Transcript 07 Oil and gas reserves estimating
OIL AND GAS RESERVES ESTIMATING
WE HAVE MET THE ENEMY, AND HE IS US
Peter R. Rose Senior Associate, Rose & Associates, LLP., and President AAPG Austin, Texas
RULES OF THE GAME
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Write your name on the form Follow instructions Try hard to answer objectively Write your answers down No joint ventures -- work independently P90 is a small number; P10 is a large number
DETERMINISTIC ESTIMATE
A single number (best guess) among a wide range of possible real outcomes.
Low confidence in being precisely correct.
Amount of uncertainty affects willingness to invest in your estimate.
UNCERTAINTY & CONFIDENCE
FOR $20, HOW MUCH ARE YOU PREPARED TO BET THAT YOUR BEAN-ESTIMATE IS EXACTLY CORRECT?
$10?
$5?
$2?
$1?
Chance of estimating the exact number of beans?
50¢?
20¢?
10¢?
5¢?
!REMOTE!
EXPRESSING CONFIDENCE I
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Traditional Engineering Convention - ±10%?
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Ranges of Numbers Corresponding to Confidence:
Confidence (=,>) Confidence (=,>) > 10 beans
very, very high
> 100 beans
high
> 1,000 beans
moderate
> 200 beans
fairly high
> 2,000 beans
low
> 20,000 beans
very, very low
EXPRESSING CONFIDENCE II LET US SPECIFY
: “High Confidence” = 90% sure =, > P90 value “Low Confidence” = 10% sure =, > P10 value “50/50 Confidence” = 50% sure =, > P50 = Median
Superiority Of Probabilistic Method “. . . still just estimates cloaked in probabilities?”
Advantages: 1. Measure our estimating accuracy by comparing probabilistic forecasts against actual outcomes 2. Use statistical principles to make better estimates (lognormal expectation, calculate mean of distribution, defined low-side & high-side criteria
P1 P10 P50 P90 P99
PRACTICAL ATTRIBUTES OF KEY PARAMETERS
Geologically possible; but extremely unlikely Reasonable Maximum Half below, Half above, the Median Reasonable Minimum As small as it could be . . . Yet detectable
Boundary Conditions 80% confidence level
Superiority Of Probabilistic Method “. . . still just estimates cloaked in probabilities?”
Advantages: 1. Measure our estimating accuracy by comparing probabilistic forecasts against actual outcomes 2. Use statistical principles to make better estimates (lognormal expectation, calculate mean of distribution, defined low-side & high-side criteria 3. Reality-checks -- natural limits, unrealistic extremes, analog distributions 4. Faster, more efficient
Compare your original “best estimate” (circled number, item 2, colored form) with your neighbor Does anyone in the audience have a circled number that is EXACTLY
Another bean slide . . .
New confidence-level:
NOTE: REASONABLE CERTAINTY ≠ “BEST GUESS
I am “Reasonably Certain” that there are ________ beans or more.
NOTE: THIS IS A PROBABILITY STATEMENT, ALTHOUGH NO PROBABILITY (= CONFIDENCE LEVEL) IS SPECIFIED
WHAT IS YOUR REASONABLE CERTAINTY?
50%? 67%? 75%? 80%? 90%? 95%? 99%?
HOW CAN YOU MEASURE YOUR ESTIMATING ABILITY USING AN UNDEFINED CRITERION?
COMPLICATIONS
1. A larger estimate may be in your personal interest 2. Your boss may prefer larger to smaller estimates 3. Possible consequences if actual result is less than your estimate a) Negative Press b) Employer Disciplines c) State Penalizes
U.S. SEC REFUSES TO SPECIFY THE CONFIDENCE-LEVEL OF
“REASONABLE CERTAINTY”
. . . BUT SEC will not specify confidence level assigned to “PROVED”
“Proved” Reserves
www .sec.gov / divisions / corpfin / forms / regsx. htm
. . . are the estimated quantities which geological and engineering data demonstrate with
reasonable certainty
to be recoverable. . . This is the foundational statement of what we think is an outdated (1978) system. Let’s take a look at the evolution of the wording
“Proved” Reserves
Yergin and Hobbs, 2005 ogj
API 1936 Every reasonable probability Capen SPE 5579 Proved probable & possible SPE 1964 1976 1981 1987 1997 Reasonable certainty Revised def.
for proved Probabilistic methods guidelines published US SEC 1978 1982 Proved w reasonable certainty Year-end pricing
DETERMINISM GETS INCREASINGLY COMPLEX
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Proved, Probable, Possible
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Developed & Undeveloped
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Weighting schemes to account for uncertainty
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? Applicability to Undrilled Prospects and Plays?
PROBABILISTIC ESTIMATING COMES TO PETROLEUM EXPLORATION ( ≈ 1985
)
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Exploration is a “repeated-trials game” of many uncertain ventures
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Statistical treatment is appropriate
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Statistics = “Language of Uncertainty”
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Aids to Improved Estimating --
Lognormality
Reality Checks
Project post-audits
improved estimating skills
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Leads to Portfolio Management
PROBABILISTIC ESTIMATING: STANDARD EXPLORATION PRACTICE
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Tipping Point mid-1990s
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SPE/WPC acknowledged in 1997, recognizing both Deterministic and Probabilistic approaches
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SPE/WPC recommendation: Proved = 90% Confidence
Reserves Estimating: A Divided Industry
Exploration: Fully Probabilistic Production: Mostly Deterministic
(Proved, Probable, Possible, Developed, Undeveloped, etc.)
TWO VIEWS OF E&P WORK: Deterministic View: ← UNCERTAINTY → Probabilistic View: ← UNCERTAINTY → “THE ANSWER” (Determinism) STOP!
Use this time & $$ to find other prospects
Determinism Promotes Unaccountability Attempts to represent highly uncertain parameters with a single, “precise” number, and without expressing how much uncertainty surrounds it.
Proved, Probable, Possible: terms not defined quantitatively, so impossible to measure and calibrate estimating abilities objectively
So the Deterministic Method is unaccountable to:
Professionals
Clients and Employers
Investors
General Public
PROBABILISTIC METHODS PROMOTE ACCOUNTABILITY All possible outcomes are assigned likelihood of occurrence Compare estimates with outcomes:
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Detects and measures bias
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Encourages learning and improved estimating Compatible with Portfolio Management Adaptable to considerations of Chance of Success Can be universally applied to all E&P projects (Plays, Prospects, Developments, Workovers, EOR’s, etc.)
? Resistance to change?
? Propped up by SEC?
? Accountants can’t deal with uncertainty?
? Encourages false confidence?
? Desire to remain unaccountable?
DETERMINISM ENCOURAGES UNREALISTIC THINKING ABOUT HIGHLY UNCERTAIN RESOURCE VALUES
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Executives, Board Members, Bankers, Analysts, Stockholders
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Enables Decision-makers to maintain unwarranted confidence
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Discourages realistic assessments of uncertainty and risk
One Simple Remedy to Start Fixing the Problem A unified statement from the E&P professional community that “Proved” = 90% confidence.
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Imposed Definition on SEC
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Support of Professional Societies?
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Support of Influential Companies?
Industry professionals created this problem - Why don’t we, as responsible Professionals, change it?
(Walt Kelly, POGO)
OIL AND GAS RESERVES ESTIMATING
WE HAVE MET THE ENEMY, AND HE IS US
Peter R. Rose Senior Associate, Rose & Associates, LLP., and President AAPG Austin, Texas