Society of Petroleum Engineers

Oil and Gas Reserves Committee

(OGRC)

Mapping Subcommittee
Final Report December 2005

Comparison of Selected
Reserves and Resource Classifications
and Associated Definitions

Mapping Subcommittee:
John Etherington
Torbjorn Pollen
Luca Zuccolo
 Table of Contents
Page

Executive Summary 3

Introduction 5
Classifications/Definitions Studied 6

Method of Study 8

Summary Comparison by issuing Agency

o Overview of Category and Class Mapping 9

o US Security and Exchange Commission (SEC-1978) 11
o UK Statement of Recommended Practices (SORP-2001) 12
o Canadian Security Administrators (CSA -2002) 13
o Russian Ministry of Natural Resources (RF-2005) 14
o China Petroleum Reserves Office (PRO2005) 16
o Norwegian Petroleum Directorate (NPD2001) 18
o United States Geological Survey (USGS-1980) 20
o United Nations Framework Classification (UNFC-2004) 22

Findings and Analysis

Overview - Classification Approach 24

Comparison by Major Issue 25

o Classification by Discovery Criteria 25
o Classification by Commercial Criteria 27
o What is Commercial?
o Project Status Categories
o Classification by Uncertainty 29
o Deterministic vs Probabilistic Methods
/Aggregations Issues
o Proved Reserves Criteria 31
o Unproved Reserves Definitions 32
o Improved Recovery (IR) 33
o Developed vs Undeveloped Reserves 34
o Other Issues 34
o Proved without Probable
o Lease Fuel
o Reserves Reference Point
o Unconventional Hydrocarbons
o Resource Entities

Conclusions and Recommendations 37

1
 Appendix A

Detailed Descriptions of Agencies Classifications/Definitions

Summary and Detailed (tables) Comparison to SPE Reserves Definitions

o US Security and Exchange Commission (SEC-1978)

o UK Statement of Recommended Practices (SORP-2001)

o Canadian Security Administrators (CSA -2002)

o Russian Ministry of Natural Resources (RF-2005)

o China Petroleum Reserves Office (PRO2005)

o Norwegian Petroleum Directorate (NPD2001)

o United States Geological Survey (USGS-1980)

o United Nations Framework Classification (UNFC-2004)

2
Executive Summary

In October 2005, the Mapping subcommittee of the SPE Oil and Gas Reserves
Committee (OGRC) completed a study of reserve/resource classification systems
published by the following eight international agencies:

1. US Security and Exchange Commission (SEC - 1978)

2. UK Statement of Recommended Practices (SORP -2001)
3. Canadian Security Administrators (CSA -2002)
4. Russian Ministry of Natural Resources (RF-2005)
5. China Petroleum Reserves Office (PRO 2005)
6. Norwegian Petroleum Directorate (NPD 2001)
7. United States Geological Survey (USGS - 1980)
8. United Nations Framework Classification (UNFC- 2004)

The overall structure of, and reserves definitions within, each system were compared to
the 1997 SPE/WPC reserves definitions, the 2000 SPE/WPC/AAPG classification, the
2001 supplemental guidelines, and the 2004 glossary (hereafter referred to as the SPE
definitions).

Although the terminology varies, there is a high degree of commonality:

All systems define major resource categories that can be mapped directly to the SPE
categories: undiscovered (prospective resources), discovered unrecoverable, discovered
sub-commercial (contingent resources) and discovered commercial (reserves).

Most classifications recognize three deterministic scenarios with decreasing

technical certainty: a low estimate, best estimate and high estimate. While probabilistic
assessments are not commonly applied, it is generally accepted that the equivalent
estimates on a cumulative probability distribution would be greater than or equal to P90,
P50 and P10 respectively. For discovered and commercial volume estimates, the
discrete (incremental) volumes within these bounds are generally referred to as proved,
probable and possible reserves. The Russian, UNFC and USGS recognize similar
certainty classes but use alternative terminology.

The regulatory agencies typically define a subset of the total classification for disclosure
to investors and further impose specific rules around technical and commercial certainty.
The SEC guidance is the most restrictive while the Canadian and UK regulations allow
disclosures more closely aligned with assessments used for internal resource
management.

The UNFC uniquely provides a high-level classification system that can be applied to all
extractive industries including energy minerals (petroleum, coal and uranium).

Based on analysis of each agencys classification system, the subcommittee collated the
following potential best practices for review by the OGRC subcommittee charged to
recommend revisions to current SPE reserves and resource definitions:

3
 Utilize a consistent set of criteria to segregate discovered from undiscovered without
reference to ultimate commerciality. All such discovered volumes should be initially
categorized as contingent resources.

Estimates of recoverable quantities must clearly identify the development project(s)

applied to a specific accumulation (reservoir) and its in-place hydrocarbons. The
project-reservoir intersect becomes the resource entity for which an uncertainty
distribution of recoverable quantities is defined. The project maturity/chance of reaching
production status is used to segregate reserves from contingent resources.

To maintain consistency, the same class confidence hurdles (P90/P50/P10) should

be applied to estimates whether assessed using deterministic or probabilistic methods
Although the assessment should support either arithmetic summation or probabilistic
aggregation, the guidelines should clearly identify that these certainty guidelines apply to
the project-reservoir entity.

From a business perspective, the inclusion of additional deterministic technical and

commercial criteria for reserves classes (proved, probable, possible) or discrete
estimates (1P, 2P, 3P) may have value in providing increased consistency in
assessments. However, these should be provided as guidelines and not imbedded in the
class definitions. The definitions should be broad enough to accommodate such criteria
as imposed by regulatory agencies.

Apply developed/undeveloped status to all reserves classes. Reserves that remain

undeveloped beyond a reasonable period demonstrate lack of commitment and should
be reclassified as contingent resources.

The definitions should encompass all hydrocarbons whether conventional or

unconventional (gas, liquid or solid phases) irrespective of the extraction method and
processing applied.

The total system should provide for accounting of all components to support mass
balance; that is, the sum of produced, recoverable, production/processing losses and
unrecoverable quantities should equal the estimated initially-in-place hydrocarbons. The
guidelines should provide the option, subject to regulatory rules, of including
hydrocarbons to be consumed as fuel in production and processing as reserves and
contingent resources.

Documentation regarding reserves and resources is best presented in a more structured

manner consisting of:
Overall Resource Classification chart and resource category definitions
Reserves Definitions high level, principle-based
Application Guidelines detailed guidance, subject to periodic revisions
Application Examples illustrations of both common and exceptional issues

The format used by the Petroleum Society of the Canadian Institute of Mining,
Metallurgy and Petroleum in their 2002 definitions provides a useful template.

4
Introduction

The goal of resource classifications is to provide a common framework for estimating

quantities of oil and gas, both discovered and undiscovered, associated with reservoirs,
properties and projects. The classification should cover volumes originally in-place,
technically and/or commercially recoverable, on production or already produced. Ideally,
subsets of a single classification system could be used by regulatory agencies,
government departments, and internally by the operating companies.

In 2000, the Society of Petroleum Engineers (SPE) jointly with the World Petroleum
Council (WPC) and the American Association of Petroleum Geologists (AAPG)
published a Reserve and Resource Classification to address the requirement for an
international standard. The underlying Reserves Definitions were unchanged from those
published by the SPE/WPC in 1997. Additionally, in 2001 the SPE/WPC/AAPG jointly
published Guidelines for the Evaluation of Petroleum Reserves and Resources as
clarifications for the application of the 2001 and 1997 documents. Further clarification
was provided in the Glossary of 2005, in particular by the definition of the term
commercial, and thereby reserves. The total information contained in these four
documents is referred to hereafter as the current SPE definitions.

At the September 2004 Annual Technical Conference and Exhibition, the leadership of
the SPE and the OGRC jointly developed a grand vision that reads:

To have a set of reserves & resource definitions (and an associated set of estimating
guidelines, which are current best practices) universally adopted by the oil industry,
international financial organization and regulatory reporting bodies.

In order to achieve this vision, the OGRC discussed several key options to clarify
and/or revise existing SPE Reserves and Resource Definitions. In December 2004, two
subcommittees were established to progress this project:

the Definitions Subcommittee was charged with reviewing the current SPE
definitions documents in detail to identify internal inconsistencies and ambiguities,
identify key issues not addressed, examine improved presentation formats, and
ultimately draft a revised set of documents.

the Mapping Subcommittee was charged with examining key alternative

classification and definitions that are, or have the potential to be, broadly applied to
reserves and resources reporting and prepare a detailed comparison of each to the
current SPE definitions.

This document contains the results of the Mapping Subcommittees findings. The survey
of each agency provides the OGRC with a useful summary of major classifications
currently being applied. The focus of this report is to identify those features that deserve
further study by the Definitions Subcommittee in their task to clarify/revise the existing
SPE definitions.

The Mapping Subcommittee consisted of: John Etherington (Consultant Canada),

Torbjorn Pollen (Statoil - Norway) and Luca Zuccolo (ENI- Italy) and was chaired by
John Etherington.

5
Classifications/Definitions Studied

The subcommittee reviewed and compared eight sets of classifications and definitions
as published by the following agencies:

1. US Security and Exchange Commission (SEC-1978)

2. UK Statement of Recommended Practices (SORP-2001)
3. Canadian Security Administrators (CSA -2002)
4. Russian Ministry of Natural Resources (RF-2005)
5. China Petroleum Reserves Office (PRO-2005)
6. Norwegian Petroleum Directorate (NPD2001)
7. United States Geological Survey (USGS-1980)
8. United Nations Framework Classification (UNFC-2004)

While there are several other major classifications/definitions that may be examined in
the future, these eight represent an appropriately diverse mix used in securities
regulations, government reporting, and/or for companies internal resource/asset
management. The eight agencies selected can be categorized as follows with additional
reference to the depth of associated documentation (see figure 1):

Security Documentation Type Government International

Disclosures Reporting Standards

SPE/WPC/AAPG
Reserves & Resource Classification

UNFC
USGS
Russia (GKZ)

China (PRO)
Norway (NPD)
Canadian (CSA)

Reserves & Resource Definitions

Application Guidelines
UK-SORP
SEC

Disclosure Rules

Application Examples

Figure 1: Categorization of Agencies Surveyed

o Securities Disclosures: SEC, Canadian (CSA), UK SORP.

These agencies define rules for defining proved and/or 2P reserves estimates to
be disclosed to security investors for publicly traded oil and gas companies. The
primary objective is to provide consistent volume and associated value
assessments such that investors may compare financial performance. The
estimation guidelines are imbedded in their financial accounting regulations.
Typically no overall reserve and resource classification context is supplied and
the application guidelines take on the format of rules. Canadas approach is
unique in that the security regulations reference a full classification, definitions
and detailed assessment guidelines that are maintained by professional
societies, not by the regulatory agency.

6
o Government and industry reporting: Norway, the Russian Federation, China, USGS.
These agencies attempt to capture the full resource base in order to project
future production potential for the country and are not primarily concerned to
show recoverable volumes and values accruing to individual companies.
Governments need this information regarding production and reserves to
implement and modify legislation and policy (fiscal terms, licensing incentives,
etc.) on resource development to manage energy supply. In the case of Norway,
the governments classification is also used internally by the Norwegian
companies to manage their oil and gas portfolios (for those listed on U.S. stock
exchanges, they must also estimate proved reserves under SEC guidelines). The
USGS conducts future potential of the world studies based on geological-based
assessment units that cut across political boundaries to support long-range
global energy supply analyses.

o Technical Standards: United Nations Framework Classification (UNFC), SPE.

The SPE and UNFC definitions are presented as independent standards to
promote international consistency in total resource assessment processes and
terminology. The SPE classification and definitions are the current de facto
standard and most oil and gas companies have adapted it into their internal
systems. The UNFC incorporates the SPE standards for petroleum within an
overall classification system applicable to all the energy minerals (including coal
and uranium). The UNFC is endorsed by the UN Economic and Social Council, a
top level body in the UN, equivalent to the Security Council, but for economic and
social affairs. SPE and UNFC committees are currently coordinating to ensure
their classifications are synchronous and have a common set of application
guidelines.

Given the diversity of oil and gas accumulations and development projects, there can be
significant interpretation latitude, not only in the estimation of recoverable quantities, but
also in their logical classification. Thus, to promote consistency in application, it is
beneficial to have a comprehensive set of application examples that cover the key
issues. None of the agencies currently have such examples. The professional societies
that maintain the Canadian technical guidelines are in the process of publishing an
extensive set of such examples showing the recommended interpretations for each.

7
Method of Study
The subcommittee made extensive use of websites and published papers to gather
information on the reserves and resources classifications and associated definitions
utilized by the identified agencies. The committee established a contact person within
the Canadian, Russian, Chinese, USGS and UNFC agencies to act as an advisor and to
validate comparisons to their definitions. For the SEC, UK-SORP and Norwegian
agencies, the committee sought advice from SPE members experienced in applying
these systems.

The selected definitions are published by international organizations such as the United
Nations or are part of reporting requirements defined by government agencies. In some
cases the definitions are extracted from regulatory reporting requirement documents
including legislation to prescribe company disclosures to securities investors of oil and
gas reserves and associated financial data.

In order to achieve consistency for analyses, a standard template was developed to

document the classification/definitions of each agency surveyed and consists of:
Overview of the Agency issuing the classification.
A summary description of the classification.
A comparison to the SPE/WPC/AAPG 2000 (SPE) classification with a discussion of
key differences.
A table detailing a comparison to the SPE reserves definitions.

In order to consolidate the definitions into a manageable-sized table, it was necessary to

summarize lengthy sections of text. This often involved rewording sections and
eliminating other sections. A complete documentation of each agencys classification is
included in Appendix A. An abbreviated summary of the classifications and a
comparison to the SPE system is included herein under the heading Summary
Comparisons by issuing Agency.

It must be emphasized that the SPE does not claim that the classification and definitions
as documented in this study represent the authoritative version of these agencies
guidelines; users should obtain official copies of the guidelines directly from the issuing
agencies. Readers are referred to the agencies publications (in many cases these are
available on websites) that are the official source of technical and commercial criteria.

Based on their review of these classifications, the subcommittee identified the underlying
key principals of a hydrocarbon classification scheme and critically evaluated the varying
approaches herein under the heading Findings and Analysis. The focus was on
identifying those features that, if adopted and adapted, have the potential to strengthen a
revised SPE reserves and resource classification and associated definitions.

