ECON 366: Energy Economics
Topic 2.3: Oil and Gas Reserves, Resources, and Financial Viability
Andrew Leach, Professor of Economics and Law
Reserves and Resources
- What do you think of when you imagine an oil reserve?
- the physical quantity of oil in the ground?
- how much oil we have left?
- Reserves are an economic concept, not a physical one
Reserves are an endogenous variable; they are a function of prices, technology, and markets
Are oil reserves increasing or decreasing?
Reserves and Resources
Understanding Oil Reserves
- Reserves are a difficult concept, since you tend to think of physical quantities
- Fossil fuel reserves are discovered, accessible, recoverable, economically viable quantities of petroleum
- Price influences both exploration and viability
- Reserves may increase or decrease over time (or not?)
- Peak Oil and other doomsday scenarios often caused by not understanding what we see in reserve data
- Oil sands reserves are speculative, economic figures, not simply a measure of the quantity of oil in place
Oil and gas evaluation handbook
Resources and Reserves
Resources
The term resource refers to a volume of petroleum estimated to exist in a naturally occurring accumulation within rocks and includes all known volumes and estimated volumes yet to be discovered.
The COGEH recognizes two resource subcategories:
- contingent resources are hydrocarbon deposits that are discovered but not commercially viable;
- prospective resources are hydrocarbon deposits that are not yet discovered.
Resources and Reserves
Reserves
Reserves refers to the remaining volume of petroleum that could be recovered from a known resource that is either already being produced or could begin production within about five years. Reserves must be recoverable under proven technology, and production must be economically viable.
The COGEH recognizes three reserve categories:
- proved (1P), proved plus probable (2P) and possible (3P) reserves;
Canadian entities are required to report on proved (1P) and proved + probable (2P) reserves under NI 51-101.
See AER ST-98
Proved (P) and Proved plus Probable (2P) Reserves
Proved Reserves are those quantities of Petroleum that, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be commercially recoverable from known reservoirs and under defined technical and commercial conditions. There should be at least a 90% probability that the quantities actually recovered will equal or exceed estimated proved reserves.
Probable Reserves are additional reserves over-and-above proved reserves, estimated such that it is equally likely that actual remaining quantities recovered will be greater than or less than the sum of the estimated Proved plus Probable (2P) reserves (i.e. there should be at least a 50% probability that the actual quantities recovered will equal or exceed the 2P estimate).
Discovery
A discovered petroleum accumulation is determined to exist when one or more exploratory wells have established through testing, sampling, and/or logging the existence of a significant quantity of potentially recoverable hydrocarbons and thus have established a known accumulation.
See SPE PRMS
Alberta Bitumen Reserves
Classifying Oil Reserves
Companies may also report more detailed reserve breakdowns:
- developed vs undeveloped
- producing vs non-producing
- hydrocarbon type
- location
- extraction technology
US vs Canadian disclosure
US disclosure is based on historic prices and costs
- future prices assumed to follow the trailing 12-month average price, calculated as the average of the first-day-of-the-month price for of the previous 12 months prior to the end of the reporting period
- SEC used to use single day value, pre-2008
- 2009 changes also included bitumen as a potential oil reserve!
Canadian disclosure is based on forecast prices and costs
Price Deck Sample
Example: Suncor Reserve Declaration
Example: Suncor 2015 Reserve Declaration
Key concept review
- Reserves and resources
- 1P 2P reserves, contingent resources
- US vs Canadian disclosure
- Suncor info: NPV10, boe, etc. (not specific numerical details, but basic concepts)