Reserves & Resources – Top 10 PRMS errors and misunderstandings Dr. Ed Jankowski - Managing Director RPS Energy Imperial College, 31 st October 2017 rpsgroup.com/energy rpsgroup.com/energy 1
P etroleum R esources M anagement S ystem 2007 SPE/WPC/AAPG/SPEE publish Petroleum • Resources Management System • 2011 Guidelines for Application of the PRMS 2014 SPE OGRC agreed to consider revision to • PRMS 2017 Updated to PRMS • rpsgroup.com/energy rpsgroup.com/energy 2
SPE-PRMS (2007): general principal Net Recoverable Reserves • The “ unit of currency ” is The Project • “ Classification ” – Into Prospective Resources, Contingent Resources or Reserves – Based solely on an estimate of Chance of Commerciality which equates to level of maturity • “ Categorisation ” – Into low, best, high, or 1C, 2C, 3C, or 1P, 2P, 3P, respectively – Based solely on the range of uncertainty: captured by three discrete estimates rpsgroup.com/energy rpsgroup.com/energy 3
Project approach rpsgroup.com/energy rpsgroup.com/energy 4
PRMS errors/misunderstandings - 6 to 10 Economic Limit Test (ELT) – based on project cash flow or company’s cash flow? Applying risk to Contingent or Prospective Resources or mixing risk with uncertainty Reserves and lease fuel Misuse of terms in PRMS Aggregation of Prospective Resources – Overstating Total Resources rpsgroup.com/energy rpsgroup.com/energy 5
PRMS errors/misunderstandings - 1 to 5 Gross vs. Net Reserves (Entitlement) – PSC Incremental projects – scope of work different in 1P , 2P and 3P cases Incremental vs. project based approach Field operating cash flow is negative but delaying abandonment improves Project value – are produced volumes still Reserves? 1P volume is uneconomic but 2P and 3P volumes have positive value what do we book as Reserves – “Economic vs. Commercial” rpsgroup.com/energy rpsgroup.com/energy 6
Aggregation of Prospective Resources – Overstating Total Resources • Total Prospective Resources are commonly grossly overstated as a result of either simply summing all P90, P50 and P10 values arithmetically or aggregating them probabilistically assuming all prospects were successful • This outcome represents only one possible success outcome resulting from a drill out of the prospect inventory • The probability of this outcome is the least likely outcome of any drilling programme and the product of each individual chance of discovery (assuming independent probabilities) • The real range of successful outcomes should encompass all possible success outcomes from 1 success to all successes and every combination/permutation in- between • The true P90 to P10 values of this distribution are much lower than assuming all prospects are successful • The consolidated chance of success increases with each prospect added into the consolidation and represents the chance of 1 or more successes • RPS internal note is available upon request rpsgroup.com/energy rpsgroup.com/energy 7
Aggregation of Prospective Resources – Overstating Total Resources P100 P90 P50 P10 P0 Mean CoD Prospect 1 20 49 89 164 400 100 10% Prospect 2 20 49 89 164 400 100 10% Prospect 3 20 49 89 164 400 100 10% Prospect 4 20 49 89 164 400 100 10% Arithmetic 80 196 356 656 1600 Total r 400 1/10^4 Probabilistic 80 283 388 532 1600 Total 34% a Success Total 20 52 98 206 1600 117 • Arithmetic and Probabilistic Total assumes 100% success • Success Total assumes at range of outcomes from 1 success to all successes and all combinations/permutations between the 2 rpsgroup.com/energy rpsgroup.com/energy 8
Aggregation of Prospective Resources – Overstating Total Resources P0 = 1600 a Full range of outcomes P10 = 656 Arithmetic P90 – P50 r P0 = 400 Range P90 = 196 P100 = 20 P100 = 20 rpsgroup.com/energy rpsgroup.com/energy 9
Misuse of terms in PRMS Some examples of the misuse of terms: • “Risked” Reserves are ...... • “Recoverable Reserves” are ...... • “Remaining Reserves “are ...... • “1P STOIIP” = ....... • “Total Reserve = Proven + Probable + Possible” • “2P production forecast excludes economic cut - off” • “Current Resource base or 3P is xx” • “A compression project is only included in the 3P reserves estimate” • “Three additional wells are included in the 3P reserves “ rpsgroup.com/energy rpsgroup.com/energy 10