8
Summary Comparisons by Issuing Agency

Overview of Category and Class Mapping

Based on reviews of the agencies documentation and discussions with experts in each
classification, the subcommittee constructed a series of correlation tables to identify
categories and classes that are generally equivalent but use different terminology.

Table 1 correlates the major status categories. All the major classifications define 3
major categories: undiscovered, discovered sub-commercial and discovered
commercial.
SPE SEC UK-SORP CSA RF PRO NPD USGS UNFC
2001 1978 2001 2002 2005 2005 2001 1980 2003
In-Place
Total Petroleum
Total PIIP Total PIIP Total PIIP Total PIIP ** Total PIIP Total PIIP
Initially-In-Place
Discovered
Discovered Discovered Geological Geological Discovered Discovered
Petroleum **
PIIP PIIP Reserves Reserves PIIP PIIP
Initially-In-Place
Undiscovered
Undiscovered Undiscovered Geological Undiscovered Undiscovered Undiscovered
Petroleum **
PIIP PIIP Resources PIIP PIIP PIIP
Initially-In-Place
Recoverable
Discovered + Recoverable Remaining
Resources Resources
Undiscovered Resources Recoverable
Produced Historical Cumulative
Produced Production Production Production Production Production Produced
Reserves Production Production
Recoverable Recoverable Identified
Discovered Discovered Discovered Discovered Discovered **
Reserves Reserves Resources
Economic - Economical
Discovered Normally Initially (Economic)
Reserves Reserves Reserves Reserves Reserves Reserves
Commercial Profitable Recoverable Reserves
Reserves Reserves*
Contingently
Discovered Contingent Contingent Profitable & Contingent Marginal Contingent
*
Sub-commercial Resources Resources Subeconomic Resources Reserves Resources
Reserves
Residual Demonstrated
Discovered (Discovered) (Discovered) Unrecoverable
Unrecoverable ** Subeconomic Unrecoverable
Unrecoverable Unrecoverable Unrecoverable Reserves
Volumes Resources
Prospective Prospective Recoverable Recoverable Undiscovered Undiscovered Prospective
Undiscovered
Resources Resources Resources Resources Resources Resources Resources
Residual
Undiscovered (Undiscovered) (Undiscovered) Unrecoverable
Unrecoverable ** Unrecoverable
Unrecoverable Unrecoverable Unrecoverable Resources
Volumes

* Chinese classification is EUR-based - includes production. Contingent Resources equivalent is technically recoverable minus economically recoverable
** The NPD classification is for recoverable quantities only based on development projects.

Table 1: Correlation of Status Categories

There is general consensus to apply the term reserves or economic reserves to the
discovered commercial category. The term geological reserves is applied to
discovered in-place volumes in China and Russia. The undiscovered category is
variously referred to as prospective, recoverable or undiscovered resources; the
common denominator is the term resources as opposed to reserves. Resources is
also commonly used as a general term for all discovered and undiscovered volumes.
The discovered sub-commercial category is variously termed contingent resources or
contingent (or marginal) reserves. The regulatory agencies typically define a subset of
the total reserves and resources for public disclosures; the SEC and UK-SORP rules
cover only a portion of reserves while the Canadian (CSA) guidelines allow the option to
also report contingent and/or prospective resources. The Norwegian Petroleum

9
Directorates classification does not include in-place categories; it applies only to
volumes recovered by development projects.

Table 2 compares terminology used for discovered volumes based on technical certainty
classes. Most classifications recognize three cumulative estimates or scenarios based
on decreasing technical certainty: low/best/high estimate. Many agencies apply specific
terms to the associated incremental volumes; the SPE terms in the discovered
commercial category are proved, probable and possible. While the same low/best/high
estimates are applied to contingent and prospective resources, only the Chinese, USGS,
and UNFC provide terms for the incremental estimates.
SPE SEC UK-SORP CSA RF* PRO ** NPD USGS UNFC***
2001 1978 2001 2002 2005 2005 2001 1980 2003
In-Place
Low Estimate Increment Measured
Best Estimate Increment Indicated
High Estimate Increment Inferred

Recoverable
Commercial Low
Increment Proved Proved Proven Proved A+B+C1 PVEIRR Measured 111
Estimate
Cumulative Proved (1P) Proven Proved A+B+C1 PVEIRR Low Est Low Est
Commercial
Increment Probable Probable Probable C2 PBEIRR Indicated 112
Best Estimate
Proved + Proven + Proved +
Cumulative Base Est Best Est
Probable (2P) Probable Probable
Commercial
Increment Possible Possible C2 PSTEUR Inferred 113
High Estimate
Proved + Proved +
Cumulative Probable + Probable + High Est High Est
Possible (3P) Possible
Sub-commercial
Increment PVSEIRR Measured 121, 231
Low Estimate
Cumulative Low Est Low Est Low Est Low Est Low Est
Sub-commercial
Increment PBSEIRR Indicated 122, 232
Best Estimate
Cumulative Best Est Best Est Best Est Base Est Best Est
Sub-commercial
Increment PSTEUR Inferred 123, 233
High Estimate
Cumulative High Est High Est High Est High Est High Est

Table 2: Correlation of Certainty Classes for Discovered Volumes

*The Russian classes AReasonable Assured, BIdentified, and C1-Estimated are roughly
equivalent to proved developed producing, proved developed non-producing and proved
undeveloped. C2 is generally equivalent to probable and possible combined.

**The Chinese make an initial certainty classification based on in-place volumes (measured,
indicated, inferred) that carry through to technically recoverable and ultimately to economically
recoverable. All recoverable estimates are EUR-based (before production). Production is
separated from proved developed leaving PDRER - proved developed remaining economic
reserves. PVEIRR is proved economic initially recoverable; PBEIRR is probable economic initially
recoverable; PVSEIRR is proved sub-economic initially recoverable reserves; PBSEIRR is
probable sub-economic initially recoverable. PSTEUR is possible technical EUR and is not
divided into commercial and sub-commercial.

*** UNFC numeric codes refer sequentially to the level of Economic, Feasibility (project status)
and Geological certainty.

The SPE and CSA use the terms low/best/high estimates for prospective resources, with
the understanding that these recoveries are conditional on discovery. There are no
terms supplied for incremental volumes. Others treat undiscovered as a completely
separate category in which the same technical certainties may not apply; for example,
UNFC codes all undiscovered as 334 where 4 refers to potential geological conditions.

10
US Security and Exchange Commission (SEC-1978)

The SEC rules and guidelines address proved reserves only. The SEC prohibits
additional disclosure of unproved reserves, i.e. probable and possible, as well as
Contingent and Prospective Resources. While SPE and SEC proved reserve definitions
are quite similar, SEC regulations are generally considered to be slightly more
restrictive. Key differences between SEC and SPE systems are:

- While both proved definitions apply current economic conditions, the SEC
specifically requires use of year-end prices and costs while the SPE will, in some
circumstances, allow use of average prices and costs.

- SPE allows use of either deterministic or probabilistic methodologies. While the

SEC does not forbid probabilistic analyses, the disclosed quantities must be
demonstrated to meet the defined deterministic criteria.

- SPE generally requires a well test to classify reserves as proved but can be
waived if the estimate is fully supported by wireline formation tests, logs and
cores. The SEC states that a well test is mandatory and can be only avoided in
the Gulf of Mexico (GOM) deep water if the estimate is fully supported by
seismic, wire line conveyed sampling, logs and cores.

- Both the SPE and the SEC limit proved reserves to those recovered above the
lowest known occurrence of hydrocarbons. In the absence of data on fluid
contacts, SPE states that the lowest known structural occurrence of
hydrocarbons controls the proved limit unless otherwise indicated by definitive
geological, engineering or performance data. In contrast, the SEC effectively
rules out the use of conclusive technical data other than direct well observations
and incremental proved below LKH can only be based on performance history.

- Regarding unconventional hydrocarbons, the SEC allows coal bed methane to

be classified as proved reserves if the recovery is shown to be economic. While
the SEC has ruled that bitumen recovered by mining is not petroleum reserves,
there are no published guidelines for bitumen produced by in situ methods. The
SPE reserve definitions apply to both conventional and unconventional
hydrocarbons.

- The SPE guidelines define developed producing and non-producing status while
SEC defines developed with no sub-categories.

- Both SEC and SPE guidelines set similar criteria around commerciality to include
not only economics but also some evidence of a commitment to proceed with
development projects within a reasonable time frame. This includes confirmation
of market, production and transportation facilities, and the required lease
extensions. Neither set of definitions specifies the documentation to support
these claims. Neither definition requires absolute certainty in terms of
approvals, contracts, market, etc.

- The SEC requires a reasonable certainty of procurement of project financing; the

SPE does not specifically address financing requirements although all proved
reserves must be reasonably certain to be produced.

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UK Statement of Recommended Practices (SORP-2001)

Note: Initial offerings in the UK employ guidelines of the London Stock Exchange (which
have different reserves guidelines) while annual reporting thereafter utilize SORP.
Commercial

Production Reserves

Proved Proved + Probable

Estimate Estimate

Developed Undeveloped

SORP is primarily an accounting standards document. It does not discuss the full
reserves and resource classification system (no possible reserves, no contingent or
prospective resources) nor does it supply detailed guidance on the recommended
evaluation practices. Under SORP, reserves may be disclosed, at companys choice, as
either Proven developed and undeveloped oil and gas reserves (option 1) or Proven
and Probable oil and gas reserves (2P- option 2). These alternatives are mutually
exclusive.

Its 2P definitions clearly require that there should be a 50% statistical probability that
the actual quantity of recoverable reserves will be more than the amount estimated as
proven and probable and a 50% statistical probability that it will be less. Further the
equivalent statistical probabilities for the proven component of proven and probable
reserves are 90% (probability actual =/>than estimated) and 10% (=/< than) respectively.

The commercial and technical criteria for the 2P case are very similar to those set by the
SPE definitions. Specific criteria include:
Reserves may only be considered proven and probable if producibility is supported
by either actual production or conclusive formation test. (SPE probable does not require
a flowing well test.)
2P includes immediately adjoining undrilled portions beyond proved which can be
reasonably judged as economically productive based on available geophysical,
geological and engineering data.
improved recovery 2P reserves can be included on the basis of successful pilots or
operation of an installed program in the reservoir or other reasonable evidence
(successful analogs or reservoir simulation studies).
reserves may be considered commercially producible if management has the
intention of developing and producing them.

The Proven Developed and Undeveloped definitions in Option 1 duplicate those of the
basic SEC guidance, thus SORP does not subdivide Proven Developed into Producing
and Non-Producing. (It is noted that some issuers interpret that while the words
duplicate the SEC proved definitions, there is no obligation to consider the supplemental
guidance issued by SEC staff and thus the reported proved reserves under SORP may
not equal those estimated for SEC disclosures).
Regarding non-conventional hydrocarbons, the Proven definition is taken from the SEC
and the 2P definition does not address the issue.

12
Canadian Security Administrators (CSA- 2002)

The disclosure rules for Canadian registered companies are contained in CSAs National
Instrument (NI) 51-101 which references resource definitions and application guidelines
contained in the Canadian Oil and Gas Evaluation Handbook Volume 1 authored by the
Canadian chapter of the Society of Petroleum Evaluation Engineers. The underlying
reserve definitions are those published by the Petroleum Society of the Canadian
Institute of Mining, Metallurgy and Petroleum in 2002 and referred to hereafter as the
CIM definitions.

NI 51-101 requires two sets of disclosures: Proved plus Probable using a defined
forecast of costs and prices (2P forecast case) and Proved using prices as of the
effective date of the assessment (1P constant case, similar to SEC Proved). Reserves
impairment is based on the 2P forecast case. Issuers have the option of also disclosing
one or all of: possible reserves, contingent resources and prospective resources.

The overall classification is identical and the reserves definitions are very similar to those
of the SPE; however, the following issues are noted:

The CIM definitions state that the qualitative certainty levels are applicable to both
individual Reserve Entities and to Reported Reserves being the sum of entity level
estimates used in disclosures. While defining the same probability hurdles (P90, P50,
P10) as the SPE, the CIM apply these at the reporting level (country or corporation)
while the SPE applies them at the entity level (field, property or project). In large
portfolios the central limit theorem would allow lower confidence targets at the entity
level. (although COGEH still requires a high degree of certainty at the entity level).
Both SPE and CIM guidance discourages fully probabilistic aggregation beyond the
field/project level. However, since the CIM claims that even deterministic estimates have
an inferred confidence level, the same portfolio effect may potentially be reflected in their
deterministic estimates.

Although NI 51-101 does specifically include bitumen (including mined bitumen) as

reserves, the CIM definitions do not address the issue and COGEH guidelines do not
include bitumen or synthetic oil as product types. SPE guidelines are designed to
incorporate both conventional and unconventional reserves but do not specifically
address in situ recovery versus mining extraction methods.

The CIM classification allows the subdivision into Developed (separated into
Developed Producing and Developed Non-producing) and Undeveloped at all reserves
certainty levels whereas the current SPE definitions apply these status categories only to
proved reserves.

The CIM reserves definitions state that, the fiscal conditions under which reserve
estimates are prepared should generally be those which are considered to be a
reasonable outlook on the future. Security regulators or other agencies may require that
constant or other prices and costs be used in the determination of reserves and value. In
any event, the fiscal assumptions used in the preparation of reserves estimates must be
disclosed.

13
Russian Federation Classification Scheme (RF-2005)

Comparisons of the new Russian Federation and SPE/WPC/AAPG classifications can

be best approached by first examining separation into categories based on the
commercial axis:

Russian Federation SPE

Produced Reserves Production

Geological Exploration Knowledge & Degree of Maturity for Economic Development

Recoverable Reserves

Commercial
Economic
Normally Reasonably
GEOLOGICAL RESERVES
Discovered Petroleum IIP)

Estimated
Reserves
TOTAL PETROLEUM-INITIALLY-IN-PLACE (IIP)

Identified
Assured

Inferred

Inferred
Profitable

C1

C2

C2
A

Commercial Risk (project status/maturity)

Economic Contingent Recoverable Reserves
Contingent

Sub-commercial
Profitable Low Best High
Estimate Estimate Estimate
Contingent
Resources

(in-place estimates only)

Sub-economic

Unrecoverable Reserves Unrecoverable

((undiscovered Petroleum IIP)

Potentially Recoverable Resources

GEOLOGICAL RESOURCES

Profitable
Localized D1 Prospective
Resources
Prospective D2 (in-place estimates only)
Indefinitely
Profitable Predicted D3 (in-place estimates only

Unrecoverable Resources Unrecoverable

Degree of Geological Exploration Knowledge

And Maturity for Production (field project status)

There is overall alignment at major boundaries. The Russians split the undiscovered into
3 categories that can be roughly described as prospects (D1), leads (D2), and plays
(D3). The SPE and other organizations such as the NPD apply a project maturity axis to
describe a similar approach.

