Abstract

Proved reserves is the class of crude oil and natural gas resources in whose recovery we have high confidence. Investors, bankers, governments, and the media perceive proved reserves as the basic assets of petroleum exploration and production (E&P) companies, and downward revisions of proved reserves, especially if they are unanticipated, negatively impact the value of such firms. Many reserves write-downs stem directly or indirectly from a long-standing, fundamental flaw in the definition of proved reserves as an estimate of future production that the estimator is reasonably certain will be achieved or exceeded. However, because no specific confidence level (= probability) is specified for reasonable certainty, and different estimators and companies have different standards, proved reserves is an inconsistent metric, so estimators cannot be accountable. This basic unaccountability taints the entire field of reserves estimating.

The proved-reserves issue is only one aspect of a larger conceptual and procedural problem in petroleum E&P: how to best measure and express the uncertain quantities of oil and gas thought to be recoverable from wells, properties, fields, prospects, and plays owned by E&P companies. Traditional methods are deterministic, where single-number estimates represent uncertain future production volumes or segments of variously uncertain future oil or gas recoveries (proved, probable, and possible). Probabilistic methods, where ranges of possible recoverable volumes are associated with their perceived likelihood, have, by now, been widely embraced by the exploration part of E&P, whereas the production/development arm of the industry has been slow to surrender the use of determinism.

Considering six clear advantages of the probabilistic approach, it may be difficult to understand why determinism persists, but there are pragmatic reasons why some segments of E&P, the accounting profession, the banking and financial community, news media, and governmental regulators and administrators prefer to use deterministic values. Joint technical committees of the leading professional E&P societies are currently addressing these issues in the hope of achieving an improved, more uniform approach.

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