisitions or outright purchases of known producing or nonproducing reserves.

History has shown that geologists play a major role in exploration and production efforts. However, to date, acquisition work has been primarily assigned to engineers. The role of the geologist in acquisitions is complicated, but when geologic techniques presently available are creatively applied the geologist can play a major role in acquisitions.

The cost of these acquisitions can be a large percentage of a company's total budget and can substantially affect the company's success. Therefore, the application of additional geological knowledge and technology is rightly justified to reduce the overall risk of an acquisition. The difficulty is in establishing an acquisition concept that fully incorporates and supports geologic functions, along with defining what those functions and duties should be to accomplish improved reserve evaluations and risk analysis.

The first step is to recognize that the engineer has several production tools using production history to give adequate risked results for producing reserves except in several situations such as water drives, overpressured reservoirs, tight rock, multiple fault blocks, and fractured reservoirs. These are proved reserve situations and a geologist is needed to assess a situation in which the engineering tools do not work or can be misleading.

Second, developmental field studies can identify valuable additional reserves. The industry has many examples of old depleted fields being brought back to life after new geologic concepts are applied.

Third, behind-pipe reserves are rarely given value for acquisition consideration during an engineering study. Geology can supply the needed volumetric analysis that would reduce their risk and allow these reserves to be given value in an evaluation.

Fourth, many times exploration prospects are listed just as potential "upside" to an acquisition consideration. The use of a geologic investigation of the prospect often can show strong merit in the exploration concepts. Then the use of a decision tree analysis can convert risk to expected value, to be used in the property evaluation determination.

The proved reserves in any acquisition consideration should contain the bulk of the asset value. If the incremental reserve value identified by geologic means is layered in with the proved reserve value, the chances of successfully acquiring the properties are higher and the risk can be controlled to fit with the company's financial situation and objectives.

Risk must be accepted as an inherent factor of the petroleum business. All evaluations will not be right all the time. But the management practice of using a geologic-supported approach to acquisitions will decrease the risk of making major reserve evaluation errors. Consistency of geologic risk analysis will, through time, establish an overall success trend.

 

AAPG Search and Discovery Article #91006 © 1991 GCAGS and GC-SEPM Meeting, Houston, Texas, October 16-18, 1991 (2009)