While the SPE classification refers to recoverable volume throughout, the Russians
estimate only in-place volumes for their D3 and D2 classes and the sub-economic
portion of their Contingent Recoverable Reserves. The logic is that lacking sufficient
definition for computing development plan economics, it is not feasible to forecast
recovery to an economic limit. In the SPE approach, analogous developments would be
used to estimate recovery efficiency.

The overall intent of the Contingent Recoverable Reserves category is similar to the
SPEs Contingent Resources, that is, these are discovered volumes that because of
some contingency (economics and/or technology), it is not currently feasible to proceed
with development. Those volumes categorized as sub-economic by RF-2005 due to
access constraints such under parks, cities, or in water protection zones (environmental)
or lack of local pipelines and/or infrastructure may still have economic potential and
would not be segregated in the SPE classification unless project status categories were
also applied. The RF-2005 proposal also includes shut-in wells in the Sub-economic

14
Contingent category; without further clarification it is not obvious why this is not classified
as developed but non-producing.

The Russians use the term reserves for all types of discovered volumes (in-place,
economic, sub-economic) whereas the SPE uses the term reserves only for the
remaining, commercially recoverable portions of discovered volumes. (This may be
typical of linguistic difficulties that are encountered internationally when technical terms
are translated using their general meaning.)

The Russian reserves classes A, B, and C1 grossly correlate to SPE Proved Developed
Producing (PDP), Proved Developed Non-Producing (PNP) and Proved Undeveloped
(PUD) respectively (see above comparison graphic). Recoverable estimates in their
category B have all the certainty of Category A but are not on production for some
reason. Category C1 correlates to SPE PUD in areas one drainage unit offset to Proved
Developed but does not specifically address proved reserves in deeper reservoirs or the
case where a relatively large expenditure is required to a) re-complete an existing well or
b) install production or transportation facilities for primary or improved recovery projects.

Category C2 encompasses SPE probable and possible (unproven) and can only be
dissected by detailed examination of the information available. Although probabilistic
methods are rarely applied in Russia, this could be used as a basis for defining a 2P
(best) versus 3P (high) estimate. The RF 2005 requires reporting by field/reservoir and
thereafter aggregations to various levels and ultimately total Russia; aggregation is
arithmetic by category based on the deterministic method.

RF-2005 does not address treatment of unconventional hydrocarbons (tight gas, coal
bed methane, bitumen). The only reference to unconventional hydrocarbons is that
heavy oils should be classified as very complicated accumulations.

Significant differences versus SPE guidelines include:

RF 2005 includes incremental reserves due to application of established improved

recovery methods and infill drilling in Category A (equivalent to SPE PDP) without the
requirement for a successful pilot in the subject reservoir or a commitment to proceed
with the incremental development.
In historical Russian classifications, one value of recovery ratio was established in
the original development plan and there was no provision to forecast a range of resulting
recovery efficiencies. To some extent, this is still true, although incremental reserves
from forecast application of a new recovery method can be included in category C1.
The Russian classification does not provide for using more conservative commercial
criteria for proved versus unproved reserves. All reserves are evaluated using the
criteria commercially recoverable if brought to production under competitive market
conditions, with use of equipment and technology of recovery and treatment ensuring
that the requirements for rational use of the subsoil and environmental protection are
observed.

Since the Russian classification is based on geologic certainty of in-place volumes, there
is a much greater emphasis on volumetric analysis in all categories whereas most
Western analysts would focus on production performance-based estimates (decline,
material balance) in Proved and Probable estimations for mature properties.

15
China Petroleum Reserves Office (PRO-2005)

There is a broad general agreement between the new Chinese (PRO-2005) and the
SPE classification systems. However, there are some interpretational differences:

Chinese Newly Amended System Total Petroleum

Initially-in-Place
(implemented 2005)
Discovered Undiscovered
(Geological Reserves) (Initially-in-place)

Measured Indicated Inferred

Geological Reserves Geological Reserves Geological Reserves

Proved Residual Probable Residual Possible Residual

Technically Technically Technically
EUR EUR EUR
SPE Prospective
Resources
Sub- Economic Sub-
Economic
economic economic
SPE Possible Reserves
and/or
Proved Proved High minus Best Est
Developed Undeveloped Contingent Resources
SPE SPE Best
Probable minus
Production Remaining Reserves Low Est
Contingent
Resources
SPE Proved SPE Proved SPE Low Est
Developed Undeveloped Contingent
Reserves Reserves Resources

a) It is key to remember that under the Chinese classification system:

1) the term reserves is used for both discovered in-place volumes and technically
recoverable volumes in addition to economically recoverable volumes.
2) Further all certainty criteria are assigned to estimated in-place volumes and
ultimate recoverable volumes, not restricted to remaining volumes. Thus, the
Chinese Proved and subset Proved Developed Estimated Initially Recoverable
Reserves must be reduced by prior cumulative production before comparison to
SPE reserves.

b) The Chinese have retained their industrial flows criteria by completion depth as a
reference to define a commercial discovery but staff are encouraged to estimate local or
field-wide criteria as well. In general, a commercial rate would allow recovery of the cost
of drilling a producing well (excluding abandonment costs).

c) For Proved Technical Estimated Ultimate Recovery (PTEUR), the feasibility studies
assume recent average prices and costs but for Proved Economic Initially Recoverable
Reserves (PVEIRR), more stringent criteria include use of prices and costs as of the
assessment date. (In practice, Chinese companies may apply their internal forecast
prices in feasibility studies to define PTEUR.)

d) For PBEIRR/Probable, Chinese guidelines allow use of either historical average or

forecast costs and prices whereas the SPE Probable and Possible apply forecast costs
and prices.

16
e) The Chinese subdivide the undiscovered resources (comparable to SPE/WPC/AAPG
Prospective Resource) into two categories: Petroleum Initially-in-place in Prospects at
early stages of exploration and Unmapped Petroleum Initially-in-place that is based on
regional reconnaissance mapping only.

f) While the China classification makes reference to probability targets, their post-
discovery assessments are usually based on deterministic scenarios and it is rare that
probabilistic analyses are used. While 2P and 3P match SPE guidance at P50 and P10,
the Chinese definitions for Proved reference a hurdle of P80 versus the SPE P90. The
Chinese documents include phrases such as indicated geological reserves are
estimates with a moderate level of confidence with a relative error not more than +/-
50%. This does not relate to actual probabilistic targets and is supplied as a general
guide. It would appear that this implies a higher degree of uncertainty than normally
associated with SPE probable estimates.

g) In the detailed definition of LKH, the Chinese specifically state that they would accept
reliable pressure data as a primary criteria; the SPE requires a lowest penetration
unless otherwise indicated by definitive geological, engineering or performance data.

The Chinese expect that there should be no material difference between SPE Proved
Ultimate and their PVEIRR. However, it should be noted that it is common for the
feasibility studies to include waterflood in the initial plans for oil reservoir development
and improved recovery volumes may not be uniquely identified.

The issue of combining a range of recovery efficiencies with in-place uncertainties to

define proved versus probable and possible recoverable volumes is problematical in the
Chinese system. In many cases, the assessment focuses on geological uncertainty
and an analog recovery factor is applied.

Regarding non-conventional hydrocarbons, the same classification is applied to Coal

Bed Methane reserves; the Chinese have not yet developed regulations for bitumen or
oil sands.

17
Norwegian Petroleum Directorate (NPD-2001)

The Norwegian Petroleum Directorate classification (NPD-2001) is based on the

SPE/WPC/AAPG 2000 classification but expanded to utilize categories that differentiate
projects based on their commerciality, that is, their maturity towards full producing
status. These categories can also be viewed as qualitative measures of commercial risk
or chance of commerciality.
SPE/WPC/AAPG NPD

PRODUCTION 0 Sold and Delivered

COMMERCIAL
DISCOVERED PETROLEUM-INITIALLY-IN-PLACE

P90 P50 P10 1 On Production

TOTAL PETROLEUM-INITIALLY-IN-PLACE

RESERVES 2 F/A Under Development

1P 2P 3P 3 F/A Development Committed

4 F/A Resources in Planning

SUB-COMMERCIAL

5 F/A Development Likely

CONTINGENT
RESOURCES 6 Development Unlikely

7F/A Being Evaluated

UNRECOVERABLE

PROSPECTIVE 8 Prospect
INITIALLY-IN-PLACE

RESOURCES
UNDISCOVERED
PETROLEUM-

9 Play and Lead

UNRECOVERABLE

F= First recovery
Range of Uncertainty
A = Advanced recovery

The horizontal axis relates to the uncertainty in recoverable hydrocarbon quantities

associated with each development project. There may be several projects recovering oil
and gas from the same accumulation, and these may be in different stages of maturity,
and thus in different categories. The NPD has found it to be convenient to distinguish
between the first project (F) and additional projects (A). For example, the incremental
recovery associated with an Enhanced Oil Recovery (EOR) project would be tracked
using the A attribute and the quantities associated with primary recovery project use
the F modifier while the estimate of original oil in-place may remain constant.

Probabilistic hurdles are similar to the SPE guidance, that is, low estimate/P90 or P80
and high estimate/P10 or P20. The P80/P20 option is rarely used and was included to
accommodate major issuers who used that convention in earlier times. The NPD
substitutes the term base estimate for best estimate. It reflects the current
understanding of the extension, characteristics and recovery factor of the reservoir. The
base estimate can be calculated deterministically or stochastically. If calculated by a
stochastic method, it should correspond to the mean value (not the median/P50).

As the NPD classification is developed for the resource management needs of the
Norwegian Government and the business process management needs of the Norwegian
companies, emphasis has been more on reflecting changes in ultimate recoverable
estimates than on annual financial reporting. The concept of proved reserves according
to deterministic criteria is not recognized as we know it from the SEC or SPE definitions.
P90 reserves are however both a reasonable and simple, well defined substitute,

18
remembering that future, uncommitted projects are not allowed to contribute to the 2P
nor 3P reserves as this would distort the P90 of the distribution.

While the terms Proved, Probable and Possible are not utilized, the definitions of low/1P,
base/2P, and high/3P estimated quantities allow derivation of these entities if required
(notwithstanding that the base is the mean and not P50).

The NPD defines a discovery as one petroleum deposit, or several petroleum deposits
collectively, which have been discovered in the same wildcat well, in which through
testing, sampling, or logging there has been established a probability of the existence of
mobile hydrocarbons (includes both a commercial and a technical discovery).

The NPD does not give definitions of commercial/economic or sub-commercial/sub-

economic but depends on the status categories to segregate Reserves from Contingent
Resources. Contingent Resources are defined as petroleum resources that have been
discovered but no decision has yet been taken regarding their (development for)
production. It is noted that their category 3 (reserves which the licensees have decided
to recover) may include projects for which the authorities have not yet approved a Plan
of Development (PDO) or granted exemption therefrom. Thus the differentiation of
Reserves from Contingent resources may seem to rest solely on the licensees internal
commitment to proceed with development. Under the petroleum law, the licensees are
however given the right to produce the petroleum. The government approval of the PDO
is an occasion to align interests in the way development will take place and not an
occasion to remove a right already granted.

19
US Geological Survey (USGS-1980)

The following graphic illustrates the overall comparison of the USBM/USGS (1980) and
the SPE/WPC/AAPG (2000) classifications for the discovered portion of total resources.

USBM/USGS (1980) SPE/WPC/AAPG (2000)

Discovered

1P 2P 3P
Economic feasibility
Increasing degree of

Proved Probable Possible

Reserves
Low Best High
Est Est Est

Contingent Resources

Unrecoverable

Increasing degree of Increasing degree of

geologic assurance technical certainty

The USGS classification is based on two parameters whereby resources are classified
by feasibility of economic recovery and degree of geologic certainty. The SPE
classification classifies resources based on 3 parameters: feasibility of economic
recovery (commerciality) in the y-axis and a combination of degree of geologic
assurance and degree of recovery efficiency termed technical uncertainty on the x-axis.
Although some differences exist, the classification schemes are comparable.

The USGS hypothetical and speculative undiscovered resources combined correlate to

SPE Prospective Resources; they can be classified by technical uncertainty
(low/best/high estimate or a probability distribution) but there is no attempt to segregate
undiscovered volumes according to commercial certainty.

Although the USGS measured, indicated, and inferred classes of reserves are assigned
to reflect geologic assurance, these classes have been loosely interchanged with,
respectively, the proved, probable, and possible classes. While measured and proved
are comparable, probable and possible may not be directly interchangeable with
indicated and inferred. Some earlier publications suggest that USGS inferred is not a
high side estimate of indicated but refers to only unexplored deposits for which estimates
of the quality and quantity are based on geologic evidence and projections and may not
have any direct sampling or measurements. Later publications indicate closer alignment
with SPE possible reserves that may be a combination of high-side estimates of drilled
(sampled) areas and adjacent undrilled areas (fault blocks and satellite features).

The shaded area in USGS classification is termed the reserves base; it may
encompass those parts of the resources that have a reasonable potential for becoming
economical within the planning horizons (30 years) beyond those that assume proven
technolgy and current economics. Thus, it appears that inferred reserves may be based
on forecast conditions while demonstrated (measured and indicated) are based on

20
current conditions. This contrasts with SPE guidance that only proved is based on
current conditions while probable and possible may be based on forecast conditions.

Users should be aware of the reserves terminology used in current USGS reports as
illustrated in this chart based on results information in the USGS World Petroleum
Assessment 2000.
World Excluding United States (conventional)

Oil - billion barrels

F95 F50 F5 Mean
1- Cumulative Production 539
2 Remaining Reserves 859
3 Known Reserves (1+2) 1398
4 Reserves Growth 192 612 1031 612
5 - Undiscovered 334 607 1107 649
6 Future Volumes (2+5) 1508
7 Future Grown Volumes (2+4+5) 2120
8 Total Endowment (1+2+4+5) 2659

Remaining reserves are taken from NRG Associates and Petroconsultants (IHS)
reports and may represent proved or proved plus probable reserves as defined in their
data sources (typically using SPE definitions). Reserves Growth as discussed above is
based on USGS projections of future (30 year) additions from new recovery methods,
improved prices, satellite development, etc. using proprietary algorithms derived from
analog fields of similar maturity. The volumes may include what would be currently
classified under SPE guidelines as possible, contingent resources and even some
portions of unrecoverable and speculative potential (for satellite accumulations). The
USGS does not quote reserve growth for individual fields, it is only statistically
meaningful for large aggregations; the 2000 report only quotes reserves growth on a
total world basis. The SPE term estimated ultimate recovery may be applied to either
USGS terms known reserves or future endowment.

