6 Oil and gas reserves

6.2 Reserves categories and reporting

There are inherent difficulties in estimating petroleum reserves accurately, not only within a given area or play (as described above), but also within a single field. Reserves never equate solely with physical measurements such as the petroleum-saturated pore volume in a trap, but instead are influenced by a combination of technological, commercial, and sometimes political, factors, as are all other physical resources.

Petroleum reserves are an estimate of future cumulative production from known fields, and they are typically defined in terms of a probability distribution into ‘proved’, ‘probable’ and ‘possible’ categories. A probability cut-off of 90% is often used to define proved reserves, meaning that there is a better than 90% chance that they will be produced over the lifetime of the field. Although there is no single technical definition of proved reserves, a commonly used description is as follows:

The estimated quantities of petroleum which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under current economic and operating conditions.

Probable reserves are often considered to have a better than 50% chance of being technically and economically producible, whilst possible reserves are those which are estimated to have a significant, but less than 50% chance of being technically and economically producible.

In general, a proportion of a field's probable and possible reserves tends to get converted into proved reserves over time, as experience from its operating history reduces the uncertainty around what remains in the reservoir. This is an aspect of the phenomenon referred to as ‘reserves growth’. As Box 4 illustrates, petroleum companies have to be very careful in assigning their reserves to the proper category since most value is attached to those that are proven.

Box 4: Reserves reporting

During the course of a turbulent 18 months of financial reporting between 2003 and 2005, Royal Dutch/Shell Group announced its fifth reduction of proven reserves. The ‘write-downs’ amounted to 8 × 108 toe, or 30% of the company's total reserves originally reported for 31 December 2002. Regulatory authorities fined Shell about $150 million for committing stock market abuse and breaching the reporting rules. Shell has also agreed to commit a further $5 million to developing and implementing an internal compliance programme.

The importance of proper reserves reporting is to allow investors and the public at large to put a value on the assets of oil companies and to make comparisons between them. However, this only works if all companies report reserves to the same standards. Financial accounting rules, and thereby reserves reporting, vary from country to country.

The United States Securities and Exchange Commission (SEC) define the accounting standards that must be adhered to by companies listed on the New York Stock Exchange. Their definition of ‘proved reserves’ was first published in 1978. This has created numerous problems for companies because technology has not stood still in the meantime. As an example, advances in 3-D seismic, direct hydrocarbon detection and refined reservoir models, all allow far greater precision in establishing in-place and recoverable reserves than was possible a quarter of a century ago.

The SEC engineers themselves state that ‘it is difficult, if not impossible, to write reserve definitions that easily cover all possible situations’. Nevertheless, the thrust of the SEC definition remains that companies may disclose only proved reserves that have been demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions.