Transcript 07 Oil and gas reserves estimating

OIL AND GAS RESERVES
ESTIMATING
WE HAVE MET THE ENEMY,
AND HE IS US
Peter R. Rose
Senior Associate, Rose & Associates, LLP.,
and President AAPG
Austin, Texas
RULES OF THE GAME
1.
Write your name on the form
2.
Follow instructions
3.
Try hard to answer objectively
4.
Write your answers down
5.
No joint ventures -- work independently
6.
P90 is a small number; P10 is a large
number
DETERMINISTIC ESTIMATE
A single number (best guess) among
a wide range of possible real
outcomes.
Low confidence in being precisely
correct.
Amount of uncertainty affects
willingness to invest in your estimate.
UNCERTAINTY & CONFIDENCE
FOR $20, HOW MUCH ARE YOU PREPARED
TO BET THAT YOUR BEAN-ESTIMATE IS
EXACTLY CORRECT?
$10?
$5?
$2?
$1?
50¢?
20¢?
Chance of estimating
10¢?
5¢?
the exact number of beans?
!REMOTE!
EXPRESSING CONFIDENCE I
• Traditional Engineering Convention -- ±10%?
• Ranges of Numbers Corresponding to
Confidence:
Confidence (=,>)
Confidence (=,>)
> 10 beans
very, very high
> 200 beans
fairly high
> 100 beans
high
> 2,000 beans
low
> 1,000 beans moderate
> 20,000 beans very, very low
EXPRESSING CONFIDENCE II
LET US SPECIFY:
“High Confidence” = 90% sure
=, > P90 value
“Low Confidence” = 10% sure
=, > P10 value
“50/50 Confidence” = 50% sure
=, > P50 = Median
Superiority Of Probabilistic Method
“. . . still just estimates cloaked in probabilities?”
Advantages:
1. Measure our estimating accuracy by comparing
probabilistic forecasts against actual outcomes
2. Use statistical principles to make better estimates
(lognormal expectation, calculate mean of
distribution, defined low-side & high-side criteria
PRACTICAL ATTRIBUTES OF
KEY PARAMETERS
P1
P10
P50
P90
P99
Geologically possible; but extremely unlikely
Reasonable Maximum
Half below, Half above, the Median
Reasonable Minimum
As small as it could be . . . Yet detectable
Boundary
Conditions
80% confidence level
Superiority Of Probabilistic Method
“. . . still just estimates cloaked in probabilities?”
Advantages:
1. Measure our estimating accuracy by comparing
probabilistic forecasts against actual outcomes
2. Use statistical principles to make better estimates
(lognormal expectation, calculate mean of
distribution, defined low-side & high-side criteria
3. Reality-checks -- natural limits, unrealistic extremes,
analog distributions
4. Faster, more efficient
 Compare your original “best
estimate” (circled number, item 2,
colored form) with your neighbor
Does anyone in the audience have a
circled number that is EXACTLY
Another bean slide . . .
New confidence-level:
NOTE: REASONABLE CERTAINTY ≠ “BEST GUESS
I am “Reasonably Certain” that there are
446
________
beans or more.
NOTE: THIS IS A PROBABILITY STATEMENT, ALTHOUGH
NO PROBABILITY (= CONFIDENCE LEVEL) IS SPECIFIED
WHAT IS YOUR REASONABLE CERTAINTY?
50%? 67%? 75%? 80%? 90%? 95%? 99%?
HOW CAN YOU MEASURE YOUR ESTIMATING
ABILITY USING AN UNDEFINED CRITERION?
COMPLICATIONS
1. A larger estimate may be in your personal
interest
2. Your boss may prefer larger to smaller
estimates
3. Possible consequences if actual result is less
than your estimate
a) Negative Press
b) Employer Disciplines
c) State Penalizes
U.S. SEC REFUSES TO SPECIFY
THE CONFIDENCE-LEVEL OF
“REASONABLE CERTAINTY”
. . . BUT SEC will not specify
confidence level assigned to “PROVED”
“Proved” Reserves
reasonable certainty
www .sec.gov / divisions / corpfin / forms / regsx. htm
. . . are the estimated quantities which geological
and engineering data demonstrate with
reasonable certainty to be recoverable. . .
