Reserves & Resources Top 10 PRMS errors and misunderstandings - - PowerPoint PPT Presentation

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Reserves & Resources – Top 10 PRMS errors and misunderstandings

• Dr. Ed Jankowski - Managing Director

RPS Energy

Imperial College, 31st October 2017

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Petroleum Resources Management System

• 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

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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

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Project approach

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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

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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”

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Aggregation of Prospective Resources – Overstating Total Resources

• Total Prospective Resources are commonly grossly
• verstated 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
• utcome resulting from a drill out of the prospect

inventory

• The probability of this outcome is the least likely
• utcome 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

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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 Total 80 196 356 656 1600 400

1/10^4

Probabilistic Total 80 283 388 532 1600 Success Total 20 52 98 206 1600 117 34% a

r

• 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

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Aggregation of Prospective Resources – Overstating Total Resources

P0 = 1600 P100 = 20 Full range of

• utcomes

P100 = 20 P0 = 400 Arithmetic P90 – P50 Range P10 = 656 P90 = 196

r

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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 “

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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

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Mixing risk and uncertainty

P100 1P P90 2P P50 3P P10 P0 Reserves 20 49 89 164 400

r

• P90 volume has a 90% chance of occurring
• P50 volume has a 50% chance of occurring
• P10 volume has 10% chance of occurring
• Total probability = 150%

r

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Expressing volumetric uncertainty

P100 1P P90 2P P50 3P P10 P0 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)

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Applying risk to Contingent or Prospective Resources

Resources P100 P90 P50 P10 P0 Mean CoD Unrisked 20 49 89 164 400 100 10% Risked 2.0 4.9 8.9 16.4 40.0 10 Risked 20 400 10 P10 P9 P5 P1 P0 20 49 89 164 400 P90 = 49 P50 = 89 P10 = 164 Risked Unrisked

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Economic Limit Test (ELT)

Economic Limit Reserves Contingent Resources 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?

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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

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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

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Economic vs. Commercial

Economic:

In relation to petroleum Reserves and Resources, economic refers to the situation where the income from an operation exceeds the expenses involved in, or attributable to, that operation.

Commercial:

The entity (company) claiming commerciality has demonstrated firm intention to proceed with development and such intention is based on all of the following criteria:

• Evidence to support a reasonable timetable
• A reasonable assessment of the future economics meeting

defined investment and operating criteria

• A reasonable expectation of a market
• Evidence that the necessary production and transportation

facilities are, or can be made, available

• Evidence that legal, contractual, environmental and other

social and economic concerns will allow for the actual implementation of the recovery project Undiscounted net cash flow ≥ 0.0 Net cash flow discounted at [x%] ≥ 0.0

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1P volume is uneconomic but 2P and 3P volumes have positive value

P90 MMbbls P50 MMbbls P10 MMbbls Volumes 49 89 164 P90 MMbbls P50 MMbbls P10 MMbbls NPV0 +ve +ve +ve NPV10

• ve

+ve +ve P90 MMbbls P50 MMbbls P10 MMbbls NPV0

• ve

+ve +ve NPV10

• ve

+ve +ve 1P MMbbls 2P MMbbls 3P MMbbls Reserves 49 89 164 1P MMbbls 2P MMbbls 3P MMbbls Reserves 89 164 1C MMbbls 2C MMbbls 3C MMbbls Contingent Resources 49

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Field operating cash flow is negative but delaying abandonment improves the NPV – are produced volumes still Reserves?

Economic Limit Reserves Contingent Resources

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Field operating cash flow is negative but delaying abandonment is more economic – are produced volumes still Reserves?

1 year delay to decommissioning is more economic Reserves or Resources ??

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Incremental vs. project based approach

• PRMS advocates that the following approaches can be adopted:

“Evaluators may assess recoverable quantities and categorize results by uncertainty using the deterministic incremental (risk-based) approach, the deterministic scenario (cumulative) approach, or probabilistic methods”

• A project based approach using either a deterministic or probabilistic

approach to the evaluation of Reserves and Resources is usually the norm

• Within the US however the incremental approach is generally adopted
• This approach results in use of such terms as the 1P or 2P or 3P area.
• Such terms and concept is not compatible with the project based approach

to evaluation that underpins PRMS

• These approaches therefore can produce very different outcomes

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The Incremental Method

• The deterministic incremental method is widely used in mature onshore

environments, especially where multiple wells are drilled and where well- spacing regulations apply.

• Typically,

➢

Proved Developed Reserves are assigned within the drilled spacing-unit

➢

Proved Undeveloped Reserves are assigned to adjacent spacing-units where there is high confidence in continuity of productive reservoir.

➢

Probable and Possible Reserves are assigned in more remote areas indicating progressively less confidence.

• The respective quantities (e.g., Probable Reserves) are estimated discretely

as opposed to defining a Proved plus Probable Reserves scenario or a best estimate for the project based on probabilistic methods.

• Particular care is required to: -

➢

Define the project correctly (e.g., distinguishing between which wells are planned and which are contingent)

➢

Ensure that all uncertainties are appropriately addressed.

