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Western reserves definitions

Renaissance Capital

20 June 2019

Russian oil & gas

SPE-PRMS or SEC?

This section is to aid the understanding of reserves classifications, and, in particular, to address the difference between Western and Russian reserves classifications. We note that the Western reserves classification system has undergone significant changes between 2007 and 2010, which were aimed at unifying two historically different approaches used by the Society of Petroleum Engineers (SPE) and the US Securities and Exchange Commission (SEC):

▪A new Petroleum Resources Management System (PRMS) was approved by the SPE board of directors in March 2007.

▪The SEC version (originally in place since 1978), traditionally more restrictive than SPE-PRMS, adopted a more balanced approach from 1 January 2010, which has moved it a lot closer to the SPE-PRMS standards.

We detail the key differences between the two systems in Figure 109.

Figure 109: Main differences between Western reserves classification standards

SPE-PRMS 2007

SEC-1978

SEC-2010

Intended purpose Reserves Resources

Proven reserves

Producibility

Volumes

Economic test

Methodology

General application – not country-specific Proven, probable, possible Contingent and prospective

Reasonable certainty

Production or formation test (analogue permitted in some cases)

Range

Forecast prices and costs

12-month historical average Deterministic

Probabilistic (defined percentages)

	Securities reporting in the US	Securities reporting in the US
	Proven only, others not permitted	Proven, probable, possible
	Not permitted or addressed	Not permitted (unless required by law)
	Reasonable certainty (more restrictive than SPE-	Reasonable certainty (similar to SPE-
	PRMS)	PRMS, recognising reliable technology)
	Conclusive test (Gulf of Mexico exception)	Use of ‘reliable technology’
	Single number	Range
	Single day price and no inflation of costs or prices	12-month historical average price
		No inflation
	Deterministic (preferred)	Deterministic
	Probabilistic (permitted, not defined)	Probabilistic (defined percentages)

Source: GCA, Renaissance Capital

The revised 2010 SEC guidelines differ in three key areas: an expanded definition of reserves (to include probable and possible reserves, as well as bitumen and other nontraditional resources); fewer limitations with regard to the types of technology that can be applied; and improved applicable economic forecasting methods. The 2010 rules make the SEC standards look more like SPE-PRMS rules.

In particular, the revised SEC standards allowed for voluntary disclosure of probable and possible reserves from 1 January 2010, while these had not been allowed previously. In addition, oil & gas companies are now able to report non-traditional reserves, such as

“saleable hydrocarbons, in the solid, liquid, or gaseous state, from oil sands, shale, coalbeds, or other non-renewable natural resources which are intended to be upgraded into synthetic oil or gas, and activities undertaken with a view to such extraction”, while previously these were excluded under SEC guidance.

The 2010 SEC standards also feature fewer limitations on the types of technology that can be used to establish reserves estimates and categories by adopting a new definition of reliable technology. This particularly applies to the identification of fluid contacts and to assignment of reserves beyond direct offsets, which are now based on development spacing, as opposed to ‘legal offsets’ used previously. The SEC requires that evidence is provided that the technology is reliable in providing the results claimed.

In addition, the new SEC guidelines moved away from a single-day year-end pricing rule (that had to be applied to test the economic feasibility of the reserves) in favour of 12month average pricing, same as in the SPE-PRMS standards. However, the SEC rule does not allow for any inflation to be priced in, while SPE-PRMS allows economic evaluation based on a reasonable forecast of future conditions.

No large differences between SEC and SPE-PRMS standards

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	Renaissance Capital
	20 June 2019
	Russian oil & gas
Kinds of reserves
Proved reserves
Proved reserves are those quantities of petroleum, which by analysis of geoscience and	Those that offer reasonable certainty
engineering data, can be estimated with reasonable certainty to be commercially
recoverable, from a given date forward, from known reservoirs and under defined
economic conditions, operating methods and government regulations. The area of a
reservoir considered proved includes:

▪That portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any.

▪The adjacent undrilled portions of the reservoir that can reasonably be judged as continuous with it and commercially productive on the basis of available geoscience and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir.

▪Reserves in undeveloped locations may be classified as ‘proved’ provided that:

1.The locations are in undrilled areas of the reservoir that can be judged with reasonable certainty to be commercially productive.

2.Interpretations of available geoscience and engineering data indicate with reasonable certainty that the objective formation is laterally continuous with drilled proved locations.

▪For proved reserves, the recovery efficiency applied to these reservoirs should be defined based on a range of possibilities supported by analogues and sound engineering judgment considering the characteristics of the proved area and the applied development programme.

