Royal Dutch Shell Evaluation of Oil Reserves — страница 6
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engineering analysis (SEC, Regulations §210.4-10 1978). That includes both evaluation of the quantity and the dollar value of the reserves. In fact, while aiming at the reasonable certainty and greater comparability of oil reserves publicly reported by the oil companies, current system of reporting contradicts the reporting standards that are accepted by industry and is rather confusing for the investors. The main problem with the reporting system as it exists today might be the fact that it omits large part of the oil reserves in the company, namely the reserves that have not yet received Royal Dutch Shell: Evaluation of Oil Reserve reasonably certain geological approval and therefore booked as probable or possible. These reserves are in average 50% larger than the ones reported by the oil companies and therefore constitute the most of the company’s potential oil production in the future (Bentley, 2002). The problems in the current system of accounting for oil and other mineral resources might be tracked down to the time it has been developed in 1978 and approved by US Congress. So called “System 1978” that has been later implemented through rules and guide lines built up by Security and Exchange Commission as well as through the accounting standards of FASB was originally created without having the investors and other market participants as the primer “client” in mind. The Congress created the requirements for reserves disclosure primary targeting the national security and energy security purposes (CERA, 2005). As one is trying to review the evaluation methods and representation patterns for oil reserves that are generally accepted in the industry and recommended by the regulatory authority like SEC, one should perhaps start with the most basic definition, that is definition for reserves probability. On one hand, oil reserves are nothing more that another type of company’s inventories, but unlike the inventories that can be precisely calculated, oil reserves are uncertain. Oil and gas reserves represent the cumulative production of a field until it is completely depleted. Production depends mainly on the volume in place (net pay and area), the geology of the reservoir (porosity, permeability), the physics (engineering) of the fluids (pressure, temperature, saturation, density and viscosity), the development scheme (wells producers and injectors), and the economics (cost and price). The geological uncertainty adds to the economic uncertainties. These uncertainties can only be represented by the range of probabilities. The problem is that investors do not like the uncertainty. Therefore, the guidelines of “reasonable certainty” were issued by SEC in 1978 according to which only proved reserves should be represented. The problem is that everyone can interpret “reasonable certainty” in its own way and it can vary from 51% (more probable than not) to 99% (Laherrere, 2004, p1). Right now, there are as many reserves definitions and evaluation techniques as there are the parties involved in the process. Namely each oil company, each security commission or government department tends to use its own definition for the reserves. This can certainly cause an enormous chaos and lack of comparability between different evaluations issued by different bodies and above all makes the definition of reserves not that certain as it was intended to be initially. Royal Dutch Shell: Evaluation of Oil Reserve Still there are two major groups of definition that can be detected and that are used today by most of the players on the oil market for the financial analysis and for technical analysis of the reserves. These are deterministic and probabilistic definitions as they are represented in Table 2.1: Deterministic Approach Probabilistic Approach Proved (P1) Reasonable certainty Proved (1P) At least 90% Probability Probable (P2) More likely than not Proved + Probable (2P) At least 50% Probability Possible (P3) Less likely than probable Proved + Probable + Possible (3P) At least 10% Probability (Source: Harrell Ryder Scott 24 Oct. 2002 in Laherrere 2004) Method is called deterministic if a single “best estimate” of reserves is made based on known geological, engineering, and economic data. The method of estimation is called probabilistic when the known geological, engineering, and economic data are used to generate a range of estimates and their associated probabilities. Many oil companies base their investments on a most likely case (deterministic), but only after gaining a thorough understanding of the range of reserves and associated probabilities (i.e., probabilistic background).