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Incremental projects – scope of work different in 1P , 2P and 3P cases

• The key to the classification of hydrocarbon volumes as Reserves or Contingent Resources is

identification and definition of the “project” that will be employed to extract those volumes

• On this basis the P90, P50 P10 volumes reported as 1P, 2P and 3P reserves should all be based
• n the same project (number of wells, same facilities etc.)
• In many cases an incremental project can be identified that will be executed sometime in the

future

• The volumes associated with this incremental project should be classified separately based on

the defined incremental project

• If this incremental project satisfies all the criteria in PRMS for Reserves which includes evidence
• f commitment to the project by the operator then the volumes can be booked as Reserves

along with the Reserves in the main project

• If any of the criteria are not satisfied then the volumes in the incremental project must lie in

Contingent Resources until such time as the factor making them contingent at this point in time have been overcome

• In some cases volumes in a contingent incremental project are added into the 3P reserves case

and treated as part of the upside potential of the main project

• In RPS’s opinion this approach is not PRMS compliant as well as being statistically incorrect.

Other auditors however sometimes use this approach

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Incremental projects – scope of work different in 1P , 2P and 3P cases

P90 MMbbls P50 MMbbls P10 MMbbls Volumes Project A 100 150 300 Volumes Incremental Project B 30 50 100 1P MMbbls 2P MMbbls 3P MMbbls Total Reserves 100 150 350

r Reserves Contingent Resources

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Production-Sharing Contract Reserves ...Under the PSC terms, the producers have an entitlement to a portion of the

• production. This entitlement, often referred to as “net entitlement” or “net

economic interest,” is estimated using a formula based on the contract terms incorporating project costs (cost oil) and project profits (profit oil). Although

• wnership of the production invariably remains with the government authority up

to the export point of the project, the producers may take title to their share of the net entitlement at that point and may claim that share as their Reserves. Net Reserves are therefore a function of the Cost Oil, Profit Oil and in some cases Tax Oil (PRMS 3.3.2)

Gross vs. Net Reserves (Entitlement) – PSC

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Contractor’s Entitlement Revenue – PSC

Gross Revenue Royalty Net Revenue Profit Oil State Share of Profit Oil Contractor’s Share

• f Profit Oil

Cost Oil State Share of Cost Oil Contractor’s Share

• f Cost Oil

Unused Cost Oil

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Contractor and Company’s Net cash Flow – PSC

Net Revenue State’s share of Profit Oil Contractor’s share of Profit Oil IOC’s share of Profit Oil Tax? NOC’s share of Profit Oil Contractor’s Cost Oil IOC’s share of Cost Oil NOC’s Share of Cost Oil

Contractors’s Share of Revenue

(Contractor’s Share of Cost Oil + Profit Oil)

Less OPEX CAPEX Abandonment Less Tax Equals Contractor’s Net Cash Flow

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• WI = 50%
• State back in 20%
• Royalty = 10%
• Cost recovery max 70%
• Profit share 80%/20%
• Tax @30% paid by Contractor
• WI = 50%
• Royalty = 10%

Tax & Royalty PSC

Assumptions:

• WI = 50%

UK

Company Net Reserves ≡ Company Share of Pre Tax Revenue

Gross vs. Net Reserves (Entitlement) – PSC

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• In the normal case, the contractor is obligated to pay income tax out of his share of the

project profit.

• In such cases, the contractor’s tax obligation impacts the project’s economic performance

but has no impact on the reserve calculations because reserves are calculated on a before tax basis.

• In many production sharing agreements, however, the government or state owned oil

company agrees to pay tax on behalf of the contractor.

• If, under the terms of the contract the contractor derives a benefit from and an economic

interest in the hydrocarbon volumes used to fund the tax payments, those payments may be considered as the contractor’s reserves...

• The contractor’s cost recovery and profit share are computed in the standard fashion, but

instead of being the contractor’s entitlement before tax, they may now be viewed as the net entitlement after tax.

• The revenue entitlement after tax must be grossed up by an amount equal to the tax paid on

the contractor’s behalf.

Gross vs. Net Reserves (Entitlement) – PSC

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Gross vs. Net Reserves (Entitlement) – PSC

Contractor pays Tax @30% NOC pays Contractor Tax @30%

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PRMS update 2017

The purpose of this new release is:

• Improve the clarity and granularity of

current PRMS guidelines

• Consider further alignment with COGEH
• Provide more of a link to the systems in

Norway and Russia

• Expected end 2017?

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Updates expected to be included in PRMS 2017 – as presented by OGRC in 2016

Some specifics:

• Lease Fuel – further clarity on treatment of lease fuel (#8)
• New categories:
• Proved Reserves (can now be uneconomic) (#5)
• Project Economic 2P Reserves – recognition that companies plan and make decision

around the status of the 2P Reserves case. (#5)

• Further clarity on definition of economic vs. commercial (#5)
• Incremental and Scenario (cumulative) methods are allowed but now must give similar

results as a probabilistic method. (#3)

• Split conditions are not allowed (use of different economic assumptions for the 1P from

the 2P or 3P cases). (#2)

• Split classification no longer allowed, i.e. you cannot have 1C with 2P and 3P. (#2)

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Summary

• PRMS guidelines are not prescriptive or black and white, there many grey areas
• All project and evaluations are different – the key is defining the project
• This results in differences in approach and interpretation
• These can lead to very different results
• Much is left to judgement of the Reporting Entity or Auditor
• Errors and misunderstandings are also very common
• There is no substitute for experience

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Thankyou

For further information contact Ed Jankowski at jankowskie@rpsgroup.com