Reserves Puzzlers Are They or Are They Not Reserves? Part 1 - PowerPoint PPT Presentation

Reserves Puzzlers Are They or Are They Not Reserves? Part 1 Richard Smith, Gaffney Cline & Associates CE seminar; 13 June 2016 Reserves & Resources Reporting

Slide 2 DISCLAIMER T HE MATERIAL AND OPINIONS EXPRESSED IN THIS PRESENTATION ARE THOSE OF THE AUTHOR AND NOT G AFFNEY , C LINE & NECESSARILY THOSE OF A SSOCIATES . W HILE THEY REFLECT WHAT IS BELIEVED TO BE INFORMED OPINION , THEY ARE NOT REPRESENTED AS BEING THE OPINIONS OF THE SPE/WPC/AAPG/SPEE/SEG THE US S ECURITIES OR AND E XCHANGE C OMMISSION OR ANY OTHER REGULATORY BODY . R EADERS ARE URGED TO OBTAIN INDEPENDENT ADVICE ON ANY MATTER RELATING TO STOCK MARKET TRANSACTIONS AND THE INTERPRETATION OF RESERVES DEFINITIONS AND GUIDANCE . SPE London/SPEE Europe – CE June 2016: Presentation Title / Richard Smith - Gaffney, Cline & Associates

Slide 3 WHY IS THIS TOPIC OF INTEREST … B ECAUSE OF THOSE WHO HAVE A STAKE ! • O PERATING C OMPANIES A ND T HEIR O WNERS • S TOCKHOLDERS • B UYERS & S ELLERS • I NVESTORS , B ANKS A ND F INANCE G ROUPS • R EGULATING A GENCIES & G OVERNMENTS SPE London/SPEE Europe – CE June 2016: Presentation Title / Richard Smith - Gaffney, Cline & Associates

Slide 4 THERE ARE INTERNATIONAL STANDARDS T HE P ETROLEUM R ESOURCES M ANAGEMENT S YSTEM “T HE PRMS” S PONSORED B Y : T HE S OCIETY OF P ETROLEUM E NGINEERS (SPE); REVIEWED AND JOINTLY SPONSORED BY THE W ORLD P ETROLEUM C OUNCIL (WPC), THE A MERICAN A SSOCIATION OF P ETROLEUM G EOLOGISTS (AAPG); AND THE S OCIETY OF P ETROLEUM E VALUATION E NGINEERS (SPEE). T HIS S TANDARD I S A N I NTERNATIONALLY R ECOGNIZED A ND A CCEPTED S TANDARD F OR T HE E VALUATION O F O IL A ND G AS R ESOURCES . SPE London/SPEE Europe – CE June 2016: Presentation Title / Richard Smith - Gaffney, Cline & Associates

Slide 5 THE INTERNATIONAL STANDARD T ODAY ’ S D ISCUSSION I S A BOUT I F “T HE B OOKING ” I S A CCEPTABLE A CCORDING T O T HE S TANDARD . SPE London/SPEE Europe – CE June 2016: Presentation Title / Richard Smith - Gaffney, Cline & Associates

Slide 6 THE ESSENTIAL DEFINITION • Reserves Are Those Quantities Of Petroleum Anticipated To Be Commercially Recoverable By Application Of Development Projects To Known Accumulations From A Given Date Forward Under Defined Conditions. (SPE PRMS) • Reserves Must Further Satisfy Four Criteria Based On The Development Project Applied: > Discovered > Commercial > Recoverable > Remaining (As Of The Evaluation Date) • D O N OT F ORGET  T HE C OMPANY MUST HAVE CLEAR ENTITLEMENT TO THE RESERVES . SPE London/SPEE Europe – CE June 2016: Presentation Title / Richard Smith - Gaffney, Cline & Associates

Reserves Evaluation Case “ Study ” ”Across an International Boundary”

FIELD A Project Fields A & B have proven hydrocarbons Company has interest in blocks in both countries but WI is different. Project has been static for 10 years. Country Y Well A1 tested upper zone and established production, and Country X then plugged back. Well A1 is completed in lower zone, tested, and suspended, WI = 0.05 waiting on tieback to platform. A1 Well B1 penetrated upper zone and MDT, logs, etc., established HC’s, but shows poorer quality and properties compared to upper zone in Field A. There is no test. WI = 0.8 A2 Shared resources are clearly defined across the border. Countries’ ministries agree and state unitization is required to proceed. Partners have agreed on WI% share. B1 WI = 0.7 B2 FIELD B

FIELD A Partners have signed committments and are proceeding with the project. Ullage is agreed and contracted. Country Y Initial plan is to hookup A1, drill and complete A2, drill and Country X complete B2. Production to begin 2H next year from A1. Evacuation Route Is In Country X. Production Is Sold in WI = 0.05 Country X. A1 WI = 0.8 A2 B1 WI = 0.7 B2 FIELD B

Fields A & B Company Asserts for A & B  Same PVT Regime Discovered  Similar Petrophysics Recoverable   Same Pressure Remaining   Gradients Commercial 

Field A Field B Unitization Share Is Applied Only To Reasonable Certainty Of 1P Country X. (Proved) Is Difficult And Data Is Limited. Only Unitized WI% Attributed to Country X Volume Is Booked As Proved Analogue Is Weak. Reserves. Difficult To Defend As Reserves. Nothing Is Booked For Portion From Country Y. This Is In “Escrow” Until Final Governments Sharing Agreement.

