Oil and gas reserves and resource quantification

Oil and gas reserves denote discovered quantities of crude oil and natural gas from known fields that can be profitably produced/recovered from an approved development. Oil and gas reserves tied to approved operational plans filed on the day of reserves reporting are also sensitive to fluctuating global market pricing. The remaining resource estimates (after the reserves have been accounted) are likely sub-commercial and may still be under appraisal with the potential to be technically recoverable once commercially established. Natural gas is frequently associated with oil directly and gas reserves are commonly quoted in barrels of oil equivalent (BOE). Consequently, both oil and gas reserves, as well as resource estimates, follow the same reporting guidelines, and are referred to collectively hereinafter as oil & gas.

As with other mineral resource estimation, detailed classification schemes have been devised by industry specialists to quantify volumes of oil and gas accumulated underground (known as subsurface). These schemes provide management and investors with the means to make quantitative and relative comparisons between assets, before underwriting the significant cost of exploring for, developing and extracting those accumulations. Classification schemes are used to categorize the uncertainty in volume estimates of the recoverable oil and gas and the chance that they exist in reality (or risk that they do not) depending on the resource maturity. Potential subsurface oil and gas accumulations identified during exploration are classified and reported as prospective resources. Resources are re-classified as reserves following appraisal, at the point when a sufficient accumulation of commercial oil and/or gas are proven by drilling, with authorized and funded development plans to begin production within a recommended five years.

Reserve estimates are required by authorities and companies, and are primarily made to support operational or investment decision-making by companies or organisations involved in the business of developing and producing oil and gas. Reserve volumes are necessary to determine the financial status of the company, which may be obliged to report those estimates to shareholders and "resource holders" at the various stages of resource maturation.

Currently, the most widely accepted classification and reporting methodology is the 2018 petroleum resources management system (PRMS), which summarizes a consistent approach to estimating oil and gas quantities within a comprehensive classification framework, jointly developed by the Society of Petroleum Engineers (SPE), the World Petroleum Council (WPC), the American Association of Petroleum Geologists (AAPG), the Society of Petroleum Evaluation Engineers (SPEE) and the Society of Economic Geologists (SEG). Public companies that register securities in the U.S. market must report proved reserves under the Securities and Exchange Commission (SEC) reporting requirements which shares many elements with PRMS. Attempts have also been made to standardize more generalized methodologies for the reporting of national or basin level oil and gas resource assessments.

An oil or gas resource refers to known (discovered fields) or potential accumulations of oil and/or gas (i.e undiscovered prospects and leads) in the subsurface of the Earth's crust. All reserve and resource estimates involve uncertainty in volume estimates (expressed below as Low, Mid or High uncertainty), as well as a risk or chance to exist in reality, depending on the level of appraisal or resource maturity that governs the amount of reliable geologic and engineering data available and the interpretation of those data.

Estimating and monitoring of reserves provides an insight into, for example, a company's future production and a country's oil & gas supply potential. As such, reserves are an important means of expressing value and longevity of resources.

In the PRMS, the terms 'Resources' and 'Reserves' have distinct and specific meaning with respect to oil & gas accumulations and hydrocarbon exploration in general. However, the level of rigor required in applying these terms varies depending on the resource maturity which informs reporting requirements. Oil & gas reserves are resources that are, or are reasonably certain to be, commercial (i.e. profitable). Reserves are the main asset of an oil & gas company; booking is the process by which they are added to the balance sheet. Contingent and prospective resource estimates are much more speculative and are not booked with the same degree of rigor, generally for internal company use only, reflecting a more limited data set and assessment maturity. If published externally, these volumes add to the perception of asset value, which in turn can influence oil & gas company share or stock value. The PRMS provides a framework for a consistent approach to the estimation process to comply with reporting requirements of particularly, listed companies. Energy companies may employ specialist, independent, reserve valuation consultants to provide third party reports as part of SEC filings for either reserves or resource booking.

Reserves reporting of discovered accumulations is regulated by tight controls for informed investment decisions to quantify differing degrees of uncertainty in recoverable volumes. Reserves are defined in three sub-categories according to the system used in the PRMS: Proven (1P), Probable and Possible. Reserves defined as Probable and Possible are incremental (or additional) discovered volumes based on geological and/or engineering criteria similar to those used in estimating Proven reserves. Though not classified as contingent, some technical, contractual, or regulatory uncertainties preclude such reserves being classified as Proven. The most accepted definitions of these are based on those originally approved by the SPE and the WPC in 1997, requiring that reserves are discovered, recoverable, commercial and remaining based on rules governing the classification into sub-categories and the declared development project plans applied. Probable and Possible reserves may be used internally by oil companies and government agencies for future planning purposes but are not routinely or uniformly compiled.