The reserves growth and undiscovered resource aggregations use probabilistic models
and will have portfolio effects. The USGS uses P95 for the lowside and P05 for the
upside with two measures of central tendency being the median (P50) and the mean.
Cumulative production and remaining reserves are aggregated arithmetically.

The 2000 USGS world assessment does not include unconventional hydrocarbons
(continuous accumulations) from tight gas, coal bed methane, heavy oil (<150 API), and
tar sands but do recognize their potential. As extraction and processing technolgy
develops, the geologic descriptions are matured and their recovery becomes
economically feasible, they will be assessed in the same manner as conventional
hydrocarbons.

USGS economic implies that profitable extraction or production under defined

investment assumptions has been established, analytically demonstrated, or assumed
with reasonable certainty. This would not conflict with SPE guidance. The USGS
definitions do not include more detailed guidance on such issues as pricing, discovery
criteria and proved (measured) limits (e.g. LKH, DSU offsets).

21
United Nations Framework Classification (UNFC-2004)

The UNFC was originally developed to support consistent reporting of coal resources but
was later extended to apply to all minerals. The classification was developed under the
auspices the United Nations Economic Commission for Europe (UNECE) and
subsequently endorsed by the UN Economic and Social Council (ECOSOC) in 1997 and
recommended for worldwide implementation. In 2000, it was proposed to study its
application to all energy resources including uranium and petroleum. The study was
carried out by the UNECE Ad Hoc Group of Experts on the Harmonization of Energy
Reserves/Resources Terminology; it included broad representation from governments
and industry including prior members of the SPE Oil and Gas Reserves Committee. The
result was the UN Framework Classification for Energy and Mineral Resources (UNFC),
published in 2004 and subsequently endorsed for worldwide implementation by the
ECOSOC.

The study teams built on existing standards; in the case of petroleum, the primary
reference standard was the 2000 SPE/WPC/AAPG classification but care was taken to
accommodate other systems such as that used in the Russian Federation. The
classification is based on three key attributes:
o Economic (E)
o Field Project Status/Feasibility (F)
o Geological (G)

Subdividing each attribute results in a 3-dimensional matrix composed of 36 potential

categories, 19 of which are applied to petroleum. An alpha-numeric numbering system
bridges the language barrier for international communication (by adopting the standard
sequence EFG, it is further reduced to a pure numeric system). The following figure
illustrates mapping of the UNFC and SPE classifications.

UNFC 2004 SPE/WPC/AAPG 2000

Reserves
1P 2P 3P
Proved Probable Possible
P90 P50 P10
111 112 113

Contingent Resources
Low Est Best Est High Est

P90 P50 P10

121 122 123

231 232 233

Prospective Resources
Low Est Best Est High Est

P90 P50 P10

334

Comparison of UNFC and SPE/WPC/AAPG Classification

The category boundary conditions are sufficiently similar to allow detailed correlations
between the two systems.

22
The economic and feasibility axes are combined in the SPE 2-dimensional system
where the single vertical axis is the degree of commerciality or the chance of reaching
producing status within a reasonable time frame.

The G-Axis is correlative to the horizontal axis in the SPE classification that represents
the range of uncertainty in quantities to be recovered. It is recognized that the
recoverable quantities reflect uncertainties both on the quantities initially-in-place and
also on the efficiency of the development project applied.

UNFC introduces the principle of non-sales quantities both to make the material balance
complete and to allow for the use of the UNFC in the management of important
economical resources that are not traded commercially. In oil and gas, this will typically
be fuel, flare, and processing losses.

The UNFC uses field status categories to effectively separate reserves and contingent
resources. UNFC has introduced the concept of justified, but not committed projects to
define reserves, but excluded such projects from contributing to committed reserves.
Committed reserves are foreseen as the primary basis for supplementing financial
reports. This allows the continued communication of large recoverable quantities, such
as those reported from the Middle East, as reserves and not as a high grade of
contingent resources.

The UNFC introduced a sub-category (E1.2 Exceptional Economic) to accommodate

projects that are not normally economic but production is supported by government
subsidies based on strategic requirements.

The UNFC geologic (technical) uncertainty categories are similarly based on

low/best/high estimates with the same probability hurdles (P90/P50/P10) as
recommended in the SPE system. Estimates may be based on either deterministic or
probabilistic methods in both systems.

The SPE classification maintains the same technical uncertainty classes (low/best/high
estimates) from pre- to post-discovery with the only change being in field status or
discovery risk. The UNFC classifies all undrilled resources as G4; any subdivision by
technical uncertainty is given by non-numeric qualifications.

The UNFC is a high level set of principles and definitions but currently lacks the detailed
application guidelines (e.g. LKH constrains on proved) to fully implement the system.
The Ad Hoc Group of Experts has been charged with developing application guidelines
and that project is ongoing in liaison with the SPE Oil and Gas Reserves Committee.

23
Findings and Analysis
Overview Classification & Assessment Approach

For those agencies that assess the total hydrocarbon resources, there is a high degree
of commonality in classification approach.

DISCOVERED UNDISCOVERED

Increasing Degree of Economic Feasibility

Demonstrated
Inferred Hypothetical Speculative
Measured Indicated

ECONOMIC RESERVES
SUBECONOMIC

paramarginal
RESOURCES

submarginal

Increasing Degree of Geological Assurance

Figure 2: McKelvey Box (unmodified)

Most of these systems, including the current SPE definitions, are based on the
classification approach recommended by V.E. McKelvey in the early 1970s and
captured graphically in the McKelvey box diagram (figure 2). In this classical diagram,
the horizontal axis denotes geological certainty while the vertical axis denotes the
degree of economic feasibility. Thus, all of the agencies recognize three major
categories: undiscovered, discovered economic and discovered sub-economic.

The following simplistic description of an exploration to production/abandonment life

cycle provides background to address key differences in reserves and resource
classification and definitions used by individual agencies.

In the initial phase, a potential accumulation is identified, the hydrocarbon type(s) is

forecast, a range of in-place volumes assessed, and a chance of discovery is estimated.
Assuming a discovery, a high-level development plan is applied to estimate a production
rate versus time profile and associated cash flow schedule. Integration over time to a
defined economic limit yields an Estimated Ultimate Recoverable (EUR) and associated
Future Net Revenue (FNR). These undiscovered volumes are termed Prospective
Resources.

Based on results of an exploratory well, all or a portion of the recoverable volumes in the
accumulation may be re-categorized as discovered based on defined criteria. These
discoveries may be economic or sub-economic depending on the development plan and
costs/prices assumed. The sub-economic include Contingent Resources (and
unrecoverable) while the economic are provisionally categorized as Reserves.

Additional analysis and potentially appraisal drilling may be required to fully define the
detailed development plan, associated recoverable volume estimates, and project
economics to justify the investment commitment to move into a development phase
leading to commercial production. Once such a project commitment is confirmed, the

24
time integration of the product delivery schedule defines quantities to be finally classified
as Reserves. Based on these analyses and by applying additional guidelines, the
recoverable volumes scenarios can be separated into low estimate (proved), best
estimate (proved plus probable or 2P) and a high estimate (proved plus probable plus
possible or 3P).

Most agencies prescribe additional rules to define the low estimate or proved class.
Reserves may be further classified as developed and undeveloped based on the status
of the wells and associated production facilities required to implement production.

In the following analysis the terms proved and proven reserves are considered
synonymous. Also, most definitions use the generic term quantities to describe the
amount of product recovered from a reservoir although the measurements are typically
in terms of volumes at defined surface conditions (temperature and pressure). For
purposes of this discussion, the terms quantities and volumes are considered
synonymous.

Comparison by Major Issue

Using the above activity flow, the resulting classification process can be related to a
series of key decision points (Figure 3).
P ro ved C riteria U n p ro ved C riteria

P ro d u ctio n
D IS C O V E R E D D evelo p ed vs
RESERVES
C O M M E R C IA L U n d e velo p ed
P ro ved P ro bable P ossible

1P 2P 3P C o m m ercial
C O N T IN G E N T C riteria
D IS C O V E R E D RESOURCES
S U B -C O M M E R C IA L
L ow B est H ig h

U nrecoverable
D isco very
P R O S P E C TIV E C riteria
RESO URCES
U N D IS C O V E R E D
L ow B est H ig h

U nrecoverable

C lassificatio n b y U n certain ty
Figure 3: Decision Points in Resource Classification

The following issues regarding decision criteria are identified for further consideration by
the Definitions subcommittee:

Classification by Discovery Criteria

The initial step in the assessment process is to clearly identify those accumulations that
have met the criteria to be classified as discovered based on the results of one or more
exploratory wells. The principle is well documented in the SPE glossary definition of
Know Accumulation: The term accumulation is used to identify an individual body of
moveable petroleum. The key requirement to consider an accumulation as known, and

25
hence contain reserves or contingent resources, is that each accumulation/reservoir
must have been penetrated by a well. In general, the well must have clearly
demonstrated the existence of moveable petroleum in that reservoir by flow to surface or
at least some recovery of a sample of petroleum from the well. However, where log
and/or core data exist, this may suffice, provided there is a good analogy to a nearby
and geologically comparable known accumulation.
While at this junction, we need not segregate reserves and contingent resources, most
of the agencies guidelines require actual production or a conclusive flowing well test at
commercial rates as indicative that a reservoir has been discovered and there is the
potential to ultimately define proved reserves. There is some latitude in definition of
commercial rates as this obviously varies by location, existing infrastructure,
hydrocarbon type/quality, price/cost and fiscal terms. For example, China issues a table
of completion depth versus flow rate as a minimum guidance.

In some cases, the productivity can be based on alternate testing methods that record
short duration drawdowns and capture fluid/gas samples (wireline formation tests) but
typically require additional supporting evidence (logs, cores, seismic). This appears to be
the intent in SPE definitions but is accepted by the SEC only in deep water Gulf of
Mexico wells. The level of evidence is based on production or a conclusive test in
neighboring wells completed in the same or analogous reservoirs when supported by
logs and cores in the subject reservoir. The appropriateness of the analog based on
similarities of the reservoir and the distance of offset are interpretations that must be
individually justified.

Thus, most of the definitions, including those of the SPE, focus on the well rates related
to proved reserves but are more circumspect regarding establishing discovery criteria for
unproved reserves and contingent resources. The China definitions allow recognition of
geological reserves in known reservoirs after the oil and gas is found by drilling.

SPE probable reserves can be based on well logs but lack core data or definitive tests
and are not analogous to producing or proved reservoirs in the area. In the SPE 1997
definitions, possible reserves can be assigned in formations that appear to be petroleum
bearing based on log and core analysis but may not be productive at commercial rates.
(Clearly this appears to be closer to contingent resources in their 2000 classification).

The Canadian CIM definitions are explicit in that potential accumulations that have not
been penetrated by a wellbore may (only) be classified as Prospective Resources.
Confirmation of commercial production of an accumulation by production or a formation
test is required for classification of reserves as proved. However, in the absence of
production or formation testing, probable and /or possible reserves may be assigned
based on well logs/cores which indicate analogy to proved reservoirs in the immediate
area.

Notwithstanding the requirement for a well penetration, users typically assign unproven
reserves to adjacent fault blocks without conclusive evidence that faults are non-sealing
allowing pressure communication.

The Norwegian Petroleum Directorate (NPD) defines a discovery as one petroleum

deposit, or several petroleum deposits collectively, which have been discovered in the
same wildcat well, in which through testing, sampling, or logging there has been

26
established a probability of the existence of mobile hydrocarbons (includes both
commercial and a technical discoveries).

The flow rate and mobile hydrocarbon criteria in the current definitions clearly refer to
conventional petroleum and would be difficult to apply to non-conventional hydrocarbon
deposits such as bitumen that is immobile under natural conditions.

Classification by Commercial Criteria

Not all accumulations that meet the criteria of a discovery can be commercially
developed in a timely manner. Even where the discovered accumulation is large and
flow rates are substantial, there may be some contingency that prevents development
and hence classification as reserves. Example contingencies include: lack of available
market, lack of current producing or transportation infrastructure, environmental or legal
constraints. In many cases the reservoirs are not economically producible with current
technology and the contingency is a combination of technology development and/or
product sales price.

Some reservoirs have tested oil or gas but at rates too low to meet current economic
criteria, thus the conflict with the commercial flow rate requirement in the above
discovery criteria.

For agencies publishing a full reserves and resource classification, there is always a
category equivalent to contingent resources (SPE, Canada, Norway); synonyms are
sub-economic (China), marginally economic (USGS), or sub-commercial (Russia). All
classifications, excepting Chinas, recognize full geological/or technical uncertainty
classes (low/best/high estimate or equivalent) within the contingent resources category.

o What is Commercial?
Three aspects that arise throughout the various classifications as criteria for reserves
versus contingent resources are: economic, commercial and commitment (or intent).
There is general agreement that economic means the project income will cover the cost
of development and operations (at zero discount rate). There is not enough detail
supplied to judge whether cash flows are uniformly computed (before/after tax?, what
pricing assumptions?). The Canadians recommend using a reasonable outlook; the
Chinese use current market conditions, the Russian reserves can be brought to
production under competitive market conditions. In most definitions commercial is used
synonymously with economic.

Interestingly the current SPE definition of commercial makes no reference to economics

but focuses on demonstrated intent to bring to production status within a reasonable
time frame. Intent may be demonstrated with firm funding/financial plans, declarations
of commerciality, regulatory approvals and satisfaction of other conditions that would
otherwise prevent the project from being developed and brought to production. The
Russian and Chinese do not directly address intent but refer to an approved
development plan that will be carried out in the near future. Similar to the SPE approach,
under the CIM guidelines undeveloped recoverable volumes must have a sufficient
return on investment to justify the associated capital expenditure in order to be classified
as reserves as opposed to Contingent Resources.

