Abstract

Exploration and production (E&P) efforts represent repeated trials involving many uncertain ventures, so a statistical treatment of the associated undiscovered resources is appropriate. However, when we consider the required reporting of proved reserves after a specific discovery, we are currently required to specify a volume of hydrocarbons that we are “reasonably certain” will be economically recovered from wells associated with that discovery. The phrase “reasonable certainty” is a probability statement, except that no confidence level is specified by the governing authorities. Company appraisers may be influenced that larger estimates (if defendable) benefit the value of their company shares and perhaps their status in a company, whereas various negative consequences may ensue if actual outcome turns out to be smaller than the reasonably certain estimate. We view this clash of probabilistic methods versus determinism as an illogical professional conundrum. Because deterministic parameters are not probabilistically specified, a professional's estimating ability cannot be properly measured and calibrated. Without a rigorous process for reality checking, this approach encourages unrealistic thinking about uncertain resource values and thus can facilitate technical and financial unaccountability. In fact, ill-defined standards can actually encourage unethical behavior through confusion and manipulation, obscuring boundaries between professional objectivity and conflicting incentive systems.

The solution can be complex because of the many factors associated with uncertainty in subsurface parameters, product prices, government takes, and capital costs. However, the solution can be addressed by full disclosure, plus the development of a unified standard within the E&P community of probabilistic reserve definitions for “proved,” “probable,” and “possible” reserves. Full disclosure of probabilistic reserve estimates will (1) facilitate the reality checking of estimates against analogs and natural limits, (2) help measure estimating accuracy against actual outcomes, (3) encourage improvements in future estimating accuracy and efficiency, and (4) provide transparency to the public.

Until more uniform standards are developed and enforced, E&P entities will continue to use resource numbers beyond the proved level as a basis for decision making, as they are more relevant for the business planning and portfolio management of their shareholders' assets.

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