Proved developed reserves

Developed reserves are expected quantities to be recovered from existing wells and facilities.

▪Developed producing reserves are expected to be recovered from completion intervals that are open and producing at the time of the estimate.

▪Developed non-producing reserves include shut-in and behind-pipe reserves.

Proved undeveloped reserves

Undeveloped reserves are quantities expected to be recovered through future investments.

Probable reserves

From existing assets

From new wells, or existing ones after further capital commitment

Probable reserves are those additional reserves which analysis of geoscience and engineering data indicate are less likely to be recovered than proved reserves but more certain to be recovered than possible reserves. 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. In this context, when probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the 2P estimate.

Probable reserves have a better than 50% chance of being produced

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Possible reserves

Possible reserves are those additional reserves which analysis of geoscience and engineering data suggest are less likely to be recoverable than probable reserves. The total quantities ultimately recovered from the project have a low probability to exceed the sum of proved plus probable plus possible (3P) reserves, which is equivalent to the high estimate scenario. In this context, when probabilistic methods are used, there should be at least a 10% probability that the actual quantities recovered will equal or exceed the 3P estimate.

Contingent resources

These are quantities of petroleum estimated to be potentially recoverable from known accumulations, but the applied project(s) are not yet considered mature enough for commercial development due to one or more contingencies. Contingent resources may include, for example, projects for which there are currently no viable markets, or where commercial recovery is dependent on technology under development, or where evaluation of the accumulation is insufficient to clearly assess commerciality. Contingent resources are further categorised in accordance with the level of certainty associated with the estimates and may be sub-classified based on project maturity and/or characterised by their economic status.

Prospective resources

These are quantities of petroleum estimated to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective resources have both an associated chance of discovery and a chance of development. Prospective resources are further subdivided in accordance with the level of certainty associated with recoverable estimates assuming their discovery and development and may be sub-classified based on project maturity.

Reconciling the two

Despite the large differences in approach to determining reserves, the Russian and Western categories can be roughly reconciled, as we show in Figure 110.

Renaissance Capital

20 June 2019

Russian oil & gas

There is at least a 10% probability that the actual quantities recovered will equal or exceed the 3P estimate

Potentially recoverable from known accumulations

Potentially recoverable from undiscovered accumulations

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Renaissance Capital 20 June 2019

Russian Oil & Gas

Figure 110: Differences in reserve classification

Temporary classification 2001

New classification 2016

Western reserve classification

Proved:

A

• Geologically & geophysically examined

A

Reserves which geological and engineering or drilling data

• Delineated by exploration & production

demonstrate to be recoverable under existing economic and

Explored/Commercialreserves

• Engineering data show recoverability

Explored/Commercialreserves

of30%+B+A C1

C1

sharea+B1+A of B2

B1

Same as C1 in the 2001 classification for Producing

operating conditions

• Reserves adjacent to A and B categories

• Represent reserves in current production

Same as A + B in the 2001 classification

B

• Geologically & geophysically examined

• Evaluated by adequate drilling

• Engineering data show recoverability

• Represent unused producing capacity

30%

• Geologically & geophysically evaluated

fields

• Verified by minimal drilling

C1

Probable:

• Engineering data show partial recoverability

Same as C1 in the 2001 classification for non-

Incompletely defined reserves estimated to occur:

(30% will shift to B and then A categories)

• In known producing areas / extensions of endowed areas

Producing fields

C1

• As above

• In undiscovered areas within known resource-bearing geologic

70%

trends

• Recoverable under existing economic and operating conditions

C2

+ D2

B2

Same as C2 in the 2001 classification for Producing

• Presumed to exist, based on favourable geologic and

fields

Possible:

70%Remainingof C1 + C2 + C3 + D1 + D2

shareRemainingof B2 + C1 + C2 + C3 + D1

geophysical data analogous to that of verified reserves

C2

Same as C1 in the 2001 classification for non-

Inferred reserves estimated to occur:

• In undiscovered areas analogous to other known resource-bearing

Producing fields

geologic trends

• Recoverable under existing economic and operating conditions

Resources

Resources

Prospectivereserves

Prospectivereserves

C3

• Prospective resources prepared for drilling

C3

Unchanged

D1

• Speculative reserves presumed to exist, based on

D1

Unchanged

geologic analogy to reference areas

• Some will shift to “C2” category

D2

• Speculative reserves presumed to exist, based on

D2

Unchanged

geologic analogy to reference areas

• Less evaluated than “D1”

• Some will shift to “D1” category

Source: IEA Russia Energy Survey 2002, TatNIPIneft, Renaissance Capital

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