Thus most agencies require intent to develop and some element of positive economics
for a development project to be commercial. There is some latitude in whether proved

27
reserve must be economic standalone, and whether a standalone project must be
economic in some cases the economics are defined on a multi-project business level.

o Project Status Categories

Project status categorization links the geologic endowment with the industrial and the
financial resources deployed to exploit it. In the 2000 classification, when referring to
their classification graphic, the SPE states the vertical axis represents the level of
status/maturity of the accumulation. Many organizations choose to further subdivide
each resource category using the vertical axis to classify accumulations on the basis of
the commercial decisions required to move the accumulation towards production.

The Norwegian Petroleum Directorate (NPD) states that: Originally recoverable

resources in a field or discovery are classified according to their position in the
development chain from a discovery being identified until production of the resources is
complete. The system is designed to allow a single field or discovery being able to
contain resources classified in different project status categories.

The NPD focuses on the project being applied to convert in-place hydrocarbons into
recoverable sales products. Their model allows several development projects, both
primary and secondary (additional) to be applied to the same accumulation. In this
approach, reserves and contingent resources are separated by the project maturity that
is based on commitment by the owners and does not specifically address economics.

The SPE 2001 supplemental guidance notes that project status can be viewed as
related to development risk (figure 4); that is, higher levels of maturity reflect higher
probability (lower risk) that the accumulation will achieve commercial production. While
some users suggest that reserves should have 90% probability of reaching producing
status, neither the SPE of NPD directly associate quantitative risk factors with their
project status categories.

Production PROJECT STATUS

On Production Lower
DISCOVERED
COMMERCIAL
RESERVES Risk
Under Development
1P 2P 3P
Planned for Development

Development Pending
CONTINGENT
Development on Hold
DISCOVERED RESOURCES Project
SUB-COMMERCIAL
Development not Viable Maturity
Low Best High
Unrecoverable

Prospect
PROSPECTIVE
RESOURCES Lead
UNDISCOVERED
Higher
Low Best High Play Risk

Unrecoverable

Range of Uncertainty

Figure 4: Project Status Categories/Commercial Risk

28
The UNFC addresses this issue using two axes within their 3-d cube system: E =
Economic and commercial viability and F= Field project status and feasibility. The
highest assurance category is a project that is both economic and is either on production
or a firm commitment to develop has been documented. By using the two axes an
explicit description of both economic and project status can be designated. Note that
UNFC reserves may include SPE reserves plus other recoverable quantities through
justified but not committed projects. Both NPD and current SPE guidelines allow some
latitude in defining commitment to qualify as reserves (for example partner concurrence
but lacking final government approvals).

Classification by Uncertainty
All classifications use the horizontal axis to describe an uncertainty range of volume
outcomes and identify three subdivisions: proved/low estimate, 2P /best estimate, and
3P/high estimate. In all cases, except for the China classification, these same
subdivisions are used in contingent resources. The USGS terms measured, identified,
and inferred are generally correlative to proved, probable, possible although the
boundaries may not exactly align. The NPD refers to the intermediate scenario as the
base estimate.

The Russian, Chinese, and USGS classifications appear to retain more of the original
McKelvey approach in which the horizontal axis is indeed geological uncertainty related
to in-place volumes and the characteristics of the reservoir. This certainty is based on
the phase of exploitation and well density. It appears that recovery efficiency is often
defined as somewhat fixed based on analogs and is taken as the optimum rate
associated with an approved development plan. Quite often this includes incremental
recoveries associated with established improved recovery processes routinely applied in
these types of accumulations. It is difficult for these classifications to accommodate
combinations of in-place volume uncertainty and recovery efficiency uncertainty; these
combined uncertainties are central to the SPE classification.

This approach is best illustrated in the Chinese classification. Their term reserves
includes both geological reserves (in-place) and recoverable reserves. The initial
uncertainty classification (measured, indicated, inferred) is based on in-place volumes
and the phase of exploitation; for example measured geological reserves are estimated
with a high level of confidence, have been proved economically recoverable by appraisal
drilling, fluid contacts or LKH established, and limits are delineated by reasonable well
spacing. In-place volumes in each of these certainty classes are then subdivided into
technically recoverable and economically recoverable. Despite this different approach,
the Chinese economically recoverable reserves categories (PVEIRR and PBEIRR) are
very comparable to the SPE proved and probable before production.

All agencies identify a grey area between possible reserves and contingent resources.
It is noted that the Chinese inferred/possible category does not differentiate economic
versus uneconomic as the volumes are not sufficiently defined to make that distinction.

Clarifications may be required to explain how uncertainty distributions and./or scenarios

underlying the reserves and resource classes may address a combination of in-place
volumes uncertainty and recovery efficiency uncertainty as regards the development
project(s) applied. In addition, there will be uncertainty associated with the realization of
uncommitted projects.

29
o Deterministic versus Probabilistic Methods and Aggregation Issues
While each of the agencies can accommodate either deterministic or probabilistic
methods for uncertainty analysis, only in Western Europe is probabilistic analysis
routinely applied to discovered volume assessments. The standard targets in
probabilistic assessments are set at low estimate/proved =/>P90, best estimate/2P
=/>P50, and high estimate/3P =/>P10. There are two exceptions: China guidelines
specify proved =/> P80; NPD guidelines allow either P90 or P80 for low estimates, P10
or P20 for high estimates and if the best estimate (= their base estimate) is calculated by
stochastic methods, it should correspond to the mean value (not P50).

There is not universal agreement on the entity level to which these targets apply; this is
commonly referred to as the aggregation issue. The SPE specifies the guidance
applies to the field or property level (pre-aggregation) whereas Canadian (CIM) guidance
specifies the reporting level (post-aggregation). Given the effect of the central limit
theorem, the arithmetic summation of field Proved volumes in a large portfolio of
properties would typically be much less than the P90 of the probabilistic aggregation of
the distributions associated with these same properties. This same portfolio effect will
cause the arithmetic sum of P10 volumes to be much greater than the P10 of the
probabilistic aggregate. (The actual variance is a function of the dependencies defined in
the probabilistic aggregation model; the mean of the aggregate is not impacted by
dependency variations.). Note that both the CIM and SPE recommend that probabilistic
aggregation be confined to the field, property or project level.

Comparisons of SPE and CIM proved volumes may still be problematical since the CIM
suggests that even deterministic estimates have an inferred confidence level that
would approximate the probability targets. The original Canadian guidance included
examples in which reporting level P90 can be achieved where the inferred proved
confidence level of individual properties in the portfolio is significantly less than P75.
However, the NI 51-101 regulations also require that proved estimates at the entity level
should reflect a high degree of confidence.

The SEC supplemental guidance requires that proved reserves be defined at the field
level and then arithmetically summed to the reporting level. (While UK-SORP option 1
duplicates SEC definitions, some issuers do not interpret that the SECs supplemental
guidance applies). None of the other classifications directly address the aggregation
issue. While they do not clearly identify the entity level being assessed, it is inferred that
it is at the reservoir or field level.

Many users interpret that the current SPE definitions consider deterministic and
probabilistic methods as distinct and thus the criteria (e.g. the proved estimate should
have high degree of confidence and at least P90 probability) are not necessarily
synchronized. Consideration should be given to clarification using the Canadian logic
that deterministic scenarios have an inferred confidence level and the same quantitative
probability targets should apply. The guiding principle is that the reserve volumes
assigned to each uncertainty class should be similar despite the method applied.

The aggregation approach may depend on what the results are being used for. For
internal portfolio management fully probabilistic aggregation that preserves the beneficial
portfolio effect may be appropriate. For 2P reserve disclosures, probabilistic
aggregation and arithmetic summation may yield similar results. Regarding proved
reserves disclosures, arithmetic aggregation may be the only method that preserves the

30
entity level high degree of certainty. The ideal solution would be to disclose both the
arithmetic and probabilistic aggregate Proved to demonstrate the benefits of a large,
diversified portfolio in protecting against negative corporate Proved revisions.

Proved Reserves Criteria

All the agencies give specific guidance that limit quantities assigned to their low estimate
case (proved, measured) including:

o LKH most are similar to SPE guidance, that is, if a hydrocarbon/water contact is
not penetrated in a wellbore, volumetric calculations of proved reserves should be
restricted by the lowest known structural elevation of occurrence of hydrocarbons as
defined by well logs, core analysis or formation testing (in the same reservoir).
China guidelines allow use of reliable pressure data to define the fluid contact. The
SEC allows that upon obtaining performance history sufficient to reasonably
conclude that more (proved) reserves will be recovered than those estimated
volumetrically down to LKH, positive reserve revisions should be made. The SPE
allows the use of definitive geological, engineering or performance data, which would
include pressure data, but in general only if supported by other data confirming the
existence of a single pressure system.

o Lateral Extent in addition to the drilling spacing unit (DSU) (or drainage area) of the
productive well, proved reserves are limited to immediate offset locations (8 offset
DSUs including diagonals) assuming they are within the productive limits of the
reservoir, appear to have lateral continuity to the productive wells based on
geological and engineering data and thus can be reasonable judged as economically
productive. Geophysical data is specifically listed in addition to geological and
engineering data used in judging proved limits in UK SORP proven plus probable
disclosure option 2. The SEC rules that seismic data and/or pressure analysis cannot
be the sole indicator(s) of lateral continuity. Where legal drilling units have not been
defined, the SEC will accept technically justified drainage area.

o Existing Conditions There is similar language in most classifications that proved

reserves are those quantities with reasonable certainty to be commercially
recoverable under current economic conditions, operating conditions and
government regulations including prices and costs as of the evaluation date. While
the SPE allows that current conditions may be based on average historical prices
and costs, SORP option 1, and China use costs/prices on the date of assessment
except as stipulated in contacts or agreements. The SEC specifies pricing
determined by the market on the last day of the reporting companys fiscal year
(typically December 31). The Russian definitions are less prescriptive; they require
that all reserves be commercially efficient for recovery under competitive market
conditions, with up-to-date equipment and technologies. Under Canadian
regulations, the proved (developed producing and non-producing, undeveloped, and
total) reserves are defined under both evaluation date (that is, year-end/constant)
and defined forecast cost/price scenarios; the proved plus probable estimates use
forecast cost/prices schedules only. Reserve impairment [ceiling test and depletion]
is calculated using the 2P/forecast case. UNFC and USGS definitions do not address
specific pricing criteria. In the case of the UNFC, this is not considered a functional
criterion to be included in the classification itself, but a prescriptive one, to be fixed,
when required in regulatory specifications or guidelines. This allows, for instance, the

31
 use of historical or forecast prices based on futures markets or some other
standard reference.

o Discovery Criteria As previously discussed, many agencies, including the SPE,

require more rigorous discovery criteria for proved (e.g. a flowing well test) than for
unproved reserves (well log indications of productivity). This leads to assessments
that may have unproven reserves without associated proved reserves; this is
problematical for reserves defined using probabilistic methods.

The potential result of applying these special proved reserves criteria is to distort the
underlying classification system; as shown in figure 5; in many cases the resulting
Proved reserve quantities may be less than the low estimate whether derived by
deterministic or probabilistic methods.

LKH from penetrations LKH and area from pressure data

area limited to offset DSUs and seismic (or P90 from probabilistic method)

low best high

est est est

Reserves
Proved economic under
chance of achieving

current conditions
Probable Possible
Discovered
producing status

economic under
forecast conditions
Contingent Resources

Unrecoverable

technical certainty in recoverable volume estimate

Figure 5: Impact of Proved Reserves Special Criteria

The practical solution may be to admit that there are two processes involved in reserves
classification. First reserves are defined as commercial or non-commercial based on a
2P/forecast case and then a distribution of recoverable quantities is based on a defined
development plan. Even where the probabilistic method is used, a separate
deterministic, conservative case for proved may be required to incorporate specific
regulatory downside cost/pricing estimates and technical criteria that limit the portions of
the reservoir considered. The full suite of modern acquisition and analysis tools (3-d
seismic, pressure gradient analysis, wireline formation tests, reservoir simulation, etc.)
should be accommodated. The drilling spacing unit/drainage area criteria become
difficult to apply in offshore operations, horizontal wells and complex multi-lateral
completions.

Unproved Reserves Criteria

All classifications (excluding SEC) recognize lower certainty levels of reserves based on
distance from producing wells, more limited availability of geological (and geophysical)
and engineering data. Most define a best estimate (2P) and high estimate (3P) case.
The Russian class C2 (inferred) includes probable and possible combined. While most
classifications have the same general requirements for commerciality, there is variation.

32
 the SPE, China, UK SORP (option 2) allow use of forecast conditions different
from proved. Canada uses forecast conditions for their base case but also
require a constant case for proved. The Russians use the same conditions
(commercially efficient under competitive market conditions) for all classes.
the Canadian and SPE guidelines do not require a flowing well test to define
probable and possible reserves.
the Chinese state that it is not possible to separate possible from high estimate
Contingent Resources due to lack of information.
it is likely that the Russian C2 and the USGS inferred categories also includes
some Contingent Resources
the UNFC does not explicitly describe probable and possible criteria but refer to
their best and high estimate cases based on geologic certainty. It furthermore
allows all quantities to be described in terms of a probability distribution or a
range using the SPE standards (P90, P50 and P10).

The SPE is the only classification that attempts to describe probable and possible
reserves with specific deterministic criteria (e.g. updip/downdip fault blocks).

There certainly is ambiguity in the current SPE definitions (and others) between
unproven reserves and contingent resources. Again use of a logical assessment
sequence that first segregates reserves and contingent resource based on commercial
criteria may be the key. This model needs to have a central reference point suggested
by the Canadians as being the 2P/forecast case. Thereafter, 3P is an upside version
(both of in-place and recovery efficiency) of the 2P case but uses the same commercial
conditions. The option of including alternative development scenarios (including
improved recovery or infill drilling) in the upside 3P case needs careful consideration and
is difficult to synchronize with investments to yield valid associated values. Use of the
NPD project-based model may be the practical solution.

Improved Recovery (IR) Reserves

Improved Recovery is the extraction of additional petroleum, beyond primary recovery,
from naturally occurring reservoirs by supplementing the natural forces in the reservoir.
It includes water-flooding, secondary processes, tertiary processes and any other means
of supplementing natural reservoir recovery processes.

For attribution of incremental proved reserves through application on new improved

recovery methods, both the SPE and SEC require that there be successful testing by a
pilot project or favorable response from an installed program in the subject reservoir. For
established IR methods, proved reserves can be booked based on successful projects in
analogous reservoirs with similar rock and fluid properties. The SEC has slightly more
rigorous criteria for analogous reservoirs. UK and Canadian guidelines are similar to
those of the SPE.

