RRRRReeeeesssssererererervvvvvoir Engoir Engoir Engoir Engoir Engininininineeeeeering for Gering for Gering for Gering for Gering for GeeeeeolooloolooloologggggistsistsistsistsistsArticle 2 – COGEH Reserve Classifications by Gary Metcalfe, P. Eng., Vice President Evaluations

In 2004, the Royal Dutch Shell Groupreported five separate write-downs of 3,900MSTB, 250 MSTB, 200 MSTB, 100 MSTB, andone undisclosed volume. In that same year,El Paso reported a 41% write-down inreserves from 4,500 BCF to 2,600 BCF.Where did the reserves go? The answer is…nowhere! These write-downs resultedfrom misinterpretation of standards andguidelines for reserve classification. Thereported oil and gas volumes likely exist; itwas just a matter of premature classificationinto the proved reserves category.

The Canadian Securities Administrators(CSA), through National Instrument 51-101(NI 51-101), sets the standards for disclosureof oil and gas activities for companies listed

on Canadian stock exchanges. The definitionsand standards for reserve appraisals andevaluations are defined in the Canadian Oiland Gas Evaluation Handbook (COGEH).

Reserves are the estimated remainingquantities of oil and natural gas and relatedsubstances anticipated to be recoverablefrom known accumulations based on analysisof drill ing, geological, geophysical, andengineering data; established technology; andspecific economic conditions.

Under the COGEH definitions, the reportedproved reserves are those estimated with ahigh degree of certainty to be recovered,probable reserves are less certain to berecovered than proved, and possible are

those less certain to be recovered thanprobable. The degree of certainty is definedas:

Proved: 90% probability of meeting orexceeding the estimated proved volume(P90).

Proved plus probable: 50% probability ofmeeting or exceeding the sum of theestimated proved plus probable volume(P50).

Proved plus probable plus possible: 10%probability of meeting or exceeding the sumof the estimated proved plus probable pluspossible volume (P10).

Figure 2.1. COGEH reserves and resources classification.

Each of the reserve classifications can bedivided into Developed and Undevelopedcategories, with the developed categoryfurther subdivided into Producing and Non-producing.

REQUIREMENTS FOR RESERVEREQUIREMENTS FOR RESERVEREQUIREMENTS FOR RESERVEREQUIREMENTS FOR RESERVEREQUIREMENTS FOR RESERVECLCLCLCLCLAAAAASSSSSSIFICSIFICSIFICSIFICSIFICAAAAATIONTIONTIONTIONTIONWithin COGEH, there are requirements andprocedures for classifying reserves. Theconditions that must be met to assignreserves are:

• Drilling – accumulation must have awell;

• Testing – accumulation must haveevidence of commercial productionfrom a test;

• Economics – for producing reserves,cash flow and NPV must be positive;for undeveloped reserves, areasonable return on investment mustbe demonstrated; and

• Regulatory – prohibitive governmentrestraints must be incorporated whenestimating appropriate levels of risk.

MEMEMEMEMETHODTHODTHODTHODTHODS OF ES OF ES OF ES OF ES OF ESSSSSTIMATIMATIMATIMATIMATING RETING RETING RETING RETING RESESESESESERRRRRVVVVVEEEEESSSSSReserves can be estimated usingdeterministic or probabilistic methods:

Deterministic: A single value assigned foreach input parameter of the reservescalculations is used. The appropriate valuefor each reserve category must be selected.The majority of reserves in Canada areestimated using this method.

Probabilistic: A full range of values are usedfor each input parameter into the reservecalculation. Reserve estimates can beextracted from a Monte Carlo type ofanalysis at the various confidence levels P90,P50, P10, etc. This method pertains mainly tovolumetric evaluations prior to the onset ofproduction.

Both the deterministic and probabilisticmethods will be presented in subsequentarticles.

AAAAAGGGGGGGGGGREREREREREGGGGGAAAAATION OF RETION OF RETION OF RETION OF RETION OF RESESESESESERRRRRVVVVVEEEEESSSSSUnder COGEH, the P90, P50, and P10 valuesare reported at the corporate level, not atthe entity (well/property) level. Whendeterministic methods are used, simplesummation of all individual entities within aportfolio provides the aggregate total.

With probabi l ist ic methods, reservedistributions for the individual entities mustbe combined in accordance with the laws ofprobabi l ity to determine the correctdistribution for the aggregate. The arithmeticP90 summation will be less than the P90 ofthe aggregate (i.e., too conservative) and

conversely the arithmetic summation of P10will exaggerate the upside and be optimisticcompared to the P10 from the aggregatedistribution.

For reserve reporting to an investment typeaudience, probabilistic aggregation poses aproblem as a P90 aggregate type corporatedisclosure cannot be allocated back oridentified in any individual well or propertyor prospect.

RESOURCESRESOURCESRESOURCESRESOURCESRESOURCESThe NI 51-101 regulations also allow for thedisclosure of information for propertieswith no attributed reserves. The generalreserve / resource classifications as they aredefined in COGEH (see Figure 2.1: COGEHReserves and Resources Classification, p. 30),are as follows:

Resources are l imited to discovered(known) and undiscovered accumulations.Contingent resources are discovered but notcurrently economic. Prospective resourcesare undiscovered but are technically viableand economic to recover. These resourcesare further classi f ied into Low(conservative), Best (realistic) and High(optimistic) estimates.

