The untold story behind natural gas and oil reserves:
There is plenty of confusion about "reserves".
And no wonder!
A common view in the upstream industry (especially among geologists and geophysicists!) is that the geologists find the reserves ... and then the petroleum engineers take them away. It comes from a difference in perspective. Geologists look at the big picture with a grandiose arm-wave, while some petroleum engineers might be thought of as 3-dimensional accountants (counting barrels instead of beans).
The problem begins when the geologist's exploration prospect is drilled, and newly discovered reserves are categorized. The petroleum engineer's "recoverable reserves" may amount to only a 1/3, or even 1/4 (or less!), of the geologist's "reserves in place" (OOIP).
Still, even a geologist's projections can appear to be downright conservative, when compared to the projections macro-statisticians who are sometimes obliged to guess-timate: things like probable future reserves, and possible future reserves and undiscovered recoverable reserves.
When the economic limit of a field or a well is taken into account (for example, in connection with a bank loan), reserves must be classified as either "proved" or "un-proved" ... and then further classified as "producing" or "non-producing". (And this is just here in the U.S.)
In this country, the guys who do the reserve estimations, are petroleum engineers, but the guys who make the rules, about how the quantity of reserves must be reported to the public, are the accountants and attorneys of the Securities Exchange Commission (SEC). And ... as is often said in the oil field:
" ... they wouldn't know a Kelly bushing from a sand grain!".
(If you're best friend is an accountant or an attorney, please don't take offense; it's just an expression ... which in this case may be pretty accurate. Or not.)
And of course each state has its own regulatory reporting requirements (in order to collect taxes on production), and there is also reporting to the Department of Energy (DOE).
SEC rules are conservative. In fact they are so conservative that there is a phenomenon commonly referred to as 'reserve growth' or 'reserve appreciation' (the reserves of a field tend to increase over time). In fact it is neither any kind of growth; it is a reporting phenomenon. What happens is this: as more wells are drilled in a field, there are more and better scientific data on which to categorize the field reserves,and to then estimate the recoverable portion. As time goes by, the effect of this evolution is that the volumes of recoverable reserves in a field that are allowed to be reported under SEC rules, increase. (Of course this is not always the case; there are always exceptions.)
Bear in mind that throughout all of this, the volume of reserves that are economically recoverable will depend on the price of oil and natural gas at some time in the future when the reserves are produced. (Higher oil and natural gas prices translated into more reserves.)
If you want to know about reserves - PDP, PDNP, PUD, BHP, EUR ... and how they are discovered, developed, produced and sold ... and who gets what in the process, then you need to get a copy of MONEY IN THE GROUND. (If you have time for only one book about the oil business, this is the one!)
All of the terms italicized above (along with hundreds of others) are thoroughly explained in MONEY IN THE GROUND, the Industry's Standard Reference on the business side of the upstream oil and gas business.
John Orban (the author) advises clients
on upstream Oil & Gas opportunities
(U.S. and International).
" Don't lay a nickel on the table until you've read this book . . ."
DOUG BENTIN, Columnist
MONEY IN THE GROUND -
Insider's Guide to Oil Deals
4th Edition 2006; 416pp.
by John Orban
Click here or book cover
for a montage of example pages
What do others say?
1 PETROLEUM - "Rock Oil"
2 GEOLOGY - Where are the rocks?
3 LAND - Who owns the land?
4 DRILLING - Getting to the rocks
5 CASING POINT ELECTION - Are there holes in the rocks?
6 COMPLETION - Is there oil in the holes?
7 PRODUCTION - Getting it out of the ground
8 SELLING OIL AND GAS - Who gets what?
9 TAXES - General Since the Boston Tea Party
10 TAX BENEFITS - For the oil and gas investor
11 DEAL STRUCTURES - Among oil industry partners
12 LIMITING LIABILITY - and the flow-thru principle
13 OIL & GAS PROGRAMS - for investors
14 ALTERNATIVES - Investors Choice
15 PERFORMANCE - "A bird in the hand..."
16 NEW TECH - Theres always a better way...
17 WHAT ABOUT THE FUTURE?
A Oil Terms Severance Tax Basins
B Authorization for Expenditure
C Tax & Securities Law Influence Oil Deals
D Classifications for Federal Income Tax Purposes
E Risk Factors
F New Technology
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