Historically Russian and Chinese classifications did not require a successful pilot for
established IR methods; in fact the recovery efficiency derived for most oil development
plans includes waterfloods. The current Russian classification retains this approach but
the new Chinese proved definitions require that the IR technology be demonstrated by a
successful pilot or successful response in an analogous field. All require some level of
commitment to proceed with facilities installation prior to booking proved reserves.

33
SPE and Canadian classifications use similar criteria for unproved. Probable reserves
can be assigned based on analogs when rock and fluid are favorable but no pilot has yet
been implemented: Possible reserves can be assigned when success is less completely
assured. There should be a reasonable certainty that the IR project will be implemented
for reserves attribution. IR volumes can be assigned as contingent resources when the
project results are risky due to poor economics, lack of technology, or lack of
commitment.

For both internal project assessments and regulatory disclosures, the incremental
recoveries and costs associated with improved recovery methods must be specifically
identified.

The Canadian NI 51-101 reconciliation guidelines include infill drilling and compression
under improved recovery processes.

Developed/Undeveloped
All classifications except the USGS provide for segregating proved reserves into
Developed and Undeveloped based on the status of production facilities. Most criteria
are similar to those stated under SPE guidelines: developed reserves are expected to
be recovered from existing wells including reserves behind pipe that can be brought to
production with minimal cost. Improved recovery reserves are considered developed
only after the necessary equipment has been installed. The Canadian system similarly
defines Proved develop producing and non-producing and these categories are roughly
equivalent to Russian A and B categories.

Undeveloped reserves are expected to be recovered from new wells on undrilled

acreage, from deepening existing wells to a different reservoir; or where a relatively
large expenditure is required to re-complete an existing well. While not using these same
terms, all agencies generally recognize that new capital is required to bring undeveloped
reserves to developed status.

The Canadian guidance proposes that it is logical to distinguish developed versus

undeveloped reserves in all uncertainty categories. Under this logic, even a proved
developed reservoir has upside geologic extent and recovery efficiency that should be
captured in the probable and possible categories. Canadian NI 51-101 rules also require
that any undeveloped reserve should have a documented plan for development within
two years to retain its reserves classification.

Other Issues

o Probable Without Proved Because of the split criteria for proved versus
reserves in general (pricing, technology), it is theoretically possible to have
probable and possible reserves but no part of reserves meet the proved criteria.
This is compounded if one applies the two tiered discovery criteria within the SPE
and Canadian systems. This becomes somewhat difficult to envisage if one is
using the probabilistic methods that define volumes exceeding P90 as proved.
The option is to require that, if no part of the reservoir/project meet the proved
criteria, then the total volumes should be reclassified as contingent resources.
None of the agencies, including the SPE, directly address this issue in current
guidelines.

34
o Lease Fuel An underlying principle in the UNFC is the conservation of mass in
reserves and resource classifications and tracking, that is, all quantities need to
be estimated whether produced, consumed, flared, lost, remaining recoverable
(reserves or contingent resources) or unrecoverable such that the total adds
back to the original in-place discovered resources in the subject accumulation.
The key issue is whether to include gas (or oil) consumed as fuel to support
production (and lease processing) operations in reserves disclosures. The
Canadian guidelines treat lease fuel as part of shrinkage. The SPE and SEC
allow issuers the option to include lease fuel consumed as part of reserves as
long as an appropriate operating expense is allocated. UK-SORP requires
issuers to consistently include or exclude such volumes for production and
reserves. The issue is not specifically addressed in other classifications. This can
become a major issue in LNG and bitumen upgrader projects as the volume of
gas or bitumen consumed relative to the marketable product quantities can be
significant (if the reserves reference point is at the plant outlet see below).

o Reserves Reference Point (also called measurement or custody transfer point).

Most agencies support the principle that the quantities used in reserves
estimations are based on measurements, product specification, and pricing at the
initial custody transfer point. Typically in a gas project the measurement is of the
marketed product in its condition as delivered to a sales pipeline. In some cases,
the sales quantity may include minor non-hydrocarbons such as CO2. Custody
transfer can be obscured by varying ownerships or sharing of processing
facilities. For example, in integrated extra-heavy oil or bitumen production and
processing projects, it is not clear if the quantity for reserves estimates is the
quantity at the upgrader inlet or synthetic crude oil measured at the upgrader
outlet.

o Unconventional Hydrocarbons Figure 6 illustrates the total spectrum of

hydrocarbon types and accumulations.

C o n v e n tio n a l
R e s e rv o ir s

H eavy
O il
T ig h t G a s
Sands
E x tra -H e a v y
O il
C o a lb e d
M e th a n e
B itu m e n

G as
O il S h a le H y d ra te s

Figure 6: Conventional vs Unconventional Hydrocarbons

The SEC has accepted down to coalbed methane and extra-heavy oil as being
part of conventional oil and gas operations, excludes oil shales, does not address
gas hydrates and is currently ambivalent on bitumen. They exclude mined
bitumen, provisionally include bitumen recovered by in situ methods and are
currently studying whether upgraded synthetic oil can be defined as the sales
product. The Canadian regulations include all bitumen as petroleum reserves

35
 whether extracted by in situ or mining methods and define the custody transfer
point for integrated operations at the upgrader outlet. Most classifications now
accept coal bed methane but do not address the bitumen issue. The current SPE
position is that their classification and definitions apply to all hydrocarbons,
conventional and unconventional. Moreover the glossary definition of petroleum
includes solid forms. However, the SPE gives no specific guidance around such
issues as mined bitumen or upgrader processing. Bitumen and oil shale may be
excluded by discovery criteria that reference identification of moveable
hydrocarbons; certainly these resources may not support a flowing well test.

o Resource Entities - Historically North American operators used the lease-well-

reservoir as the smallest reserve entity, that is, reserves were computed on a
drilling spacing unit basis by completion interval. This was the level at which
ownership and royalties could be allocated. In foreign operations where leases
covered broad areas, the reservoir (or zone of a reservoir) became the reserve
entity. Many European operators identify the project as operational unit and lease
zones are aggregated to the project level to allocate costs versus volumes to
establish economic criteria.

It is not always clear in the various definitions which reserve entity is being
assessed for risk and uncertainty analysis. Figure 7 illustrates the relationship
between the reservoir, lease (property) and project entity. In-place volumes are
estimated for reservoirs. Projects have associated cash flow attributes. The
intersection of reservoir and project (through a well completion) defines a specific
development project applied to a specific reservoir and attributes would be
recoverable quantities and associated cash flows. Ownership and fiscal terms
are typically defined for a lease. Thus aggregation or allocation of a reservoir
project to a lease would form the basic entity for resource assessment. By careful
design of a data model, quantities and value can be associated with individual
reservoirs, leases and projects (and wells).

lease-
reservoir
- project

Reservoir Lease Project

(in-place) (ownership) (cash flow)
reservoir -
project
(recoverable)
Well
Completion
Facilities
Figure 7: Resource Data Entities and Entity Relationships

The entity level defined for reserves disclosures varies between securities
agencies and may be total corporate or by country; however issuers must
maintain detailed accounting by lease and reservoir subject to audits. The SEC
requires separate disclosures for PSC/PSAs. While the SEC requires products
categorized as crude oil (includes condensate), gas and natural gas liquids, other
agencies require a more detailed accounting by product type. The SPE does not
address tracking resources by product or type of lease.

36
Conclusions and Recommendations
The following observations are based on an analysis of the reserves and resource
classifications and associated definitions and guidelines as published by the eight
agencies surveyed in this report.

There is general international agreement on a classification system for petroleum

resources that defines three broad categories of recoverable quantities: undiscovered,
discovered sub-commercial, and discovered commercial.

All classifications incorporate classes of resources within each category to describe

uncertainty in estimating the quantities of hydrocarbons that may be recovered by
applying development projects. The assessments accommodate uncertainty in both the
in-place hydrocarbon volumes and a range of recovery efficiencies associated with
projects being applied. All classifications define 3 scenarios to define this uncertainty
range: a low, intermediate (termed best) and high estimate. Most classifications agree
that if these uncertainty distributions were derived stochastically, the associated
cumulative probability hurdles would be P90/P50/P10. There is some variation in the
deterministic qualitative criteria that define these scenarios.

To achieve greater consistency among project assessments, many of the classifications

apply additional deterministic criteria to the low estimate of discovered commercial,
typically defined as proved reserves. All classifications recognize that a portion of these
discovered commercial volumes may be recovered with existing facilities (developed)
while the remaining portion requires additional investment (undeveloped).

While there is variation in the terminology used to describe the resource categories and
uncertainty classes, it is quite feasible to identify correlative terms. There is lack of clarity
in the detailed definitions of boundary conditions between categories.

Based on this analysis, revisions to the current SPE resource classification, definitions
and guidelines may consider the following as potential best practices to provide
increased clarity and better align with business processes:

Utilize a consistent set of criteria to segregate discovered from undiscovered without

reference to ultimate commerciality. A discovery is a known accumulation(s). It has been
penetrated by a wellbore and the resulting analysis of well logs, cores or formation tests
indicates that significant hydrocarbons exist and are potentially recoverable. All such
discovered volumes should be initially categorized as contingent resources.

The guidelines should emphasize that recoverable quantities must clearly identify the
development project applied to a specific accumulation and its in-place hydrocarbons.
Without an associated development project, in-place volumes must be designated as
unrecoverable. Economics and feasibility attributes are associated with development
projects. The remaining quantities associated with projects categorized as commercial
are assigned the term reserves. The boundary between contingent resource and
reserves thus rests on the term commercial as applied to a development project. It has
two components: economics and feasibility or intent. The most practical approach is to
use the project maturity/chance of reaching production status to clarify reserves versus
contingent resources. An appropriate chance may be 90% (i.e. 10% risk).

37
 Definitions and guidelines should accommodate both deterministic and probabilistic
assessment methods. To maintain consistency, the same class confidence hurdles
(P90/P50/P10) should be applied to estimates whether assessed using deterministic or
probabilistic methods. While inherently qualitative, all deterministic estimates have an
inferred probability. Calibration tests utilizing both assessment methods are
recommended. Although the assessment should support either arithmetic summation or
probabilistic aggregation, the guidelines should clearly identify the entity to which these
certainty guidelines apply and the preferred entity is the project level.

Guidelines around economics/intent should focus on the best estimate, being the
equivalent of proved plus probable (2P), of recoverable quantities associated with a
project. While companies certainly evaluate upside and downside cases or the complete
probabilistic distribution to make investment decisions, the most representative single
estimate is generally accepted as 2P. (While there are valid arguments to use the mean
as the preferred measure of central tendency, this may not be practical to maintain
comparability to deterministic assessments.)

From a business perspective, the inclusion of additional deterministic technical and

commercial criteria for reserves classes (proved, probable, possible) or discrete
estimates (1P,2P, 3P) may have value in providing increased consistency in
assessments. The definitions should be broad enough to accommodate such criteria as
imposed by regulatory agencies.

Apply developed/undeveloped status to all reserves classes. Logically there is a

range of recoveries associated with developed reserves. Reserves that remain
undeveloped beyond a reasonable period demonstrate lack of commitment and should
be reclassified as contingent resources.

The definitions should encompass all hydrocarbons whether conventional or non-

conventional (gas, liquid or solid phases). Supplemental guidelines may be required to
address issues pertaining to extraction (mining, in situ) and processing (upgrading) that
is required to yield a marketable product.

The total system should provide for accounting of all components to support mass
balance; that is, the sum of quantities sold, production and processing losses (including
hydrocarbons consumed as fuel) and unrecoverable quantities should equal the
estimate of initially-in-place hydrocarbons.

Documentation regards reserves and resources is best presented in a more structured

manner consisting of:
Overall Resource Classification chart and resource category definitions
Reserves Definitions - high level, principal-based
Application Guidelines detailed guidance, subject to periodic revisions
Application Examples - illustrations of both common and exceptional issues

While not necessarily endorsing its content, the format used by the Petroleum Society of
the Canadian Institute of Mining, Metallurgy and Petroleum provides a useful template.

38
 SPE Oil and Gas Reserves Committee
Mapping Subcommittee Final Report December 2005

APPENDIX A

Detailed Description of Agencies Classification/Definitions

Includes a description of each classification/ references utilized plus comparison to SPE
definitions using:
a) summary text/diagrams and
b) a table detailing position on key issues

Page

US Security and Exchange Commission (SEC-1978) 2

UK Statement of Recommended Practices (SORP-2001) 13

Canadian Security Administrators (CSA -2002) 23

Russian Ministry of Natural Resources (RF-2005) 35

China Petroleum Reserves Office (PRO2005) 53

Norwegian Petroleum Directorate (NPD2001) 67

United States Geological Survey (USGS-1980) 70

United Nations Framework Classification (UNFC2004) 75

1
 US Security and Exchange Commission (SEC-1978)

Oil and Gas Reserves disclosures by all companies (both US and foreign-based) quoted
on the US Stock Exchange are governed by SEC Accounting Rules (S-X 210.4-10 and
S-K) and two Statements of Financial Accounting Standards Board (FASB): SFAS No.19
and SFAS No.69.

The S-X regulation, published in 1978, deals with the definitions of proved reserves
(developed and undeveloped) to be used in determining quantities of oil and gas
reserves to be reported in filings with the SEC. In 1997 (Oil and Gas Producing Activities
Topic 12) and 2001, (Accounting and Financial Reporting Interpretations and
Guidance) the SEC published additional clarifications on selected reserves disclosure
issues.

The regulation S-K defines the standard instructions for filing forms. This regulation
prohibits disclosure of estimated quantities of probable or possible reserves of oil and
gas. The SFAS No.19 (Financial Accounting and Reporting by Oil and Gas Producing
Companies), published in 1977, requires the disclosure of the standardized measure of
discounted future net cash flows from production of proved oil and gas reserves,
computed by applying year-end prices of oil and gas. The SFAS No.69 (Disclosures
about Oil and Gas Producing Activities) has been published in 1982. This Statement
amends FASB Statement No.19.

The proved reserves are estimated using prices and costs as at the evaluation date
(most companies use 31st December), without any escalation. The SEC does not require
independent evaluations.