There are no detailed guidelines in COGEHfor resource appraisals; however, COGEHdoes recommend probabilistic evaluation. Ifresources are subitted in an NI 51-101report, disclosure must include volumes, netpay, areal extent, flow rates, land, seismic,wells, exploration / development programs,and capital expenditures. The expl icitdisclosure of risk and / or probability ofsuccess are also required. This is problematicin that a single probability estimate is notpossible to calculate.

RECENT DEVELOPMENTS IN RESERVESRECENT DEVELOPMENTS IN RESERVESRECENT DEVELOPMENTS IN RESERVESRECENT DEVELOPMENTS IN RESERVESRECENT DEVELOPMENTS IN RESERVESCLCLCLCLCLAAAAASSSSSSIFICSIFICSIFICSIFICSIFICAAAAATIONSTIONSTIONSTIONSTIONSInternational propertiesThe scrutiny of oi l and gas reservescontinues to increase, especially as more andsmaller Canadian issuers are competing inthe U.S. and international markets. Thefinancial world is attempting to create a setof global accounting standards through theInternational Accounting Standards Board(IASB). The IASB expects reserve estimatesto reflect expected values rather thanconservative (proved) estimates and believesreserve estimates should be presented as arange reflecting uncertainty.

Petroleum Resource ManagementSystem (PRMS)Establishing a rigorous, harmonized, anduniversal reserves and resourcesclassification system for all stakeholders (oilindustry, accountants, regulators, business /f inancial analysts, investors, andgovernments) is an ongoing process. Therecent 2007 SPE / AAPG / WPC / SPEE {etrp;ei,Respirce <amage,emt Suste, (PRMS) has beenproposed as the new standard for petroleumreserve and resource classi f icat ion,definition, and guidelines. This system has a“commercial ity” or “projectmaturity”subclass (see Figure 2.2: ProjectStatus Categories / Commercial Risk).

The United Nations Economic Commissionfor Europe (UNECE) and the United NationsFramework Classification for Fossil Energyand Minerals Resources (UNFC) bothrecognize project maturity (along witheconomic viability and geological knowledge)as the basic criteria for categorization andalignment of energy management and financialreporting. To this end, it appears the UNFCand the PRMS definitions are compatible.

Figure 2.2. Project status categories / commercial risk (sourced from SPE Oil and Gas Committee FinalReport - December 2005).

Figure 2.3. Multi-well gas pool example reserves classification (sourced from Canadian Oil and GasEvaluation Handbook, Volume 2, Secion 6 - Procedures for estimation and calssification of reserves, Figure6-2B).

Figure 2.4. Aggregation (summation)issues (sourced from Kemirmen, Ferruh, Society of Petroleum EngineersPaper #103434, Figure 10).

PRMS is an ongoing, long-term process. Ifthese new standards are developed andimplemented, Canadian and U.S. regulatorsmust respond posit ively and provideregulatory enforcement in order to gain thetrust of investors and have credibility in themarketplace.

Unconventional Reserves andResourcesThe industry is investing heavi ly intechnology to improve recovery andprocesses for unconventional extra heavyoil, tight gas sands, CBM, oil shales, and gashydrates. The classification and technicalstandards for these unconventional reserves/ resources must conform to the system usedfor conventional reservoirs.

The COGEH Volume 3 “Detailed Guidelinesfor Estimation and Classification of CBMReserves and Resources” is in draft stage atthe time of writing this article. This hugeundertaking is likely the first publicationdealing specifically with classifying, defining,and quantifying unconventional reserves andresources.

Reserves Evaluator TrainingThe SPEE/WPC/AAPG and SPE have formedthe Joint Committee on Reserves EvaluatorTraining (JCORET) to investigate trainingcourses for reserve evaluators that focus, inpart, on reserves and resources definitions,classification, and applications. Discussionson qual i f icat ions and standards forprofessional reserve evaluators and auditorsare ongoing.

CONCLUSIONCONCLUSIONCONCLUSIONCONCLUSIONCONCLUSIONThe reason for NI 51-101 and COGEH is toprovide the shareholder/ investor/stakeholder with consistent and reliablereserves information using standardizedreporting guidelines in a format that can bewidely understood. While the COGEHframework al lows for def init ions andclassifications for current conventional andunconventional reserves and resources, theclassification and definition of reserves is anever-evolving process. COGEH will continueto be modified to adapt to new technologyand standardization in a global economy.

REFERENCESREFERENCESREFERENCESREFERENCESREFERENCESKemirmen, Ferruh, 2007. “ReservesEstimation: The Challenge for the Industry,”Society of Petroleum Engineers Paper#103434, In Journal of Petroleum TechnologyMay 2007, P80-89.

Canadian Oil and Gas Evaluation Handbook,First Edition, November 1, 2005, Volume 2,Detailed Guidelines for Estimation andClassification of Oil and Gas Resources and

Reserves. Section 6: Procedures forEstimation and Classification of Reserves,2005.

Oil and Gas Reserves Committee, MappingSubcommittee Final Report – December2005: Comparison of Selected Reservesand Resource Classifications andAssociated Definitions, 2005. Richardson,Texas: Society of Petroleum Engineers.http://www.spe.org/web/ogr/OGR_mapping_Final_Report_15Dec05.pdf.