Reserves and lease fuel • Lease fuel is that portion of produced natural gas, crude oil, or condensate consumed as fuel in production and lease plant operations. • Lease fuel should be treated as shrinkage and is not included in sales quantities or resource estimates. • However, some regulatory guidelines may allow lease fuel to be included in Reserves estimates where it replaces alternative sources of fuel and/or power that would be purchased in their absence. • Where claimed as Reserves, such fuel quantities should be reported separately from sales, and their value must be included as an operating expense. • Flared gas and oil and other losses are always treated as shrinkage and are not included in either product sales or Reserves. (PRMS 3.2.2) • Guidance and rules to be addressed in 2017 update rpsgroup.com/energy rpsgroup.com/energy 11
Mixing risk and uncertainty 1P 2P 3P P100 P0 P90 P50 P10 Reserves 20 49 89 164 400 • P90 volume has a 90% chance of occurring • P50 volume has a 50% chance of occurring r • P10 volume has 10% chance of occurring • Total probability = 150% r rpsgroup.com/energy rpsgroup.com/energy 12
Expressing volumetric uncertainty 1P 2P 3P P100 P0 P90 P50 P10 Reserves 20 49 89 164 400 Probability Density Function (PDF) • There is a 90% chance that the volume ≥49 and lies between 49 and 400 • There is a 50% chance that the volume ≥89 and lies between 89 and 400 • There is a 10% chance that the volume ≥164 and lies between 164 and 400 • There is a 80% chance that the volume lies between 49 and 164 (P90 to P10 range) rpsgroup.com/energy rpsgroup.com/energy 13
Applying risk to Contingent or Prospective Resources Unrisked Resources P90 = 49 P100 P90 P50 P10 P0 Mean CoD Unrisked 20 49 89 164 400 100 a r Risked 2.0 4.9 8.9 16.4 40.0 10 10% a Risked 0 0 0 20 400 10 P50 = 89 P10 P9 P5 P1 P0 a 20 49 89 164 400 Risked P10 = 164 rpsgroup.com/energy rpsgroup.com/energy 14
Economic Limit Test (ELT) Contingent Reserves Resources Economic Limit Economic Limit • ELT date is based on undiscounted operating net cash flow • Excludes abandonment, decommissioning and reclamation (ADR) costs • Is that the project net cash flow of company's net cash flow? rpsgroup.com/energy rpsgroup.com/energy 15
Economic Limit Test (ELT) in a PSC setting • “Contractors” operating cash flow very different to project operating cash flow • Contractor pays 100% of costs but only receives a share of revenue based on cost oil and profit oil – not related to Working Interest • Contractor ELT date may be much earlier than Project ELT date • ADR costs included in operating costs and therefore recoverable as Cost Oil rpsgroup.com/energy rpsgroup.com/energy 16
1P volume is uneconomic but 2P and 3P volumes have positive value • Categorising volumes as Reserves requires an assessment of the economic viability of the estimated volume range • In some cases part of the volume range (the lower end) is shown to be uneconomic under current economic assumptions • In the case where the discounted value of the P90 case is negative but the undiscounted net cash flow is still positive then Reserves can be assigned to the P90, P50 and P10 volumes • In some cases however even the undiscounted cash flow at the P90 level is negative. It is currently acceptable in PRMS in these cases to classify the P90 volume as 1C Contingent Resources and the P50 and P10 volumes as 2P and 3P reserves respectively • Once the investment that caused the P90 case to be uneconomic is sunk then the point forward value would become positive and the remaining 1C volume moved back to 1P • RPS normal practice would be to not use a split category approach • The P90 – P10 volumetric range is derived from a continuous distribution and the entire range should be classified accordingly • If the operator is committed to the project even though part of the distribution is uneconomic then the whole range should be classified as Reserves. This situation should reported as a footnote to the reported Reserves table • If the operator has effectively placed the project on hold as a result of this situation then the entire distribution should be categorised as Contingent Resources until such time the operator is ready to commit to the project rpsgroup.com/energy rpsgroup.com/energy 17
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