This is the foundational statement of what
we think is an outdated (1978) system.
Let’s take a look at the evolution of the wording
“Proved” Reserves
reasonable certainty
Yergin and Hobbs, 2005 ogj
API 1936
Every reasonable
probability
Capen
SPE 5579
1964
SPE
Reasonable
certainty
US SEC
Proved
probable &
possible
1976
1981
1987
Revised def.
for proved
1978
1982
Proved w Year-end
reasonable pricing
certainty
1997
Probabilistic
methods
guidelines
published
DETERMINISM GETS
INCREASINGLY COMPLEX
• Proved, Probable, Possible
• Developed & Undeveloped
• Weighting schemes to account for
uncertainty
• ? Applicability to Undrilled Prospects
and Plays?
PROBABILISTIC ESTIMATING COMES TO
PETROLEUM EXPLORATION (≈ 1985 )
• Exploration is a “repeated-trials game” of
many uncertain ventures
• Statistical treatment is appropriate
• Statistics = “Language of Uncertainty”
• Aids to Improved Estimating -Lognormality
Reality Checks
Project post-audits  improved estimating skills
• Leads to Portfolio Management
PROBABILISTIC ESTIMATING:
STANDARD EXPLORATION PRACTICE
• Tipping Point mid-1990s
• SPE/WPC acknowledged in 1997,
recognizing both Deterministic and
Probabilistic approaches
• SPE/WPC recommendation:
Proved = 90% Confidence
Reserves Estimating: A Divided Industry
Exploration: Fully Probabilistic
Production: Mostly Deterministic
(Proved, Probable, Possible,
Developed, Undeveloped, etc.)
TWO VIEWS OF E&P WORK:
STOP!
Use this time &
$$ to find other
prospects
“THE ANSWER”
(Determinism)
TIME & $$
P10
← UNCERTAINTY →
P90
TIME & $$
← UNCERTAINTY →
Probabilistic View:
P50
Deterministic View:
Determinism Promotes Unaccountability
Attempts to represent highly uncertain parameters with
a single, “precise” number, and without expressing
how much uncertainty surrounds it.
Proved, Probable, Possible: terms not defined
quantitatively, so impossible to measure and calibrate
estimating abilities objectively
So the Deterministic Method is
unaccountable to:
 Professionals
 Clients and Employers
 Investors
 General Public
PROBABILISTIC METHODS
PROMOTE ACCOUNTABILITY
All possible outcomes are assigned likelihood of
occurrence
Compare estimates with outcomes:
• Detects and measures bias
• Encourages learning and improved estimating
Compatible with Portfolio Management
Adaptable to considerations of Chance of Success
Can be universally applied to all E&P projects
(Plays, Prospects, Developments, Workovers, EOR’s, etc.)
? Resistance to change?
? Propped up by SEC?
? Accountants can’t deal with uncertainty?
? Encourages false confidence?
? Desire to remain unaccountable?
DETERMINISM ENCOURAGES
UNREALISTIC THINKING ABOUT HIGHLY
UNCERTAIN RESOURCE VALUES
• Executives, Board Members, Bankers,
Analysts, Stockholders
• Enables Decision-makers to maintain
unwarranted confidence
• Discourages realistic assessments of
uncertainty and risk
One Simple Remedy to Start Fixing the Problem
A unified statement from the E&P professional
community that “Proved” = 90% confidence.
•Imposed Definition on SEC
•Support of Professional Societies?
•Support of Influential Companies?
Industry professionals created this problem -Why don’t we, as responsible Professionals, change it?
(Walt Kelly, POGO)
OIL AND GAS RESERVES
ESTIMATING
WE HAVE MET THE ENEMY,
AND HE IS US
Peter R. Rose
Senior Associate, Rose & Associates, LLP.,
and President AAPG
Austin, Texas