The SEC regulations and guidelines about reserves definitions can be accessed on the
Internet at:

2004 Testing Requirements in Deep Water GOM

http://www.sec.gov/divisions/corpfin/guidance/oilgasltr04152004.htm
Guidance on Reserves Classification
http://www.sec.gov/divisions/corpfin/guidance/cfactfaq.htm#P279_57537
1997 Oil and Gas Producing Activities Topic 12
http://www.sec.gov/interps/account/sabcodet12.htm
Regulation S-X (Reserves Definition)
http://www.sec.gov/divisions/corpfin/forms/regsx.htm#gas
Industry Guides (Disclosure of Oil and Gas Operations)
http://www.sec.gov/divisions/corpfin/forms/industry.htm
Regulation S-K
http://www.sec.gov/divisions/corpfin/forms/regsk.htm

FASB documents could be found at www.fasb.org.

The oil and gas industry is generally aware of additional interpretations based on SEC
correspondence with individual companies and/or opinions expressed by SEC engineers
in public forums. However, the guidance on SEC definitions contained herein is based
solely on information published by the SEC and taken from the sources listed above.

2
Comparison to SPE Definitions

The SEC rules and guidelines address proved reserves only. The SEC prohibits
additional disclosure of unproved reserves, i.e. probable and possible, as well as
Contingent and Prospective Resources. While SPE and SEC proved reserve definitions
are quite similar, SEC regulations are generally considered to be slightly more restrictive
than associated SPE guidance. Key differences between SEC and SPE systems are:

- While both proved definitions apply current economic conditions, the SEC
specifically requires use of year-end prices and costs while the SPE will, in some
circumstances, allow use of average prices and costs

- SPE allows use of either deterministic or probabilistic methodologies. While the

SEC does not forbid probabilistic analyses, the disclosed quantities must be
demonstrated to meet the defined deterministic criteria.

- SPE generally requires a well test to classify reserves as proved but can be
replaced if the estimate is fully supported by wireline formation tests, logs and
cores. The SEC states that a well test is mandatory and can be only avoided in
the Gulf of Mexico (GOM) deep water if the estimate is fully supported by
seismic, wire line conveyed sampling, logs and cores.

- Both the SPE and the SEC limit proved reserves to those recovered above the
lowest known occurrence of hydrocarbons. In the absence of data on fluid
contacts, SPE states that the lowest known structural occurrence of
hydrocarbons controls the proved limit unless otherwise indicated by definitive
geological, engineering or performance data. In contrast, the SEC effectively
rules out the use of conclusive technical data other than direct well observations
and incremental proved can only be based on performance history.

- Regarding unconventional hydrocarbons, the SEC allows coal bed methane to

be classified as proved reserves if the recovery is shown to be economic. While
the SEC has ruled that bitumen recovered by mining is not petroleum reserves,
there are no published guidelines for bitumen produced by in situ methods. The
SPE definitions apply to both conventional and unconventional hydrocarbons

- The SPE guidelines define developed producing and non-producing status while
SEC defines developed with no sub-categories.

- Both sets of definitions set similar criteria around commerciality to include not
only economics but also commitment to proceed with development projects
within a reasonable time frame. This includes confirmation of market, production
and transportation facilities, and the required lease extensions. Neither set of
definitions specifies the documentation to support these claims.

- The SEC requires a reasonable certainty of procurement of project financing; the

SPE does not address financing requirements.

The SPE does not represent these analyses as being definitive guidance for those required to
disclose reserves and resources under criteria set by these agencies; issuers should obtain
guidelines documentation directly from each agency.

3
 Comparison of Reserves Definitions
Reserves Definition/Proved Criteria

SPE/WPC U.S. SEC

(1997) Reg. S-X (1987)
Accounting Interpretation and Guidance
(2001)
Intended purpose General application not country Securities reporting
specific
Qualitative Reasonable certainty to be Reasonable certainty to be commercially
description of commercially recoverable recoverable
certainty- proved

Qualitative Not proved, but more likely than Not Defined

description of not to be recoverable
certainty- probable

Qualitative Less likely to be recovered than Not Defined

description of probable
certainty- possible

Quantification of Proved =/> P90 Not Addressed

probabilities 2P =/> P50
associated with 3P =/>P10
estimates.

Proved reserves No proved reserves below LKH as No proved reserves below LKH. Make
relative to lowest defined by well logs, core analysis positive revision if performance history
known hydrocarbon or formation testing indicates more reserves than estimated
(LKH) volumetrically to the LKH .

Limited to directly offsetting DSUs except

Proved reserve Directly offsetting DSUs and/or where continuity of production from the
extensions on where reasonably certain of existing productive formation has been
undrilled acreage continuity and commercial recovery demonstrated with certainty. Seismic data
cannot be the sole indicator of continuity.

In most cases, reservoirs require actual

Generally require actual production
production or a conclusive flowing well test
or a conclusive flowing well test. In
Proved reserves at economic rates For deep water GOM can
certain cases, proved reserves can
requirements for be avoided if the estimate is fully supported
be based on logs and/or cores and
testing by seismic, wire line conveyed sampling,
is analogous to producing or tested
logs and cores.
reservoirs

Successful pilot or existing project in subject

Classification of
Successful pilot or existing project or poorer quality analogous reservoir
enhanced recovery
in subject or analogous reservoir Not required if the IOR technique has been
mechanism as
verified by routine commercial use in the
proved
area

4
 Comparison of Reserves Definitions
Development Status

Development and Developed producing and non- Developed

production status producing. Undeveloped. Undeveloped
categories

Developed Reserves expected to be Reserves that can be expected to be

recovered from existing wells recovered through existing wells with
including reserves behind pipe. existing equipment and operating methods.
Improved recovery reserves Additional oil and gas expected to be
require that necessary equipment obtained through the application of fluid
has been installed or when costs injection or other improved recovery
to do so are relatively minor. techniques should be included as proved
developed reserves only after testing by a
pilot project or after the operation of an
installed program has confirmed through
production response that increased
recovery will be achieved.

Developed - Reserves expected to be Not Defined

Producing recovered from completion
intervals which are open and
producing at the time of the
estimate. Improved recovery
reserves are considered
developed producing only after the
improved recovery project is
operational.

Developed Non- Includes shut-in (open but not Not Defined

Producing producing, waiting on
market/pipeline connections, or
mechanical problems) and behind
pipe (requires additional
completion or future recompletion)
reserves.

Undeveloped Reserves to be recovered from Reserves that are expected to be recovered

additional drilling, deepening from new wells on undrilled acreage, or
existing wells to a different from existing wells where a relatively major
reservoir or where a relatively expenditure is required for recompletion
large expenditure is required to
complete an existing well or install
production or transportation
facilities.

Allocation in Multi-well Not Defined Not Defined

Pools

5
 Comparison of Reserves Definitions
Unproved Reserves

Unproved Reserves Technical, contractual, economic, or Not Defined.

regulatory uncertainties preclude
reserves being classified as proved.
Unproved reserves may be
estimated assuming future
economic conditions (and
technological development)
different from those prevailing at the
time of the estimate.

Probable Reserves Includes: 1) step-out areas from Not Defined

proved 2) formations that appear
productive on logs but lack core,
definitive tests, or productive
analogs 3) incremental reserves
attributable to infill drilling 4)
reserves attributable to improved
recovery methods but lack pilot 5)
adjacent fault blocks up-dip to
proved 6) reserves attributable to
future workover treatments or other
procedures without successful
analogs 7) incremental reserves in
proved reservoirs through
alternative interpretations.

Possible Reserves Includes: 1) areas beyond probable Not Defined

potentially productive based on
geological interpretations 2)
formations that appear petroleum
bearing in cores and logs but may
not be commercially productive on
tests 3) reserves attributable to infill
drilling that are subject to technical
uncertainty 4) improved recovery
reserves where no pilot is
operational and reservoir
characteristics may not support
commercial application 5) adjacent
fault blocks down-dip to proved
areas.

6
 Comparison of Reserves Definitions
Deterministic vs Probabilistic Methods

Deterministic vs Reserve estimates may be Reserves estimates are prepared using

Probabilistic prepared using whether mainly deterministic methodologies. If
Methods deterministic or probabilistic probabilistic methodologies are used, the
methods. Reserve numbers are limiting criteria in the SEC definitions, such
generally defined within a range, as LKH, are still in effect and shall be
not as one fixed quantity. The range honored.
may be described qualitatively by
deterministic methods or
quantitatively by probabilistic
methods.
(the probabilistic limits (e.g. Proved
=/> P90) can only be specifically
applied when the probabilistic
method is applied)

Deterministic Deterministic estimates do not Deterministic calculations are made with

Method address uncertainties in terms of every input value singly determined.
probabilities; they require that Reasonable certainty of these estimations
volumes be described in terms of can be made with a high degree of
discrete estimates using defined confidence. The best estimate of reserves is
criteria (e.g. LKH) including made on known geological, engineering and
qualitative certainty. economical data.

Probabilistic Method If probabilistic methods are used Not specified. SEC staff feels that it would
the defined quantitative limits (e.g. be premature to issue any confidence
Proved =/> P90) apply at the entity criteria at this time.
level (before aggregation).

Application of Numerical probabilities are only Probabilistic aggregation of proved reserves

probability criteria applied in probabilistic method and can result in larger reserve estimates (due
and aggregation. probability limits apply at the entity to decrease in uncertainty of recovery) than
level. Probabilistic aggregation simple addition would yield. The SEC
allowed to the field level only, then requires a straightforward reconciliation of
arithmetic summation to reporting this for financial reporting purposes.
level. Dependencies between
entities and their distributions must
be modeled in probabilistic
aggregation.

7
 Comparison of Reserves Definitions
Special Issues

Treatment of Classification applies to all Includes only conventional hydrocarbons.

Unconventional petroleum deposits. Mined bitumen is a mining reserve, not a
Hydrocarbons petroleum reserve. However, coal bed
methane gas can be classified as proved
reserves if the recovery of such is shown to
be economically feasible.

Fuel Gas Reserves Issuers have the option to include Issuers have the option to include gas
Status gas volumes consumed in volumes consumed in operations in
operations in production and reserves if produced from the lease and
reserves if an appropriate reduces the OPEX.
expense is allocated.

Natural Gas Injection To include injection gas as Injected gas should be omitted from the
reserves, the volumes would have reported production. The reporting as
to meet the normal criteria reserves (i.e. when blow down is done) is
(economic when available for not indicated.
production, existence of a firm
market, available pipeline or other
export option, part of established
development plan).

Gas Sales Volumes Reported gas reserves reflect the Gas volumes are reported on an as sold
condition of the gas at the point of basis.
sale. If sold as wet gas, associate
liquids reserves are not reported
separately. If sold with a non-
hydrocarbon gas content, the full
volume as sold is included in
reserves. The price received will
reflect quality.

Infill Drilling Not Defined Not Defined

Compression Not Defined Not Defined

8
 Comparison of Reserves Definitions
Special Issues

Net Profits Interests Not Defined Not Defined

Production-Sharing Under a PSC the host government To calculate the reserves entitlement the
Contracts retains ownership, however the economic interest method is preferred.
contractor receives a stipulated
share of production remaining
after cost recovery. Reported
reserves are based on the
economic interest held subject to
the specific terms and time frame
of the agreement. Being tied to
economic interest, reserves must
be re-calculated annually based
on product price and operating
costs and may vary considerably.
Under SPE definitions, an average
price over the term of the contact
may be used to define reserves.

Contract Extensions Where agreements allow For purposes of determining proved

extension through negotiation of reserves, a registrants estimate of oil & gas
renewed contract terms, exercise reserves should be limited to quantities
of options to extend or other expected to be produced during the term of
means additional reserves (of its leases or concessions. Renewals should
various categories) or contingent not be assumed unless the registrant has a
resources may be assigned demonstrated history of obtaining renewals.
depending the level of certainty Automatic renewal of such agreements
and commercial viability cannot be expected if the regulatory body
associated with the contract has the authority to end the agreement
extension. unless there is a long and clear track record
which supports the conclusion that such
approvals and renewal are a matter of
course.

Product NA NA
Categorization

9
 Comparison of Reserves Definitions
Economics/Commerciality

Commerciality In order to assign reserves of any In frontier areas, issuers must demonstrate
category, a project needs to be reasonable certainty of a market and the
defined in terms of a commercially existence (or is likely to exist in the near
viable development plan and there future) of an economic method to extract,
should be evidence of firm intent treat and transport the hydrocarbon
to proceed.

Commitment If the degree of commitment is not In frontier areas a commitment by the

such that an accumulation is company to develop the necessary
expected to be developed and production, treatment and transportation
placed on production within a infrastructure is essential to the attribution
reasonable time frame (e.g. 5 of proved undeveloped reserves. Significant
years), the estimated recoverable lack of progress on the development of
volumes should be classified as such reserves may be evidence of a lack of
contingent resources (not such commitment. Affirmation of this
reserves). commitment may take the form of signed
sales contracts for the products; request for
proposals to build facilities; signed
acceptance of bid proposals; memos of
understanding between the appropriate
organizations and governments; firm plans
and timetables established; approved
authorization for expenditures to build
facilities; approved loan documents to
finance the required infrastructure; initiation
of construction of facilities; approved
environmental permits etc. Reasonable
certainty of procurement of project financing
by the company is a requirement for the
attribution of proved reserves.

Economics The underlying economic Economics has to be computed property by

evaluation based on perception property, applying year-end costs and
(best estimate) of future costs and prices and using only proved reserves.
prices together with best-estimate Future price changes shall be considered
production profile expected to only to the extent provided by existing
equate to a proved plus probable contractual arrangements. A positive cash
scenario. To limit downside flow is necessary to classify reserves as
exposure the low case scenario proved.
should be at least break-even,
which is consistent with the
requirement that proved reserve
are viable under current
economic conditions.
Development Plan While some companies choose See the Commitment item.
Approvals not to assign any proved reserves
until the development plan has
received all relevant formal
approvals, SPE definitions require
only a reasonable expectation that
the necessary facilities to process
and transport those reserves will
be installed.

10
 Comparison of Reserves Definitions
Economics/Disclosure Guidelines

Prices & Costs for Proved: Existing economic Prices and costs as of the last day of the
defining reserves conditions (year-end or companys fiscal year
economic limit. appropriate period* average) no escalation
(SPE *recommends prior 12
month period)

Unproved: reserves may be

based on forecast prices and
costs

Abandonment Costs Economic limit calculated Economic limit calculated including

including abandonment and abandonment costs.
reclamation costs.

Net Present Value of Not Defined The Standardized Measurement of

Future Net Revenue Discounted Future Net Cash Flows have to
(FNR). be disclosed together with the future cash
inflow, future development and production
cost, future income tax expenses. A discount
rate of 10 % is used.