Reserves Evaluation Case “ Study ”Oil Gas Dual Structure with Fault”

1 3 OIL RESERVOIR = well = DST W E B S e i s m i c i n t e r s e c t i o n W E DST A C • S ANCTION FID IS B ASED ON C OMBINED V OLUMES OF A & B • O NLY ONE PRODUCTION DST WITH GOOD RATES . • G OOD RESERVOIR PROPERTIES IN A, B & C. FDP IS PARTNER AGREED , SIGNIFICANT LONG LEAD INVESTMENT COMMITTED AND UNDERTAKEN , S EVERAL CONTRACTS SIGNED . • V OLUME EVALUATION AGREED . T HERE I S U NCERTAINTY OF F AULTING / J UXTAPOSITION . Image adapted from PGS in GeoExpro

F IELDS A & B & C HAVE PROVEN HYDROCARBONS P ERMITS HAVE BEEN GIVEN . P ARTNERS HAVE APPROVED THE PROJECT AND FUNDING BASED ON 2P VOLUME . C IS AN ADDITIONAL ” PLUS ” BUT IS SCHEDULED FOR LATER DEVELOPMENT . P LANNED INVESTMENT MAKES 1P VOLUME NON - COMMERCIALLY .

THANK YOU QUESTIONS OR COMMENTS? STAY TUNED FOR PART 2 CE seminar; 13 June 2016 Reserves & Resources Reporting

Reserves Puzzlers Are They or Are They Not Reserves? Part 2 Richard Smith, Gaffney Cline & Associates CE seminar; 13 June 2016 Reserves & Resources Reporting

Reserves Evaluation Case “ Study ”Big New Discovery – WOW”

FIELD WOW C OMPANY HAS INTEREST ONLY IN EAST LICENSE . P ROVEN AND APPRAISED HYDROCARBONS WITH SUPER East West PRODUCTIVE RESERVOIR . R ADIUS OF INVESTIGATION FROM License License WELL TESTS ARE FROM A TO B DEPENDING ON ASSUMPTIONS . C ONCEPTUAL DEVELOPMENT PLAN IS AGREED . WI = 0.0 P ARTNERS HAVE AGREED TO UNITIZATION PROCESS BUT NO AGREEMENT YET . WI = 0.4 a b

FIELD WOW P ARTNERS HAVE SIGNED COMMITTMENTS FOR MOVING FORWARD TO DEVELOPMENT . East West D EVELOPMENT IS ASSURED AT THIS POINT AND COMMITS License License FUNDS NECESSARY BASED ON ESTIMATED UNITIZED INTEREST . P ARTNERS HAVE SIGNED AFE’ S FOR LONG LEAD ITEMS BASED ON ESTIMATED SHARE . WI = 0.0 C OMPANY IS PREPARING TO DECLARE COMMERCIAL STATUS IN Q4. WI = 0.4 a b

Company Asserts for A & B  Discovered Recoverable  Remaining  Commercial NO

I S THERE SOMETHING MISSING ? WHAT IF License a b East WI = 0.4 License West WI = 0.0

Reserves Evaluation Case “ Study ” ”Continuing Utilization Of Applied Techniques” (SPEE Halifax – 2015)

T HE T ARGET T HE T ECHNOLOGY I NJECTED B ODIES ABOVE M AIN Sand T RIED AND T RUE T HE O UTCOME O VER S EVERAL Y EARS

OBSERVATI ONS “ RESERVOIR ”  ‘A SUBSURFACE ROCK FORMATION CONTAINING AN INDIVIDUAL AND SEPARATE NATURAL ACCUMULATION OF MOVEABLE PETROLEUM THAT IS CONFINED BY IMPERMEABLE ROCKS / FORMATIONS AND IS CHARACTERIZED BY A SINGLE - PRESSURE SYSTEM . S TATIC R ESERVOIR  L ARGE C ONTIGUOUS A REA P RESSURE Profile Data A REAL G AS C AP  A REAL A QUIFER  S AME PVT R EGIME  S AME P ETROPHYSICS  4D S EISMIC CONTACT SURVEILLANCE  A REAL P RESSURE B EHAVIOR

THE COMPANY ASSERTS  A DEFINED , APPROVED , FUNDED AND PERMITTED CAMPAIGN FOR 4 NEW WELLS IN NEXT 24 MONTHS , STARTING IN MID - YEAR 2017.  Discovered  B ELIEVES IT USES A RELIABLE TECHNOLOGY AND THUS  Recoverable SUPPORTS HISTORICAL SUCCESS .   A SKS INDEPENDENT CONSULTANT TO CERTIFY 1P & 2P Remaining U NDEVELOPED R ESERVES .  Commercial The Statistics of Economic Success  20 of 23  87%  Reasonable Certainty? R ATIOS OF RESERVES @ 5- YEARS COMPARED TO ORIGINAL ESTIMATE IS SIGNIFICANTLY ABOVE 1.0

You Are The Consultant “ ” What Is Your Opinion?

Hmmm? Does this help? “ ” SPE PRMS S TATES : T HE AREA OF THE RESERVOIR CONSIDERED AS P ROVED INCLUDES (1) THE AREA DELINEATED BY DRILLING AND DEFINED BY FLUID CONTACTS , IF ANY , AND (2) ADJACENT UNDRILLED PORTIONS OF THE RESERVOIR THAT CAN REASONABLY BE JUDGED AS CONTINUOUS WITH IT AND COMMERCIALLY PRODUCTIVE ON THE BASIS OF AVAILABLE GEOSCIENCE AND ENGINEERING DATA . S.E.C. R ULES S TATE : …… R ESERVES SHOULD NOT BE ASSIGNED TO AREAS THAT ARE CLEARLY SEPARATED FROM A KNOWN ACCUMULATION BY A NON - PRODUCTIVE RESERVOIR .

THANK YOU QUESTIONS OR COMMENTS? CE seminar; 13 June 2016 Reserves & Resources Reporting