ECON 366: Energy Economics

class: center, middle, inverse, title-slide

.title[
# ECON 366: Energy Economics
]
.subtitle[
## Topic 2.3: Oil and Gas Reserves, Resources, and Financial Viability
]
.author[
### Andrew Leach, Professor of Economics and Law
]
.date[
### <a href="mailto:aleach@ualberta.ca"> aleach@ualberta.ca</a> <a href="https://github.com/leachandrew"> leachandrew</a> <a href="https://twitter.com/andrew_leach"> @andrew_leach</a> 
]

---

# 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?

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# Reserves and Resources

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# 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

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# Oil and gas evaluation handbook

<img src="coge.PNG" width="800px" style="display: block; margin: auto;" />
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# 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.

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# 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](https://www.bcsc.bc.ca/-/media/PWS/Resources/Securities_Law/Policies/Policy5/51101-NI-July-1-2015.pdf).

.site_link[See [AER ST-98](https://www.aer.ca/providing-information/data-and-reports/statistical-reports/st98/reserves)]
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# 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).

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# 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.

.site_link[See [SPE PRMS](https://www.spe.org/en/industry/reserves/)]

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# PRMS

.site_link[See [SPE PRMS](https://www.spe.org/en/industry/reserves/)]
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# Alberta Bitumen Reserves

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# Alberta Crude Oil Reserves

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# Classifying Oil Reserves

Companies may also report more detailed reserve breakdowns:
- developed vs undeveloped
- producing vs non-producing
- hydrocarbon type
- location
- extraction technology

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# 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
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# Canadian disclosure

[Sproule](https://sproule.com/price-forecast/)

[McDaniel](https://mcdan.com/price-forecasts/)

[GLJ](https://www.gljpc.com/historical-forecasts)

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# Price Deck Sample

<hr.space-1>

.site_link[See [GLJ Pricing PDF](https://www.gljpc.com/sites/default/files/pricing/Jul23.pdf)]

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# Example: Suncor Reserve Declaration

<hr.space-1>

.site_link[See [Suncor 2022 AIF excerpt](suncor-2021-aif-en.pdf)]

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# Example: Suncor 2015 Reserve Declaration

<hr.space-1>

.site_link[See [Suncor 2015 AIF excerpt](suncor-2015-aif-en.pdf)]

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# 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)