Comparative Reserves Definitions: U.S.A., Europe, and the Former Soviet Union (includes associated paper 28020 )

Abstract

Summary Reserves definitions in use in the Former Soviet Union (FSU) are described and discussed. The U.S. Securities and Exchange Commission (SEC) and SPE deterministic definitions and the 1983 World Petroleum Congress (WPC) probabilistic (1P, 2P, and 3P) definitions commonly used in Europe are compared with the A, B, C, and D system used in the FSU. We discuss the strengths and weaknesses of each system, the implication for quantification of reserves and resources in each area, and the translation difficulties between systems. Introduction Reserves definitions have evolved in response to specific goals. Requirements and standards are fundamentally different when the goal is consistent financial reporting or providing collateral than when the goal is making an investment decision. As a result, the fiscal environment and maturity of the reserves evaluation target have played a key role in the evolution of formal reserves definitions. The role of "certainty" is at the core of such differences. While such philosophical differences are fundamental, they are also a serious stumbling block in communicating basic quantitative information on oil and gas reserves. U.S. definitions are most applicable to mature situations and tend to be conservative, resulting in considerable reserves growth through positive revision. Lower confidence categories normally are not formalized, which limits their use in immature field evaluations and for corporate planning. WPC definitions are probabilistic and use uncertainty as the criterion for defining reserves categories. The FSU system recognizes reserves categories as a function of maturity but tends to apply economically unfounded theoretical aspects to the quantification process. As a result, such estimates tend to err on the optimistic side. With the U.S. oil industry rapidly becoming international and with the FSU an industry focal point, it is vital to understand the different reserves evaluation systems. We then can comprehend the difficulties in translation between systems and can better understand the valuable information in the lower confidence categories, which is vital for evaluating international investment decisions. Also, future revisions to SPE definitions will benefit from certain concepts incorporated in the FSU system. Background SPE formed a committee some years ago to investigate the merits of changing the existing reserves definitions. There was a growing concern in the industry that SPE definitions had application drawbacks in certain circumstances and that application of SPE definitions was difficult or even inappropriate when addressing many international reserves evaluation situations. The main controversy concerns methods of integrating or translating the deterministic approach adopted by the SPE definitions into the WPC definitions, which are probabilistic and are the standard in some international areas. To add fuel to this fire, the recent "opening" of the FSU introduced a third system, which is based on concepts common to SPE and WPC systems. Because few details and little discussion on the FSU system has reached western literature, this paper documents FSU definition construction and then compares and contrasts aspects of the three systems. Refs. 1–5 provide detailed discussions of the SPE and WPC systems. Resources vs. Reserves The FSU reserves classification system adopts an approach that is fundamentally different from SPE and WPC systems. The FSU approach first recognizes the natural progression of resource identification, delineation, and conversion to reserves. Resources and reserves are classified by where a reservoir, field, or region is in this sequence. This is similar to the classic concepts proposed by the U.S. Geological Survey (USGS) and diagrammatically expressed as the McKelvey box.6 While the industry embraces this concept, formal linkage of McKelvey's "measured," "indicated,"and "inferred" categories with standard industry use of "proved," "probable,"and "possible" has not occurred because of differences in concept and purpose.7 However, the McKelvey box is extremely useful for illustrating conceptual similaries and differences between reserves classification systems. McKelvey, former director of the USGS, developed the box in 1972. The box represents the total volume of unproduced mineral resources and classifies such volumes with reference to a horizontal axis representing degree of geologic and engineering certainty and a vertical axis representing the range of economic feasibility of mineral recovery (Fig. 1).