Audit Requirements No requirement for use of Not Required

external evaluators. SPE
Standards Pertaining to the
Estimating and Auditing of Oil and
Gas Information recommends
standards for training, experience
levels, and sets independence
criteria for evaluators and
auditors whether internal or
external.

Gross vs Net See Note 1 See Note 1

Reserves

11
Note 1:

SEC Net
FASB 69-10: Net quantities of reserves include those relating to the enterprises operating and
non-operating interests in properties as defined in paragraph 11(a) of Statement 19. Quantities of
reserves relating to royalty interested owned shall be included in net quantities. Net quantities
shall not include reserves relating to interests of others in properties owned by the enterprise.
FASB 69-13: Net quantities shall not include oil and gas subject to purchase under long-term
supply, purchase, or similar agreements and contracts.

SPE Regards Royalty

Within the U.S., royalty volumes are strictly omitted from reported reserves (that is, they are
reported on a net basis). In some cases outside the U.S., where royalty is paid in cash and the
cash flow from the royalty is reflected in the companys accounts, the corresponding royalty may
be included in reserves.

12
 UK Statement of Recommended Practices (SORP-2001)

The Oil Industry Accounting Committee (OIAC) was established in 1984 to develop and
promulgate guidance for the United Kingdom (UK) upstream oil and gas industry. The
OIAC was authorized by the U.K. Accounting Standards Board (ASB) to develop a
Statement of Recommended Practices (SORP) for the preparation of financial
disclosures.

The first version was issued in 1986 and the last update was published in June 2001.
For accounting periods beginning on or after 24 December 2001, Financial Reporting
Standard 18, Accounting Policies, requires disclosure for entities falling within the scope
of a SORP, whether the SORP has been followed and give details of and explanations
for any departures.

The major feature is that the reserves may be disclosed, at companys choice, as either
Proved and probable oil and gas reserves or Proved developed and undeveloped oil
and gas reserves. These alternatives are mutually exclusive and two different
definitions are provided. Thus, the comparison with SPE definitions was made
separating these two possible choices.

The degree of certainty of proven and probable reserves is given by a probabilistic

definition (2P =/> P50) while proved developed and undeveloped use a deterministic
definition (reasonable certainty) almost equal to that defined by the SEC. In either
submission, the key proved reserve boundaries (e.g. LKH and area extension) must be
based on single-value deterministic estimates.

The proved developed and undeveloped reserves are defined with prices and costs as
at the date the estimate is made. The proved and probable reserves definition does not
address this aspect although such reserves quantification has to be based upon a
reasonable assessment of the future economics of their production, a reasonable
expectation of an available market, and evidence that the necessary production,
transmission and transportation facilities are available or can be made available.

The SORP requires that the source of the estimate should be disclosed together with a
description of the basis used to arrive at net quantities.

The SORP guidelines have a financial reporting purpose; methodological aspects are
not contemplated. The SORP document can be accessed on the Internet at:
www.oiac.co.uk/pronouncements.htm

13
Comparison to SPE Definitions

Commercial

Production Reserves

Proved Proved + Probable

Estimate Estimate

Developed Undeveloped

SORP is primarily an accounting standards document. It does not discuss the full
reserves and resource classification system (no possible reserves, no contingent or
prospective resources) nor does it supply detailed guidance on the recommended
evaluation practices. Its reserves definitions are confined to the Proven and 2P estimate
options defined above.

Its 2P definitions clearly require that there should be a 50% statistical probability that
the actual quantity of recoverable reserves will be more than the amount estimated as
proven and probable and a 50% statistical probability that it will be less. Further the
equivalent statistical probabilities for the proven component of proven and probable
reserves are 90% and 10% respectively.

The commercial and technical criteria for the 2P case are very similar to those set by the
SPE definitions. Specific criteria include:
Reserves may only be considered proven and probable if producibility is supported
by either actual production or conclusive formation test.
2P includes immediately adjoining undrilled portions beyond proved which can be
reasonable judged as economically productive based on available geophysical,
geological and engineering data.
Improved recovery 2P reserves can be defined based on successful pilots or
operation of an installed program in the reservoir or other reasonable evidence
(successful analogs or reservoir simulation studies).
Reserves may be considered commercially producible if management has the
intention of developing and producing them.

The Proved Developed and Undeveloped definitions duplicate those of the basic SEC
guidance and estimates would meet all SPE guidelines. SORP does not subdivide
Proved Developed into Producing and Non-Producing. (It is noted that some issuers
interpret that while the words duplicate the SEC proved definitions, there is no obligation
to consider the supplemental guidance issued by SEC staff and thus the reported proved
reserves under SORP may not equal those estimated for SEC disclosures).

Regarding non-conventional hydrocarbons, the Proved definition is taken from the SEC
and the 2P definition does not address the issue.

14
 Comparison of Reserves Definitions
Reserves Definitions/Proved Criteria

SPE/WPC U.K. SORP

(1997) (2001)

Disclosure of Proved
Disclosure of Proved and
Developed and
Probable
Undeveloped
Intended purpose General application not Financial statements reporting in UK
country specific

Qualitative Reasonable certainty to be Not defined Reasonable certainty to

description of commercially recoverable be commercially
certainty- proved recoverable
Qualitative Not proved, but more likely than Not defined -
description of not to be recoverable
certainty- probable

Qualitative Less likely to be recovered than - -

description of probable
certainty- possible

Quantification of Proved =/> P90 Proved =/> P90 Not defined

probabilities 2P =/> P50 2P =/> P50
associated with 3P =/>P10
estimates.
Proved reserves No proved reserves below LKH No proved reserves below No proved reserves
relative to lowest as defined by well logs, core LKH below LKH
known hydrocarbon analysis or formation testing. (no detailed criteria) (no detailed criteria)
(LKH)

Proved reserve Directly offsetting DSUs and/or Limited to immediately Limited to immediately
extensions on where reasonably certain of adjoining portions not yet adjoining portions not yet
undrilled acreage continuity and commercial drilled, but which can be drilled, but which can be
recovery. reasonably judged as reasonably judged as
economically productive economically productive
based on geological, based on geological and
geophysical and engineering engineering data.
data.

Proved reserves Generally require actual Producibility is supported by Economic producibility is

requirements for production or a conclusive either actual production or supported by either actual
testing flowing well test. In certain conclusive formation test production or conclusive
cases, proved reserves can be formation test
based on logs and/or cores and
is analogous to producing or
tested reservoirs.

Classification of Successful pilot or existing Successful pilot or existing Successful pilot or

enhanced recovery project in subject or analogous project in subject or other existing project in subject.
mechanism as reservoir. reasonable evidence
proved (analogous reservoirs,
reservoir simulation studies).

15
 Comparison of Reserves Definitions
Development Status

Development and Developed producing and non- Not defined Developed and
production status producing. Undeveloped. Undeveloped
categories

Developed Reserves expected to be Not defined Proved reserves that can

recovered from existing wells be expected to be
including reserves behind pipe. recovered from existing
Improved recovery reserves wells, equipment and
require that necessary operating methods.
equipment has been installed or Improved recovery
when costs to do so are reserves included only
relatively minor. after testing by a pilot
project or after operation
confirms increased
recovery.

Developed - Reserves expected to be Not defined Not defined

Producing recovered from completion
intervals that are open and
producing at the time of the
estimate. Improved recovery
reserves are considered
developed producing only after
the improved recovery project is
operational.

Developed Non- Includes shut-in (open but not Not defined Not defined
Producing producing, waiting on
market/pipeline connections, or
mechanical problems) and
behind pipe (requires additional
completion or future re-
completion) reserves

Undeveloped Reserves to be recovered from Not Defined Proved undeveloped

additional drilling, deepening reserves are all other
existing wells to a different proved reserves that do
reservoir or where a relatively not meet the proved
large expenditure is required to developed definition.
complete an existing well or
install production or
transportation facilities

Allocation in Multi- Not Defined Not Defined

Not Defined
well Pools

16
 Comparison of Reserves Definitions
Unproved Reserves

Unproved Reserves Technical, contractual, A qualitative characterization Estimates of proved

economic, or regulatory of unproved reserves is not reserves do not include:
uncertainties preclude reserves indicated volumes classified as
being classified as proved. indicated additional
Unproved reserves may be reserves or where
estimated assuming future recovery is uncertain. -
economic conditions (and
technological development)
different from those prevailing
at the time of the estimate.

Probable Reserves Includes: 1) step-out areas from No qualitative criteria given-

proved 2) formations that
appear productive on logs but
lack core, definitive tests, or
productive analogs 3)
incremental reserves
attributable to infill drilling 4)
reserves attributable to
improved recovery methods but
lack pilot 5) adjacent fault
blocks up-dip to proved 6)
reserves attributable to future
workover treatments or other
procedures without successful
analogs 7) incremental
reserves in proved reservoirs
through alternative
interpretations.

Possible Reserves Includes: 1) areas beyond NA-

probable potentially productive
based on geological
interpretations 2) formations
that appear petroleum bearing
in cores and logs but may not
be commercially productive on
tests 3) reserves attributable to
infill drilling that are subject to
-
technical uncertainty, 4)
improved recovery reserves
where no pilot is operational
and reservoir characteristics
may not support commercial
application 5) adjacent fault
blocks down-dip to proved
areas.

17
 Comparison of Reserves Definitions
Deterministic vs Probabilistic Methods

Deterministic vs Reserve estimates may be Reserves estimates are Reserves estimates have
Probabilistic Methods prepared using wither prepared using a probabilistic to be prepared using only
deterministic or probabilistic approach with deterministic deterministic methods
methods. Reserve numbers are constraints. (i.e. LKH).
generally defined within a
range, not as one fixed
quantity. The range may be
described qualitatively by
deterministic methods or
quantitatively by probabilistic
methods.
(the probabilistic limits (e.g.
Proved =/> P90) can only be
specifically applied when the
probabilistic method is applied)

Deterministic Method Deterministic estimates do not Methods are not addressed in Methods are not
address uncertainties in terms SORP addressed in SORP
of probabilities; they require
that volumes be described in
terms of discrete estimates
using defined criteria (e.g. LKH)
including qualitative certainty.

Probabilistic Method If probabilistic methods are Methods are not addressed in -

used the defined quantitative SORP
limits (e.g. Proved =/> P90)
apply at the entity level (before
aggregation).

Application of Numerical probabilities are only Application of probability -

probability criteria applied in probabilistic method criteria and aggregation are
and aggregation. and probability limits apply at not addressed in SORP.
the entity level. Probabilistic
aggregation allowed to the field
level only, then arithmetic
summation to reporting level.
Dependencies between entities
and their distributions must be
modeled in probabilistic
aggregation.

18
 Comparison of Reserves Definitions
Special Issues

Treatment of Classification applies to all Classification applies to crude Estimates do not include
Unconventional petroleum deposits. oil, natural gas and natural crude oil, natural gas and
Hydrocarbons gas liquids. (unconventional natural gas liquids
hydrocarbons not addressed) hydrocarbons that may
be recovered from oil
shales, coal, gilsonite and
other such sources.

Fuel Gas Reserves Issuers have the option to The figures both for See Proved and
Status include gas volumes consumed production and commercial Probable.
in operations in production and reserves should consistently
reserves if an appropriate either include or exclude any
expense is allocated. quantities of oil and gas
consumed in operations.

Natural Gas Injection To include injection gas as Not defined Not defined
reserves, the volumes would
have to meet the normal criteria
(economic when available for
production, existence of a firm
market, available pipeline or
other export option, part of
established development plan).

Gas Sales Volumes Reported gas reserves reflect Not defined Not defined
the condition of the gas at the
point of sale. If sold as wet gas,
associate liquids reserves are
not reported separately. If sold
with a non-hydrocarbon gas
content, the full volume as sold
is included in reserves. The
price received will reflect
quality.

Infill Drilling Not Defined Not defined Not defined

Compression Not Defined Not defined Not defined

19
 Comparison of Reserves Definitions
Special Issues

Net Profits Interests Not defined P.164 Where a purchasers See Proved and Probable
entitlement is represented by
a specific proportion of future
net revenue (such as in a net
profits interest) the owner
retains the primary interest in
the underlying reserves. The
purchaser, is not considered
to hold a direct interest in the
underlying reserves.

Production-Sharing Under a PSC the host P.157-161 If there is See Proved and Probable
Contracts government retains ownership, production, the contractor
however the contractor receives receives a share of the It appears that SORP
a stipulated share of production production for recovery of its would allow reporting of
remaining after cost recovery. costs (cost oil). The reserves based on
Reported reserves are based remainder of the production economic interests.
on the economic interest held (profit oil) is shared between
subject to the specific terms the contractor and the No guidance on the use
and time frame of the government in agreed ratios, of average prices is
agreement. Being tied to the share of the profit oil given.
economic interest, reserves taken by the government
must be re-calculated annually representing a form of
based on product price and taxation. The contractor's
operating costs and may vary anticipated production
considerably. Under SPE revenues, from both the cost
definitions, an average price oil and the profit oil
over the term of the contact elements, are combined in
may be used to define their evaluation of the project
reserves. economics

Contract Extensions Where agreements allow Not defined Not defined

extension through negotiation
of renewed contract terms,
exercise of options to extend or
other means additional
reserves (of various categories)
or contingent resources may be
assigned depending the level of
certainty and commercial
viability associated with the
contract extension.

20
 Comparison of Reserves Definitions
Economics/Commerciality

Commerciality In order to assign reserves of Based on a reasonable Not defined

nay category, a project needs assessment of future
to be defined in terms of a economics, a reasonable
commercially viable expectation that there is a
development plan and there market and the evidence that
should be evidence of firm necessary production,
intent to proceed. transmission and
transportation facilities are
available or can be in the
future are required.

Commitment If the degree of commitment is Reserves may be considered Not defined

not such that an accumulation commercially producible if
is expected to be developed management has the
and placed on production within intention of developing and
a reasonable time frame (e.g. 5 producing them.
years), the estimated
recoverable volumes should be
classified as contingent
resources (not reserves).

Economics The underlying economic A reasonable assessment of Not defined

evaluation based on perception future economics is required.
(best estimate) of future costs
and prices together with best-
estimate production profile
expected to equate to a proved
plus probable scenario. To limit
downside exposure the low
case scenario should be at
least break-even which is
consistent with the requirement
that proved reserve are viable
under current economic
conditions.

Development Plan While some companies choose Not defined Not defined
Approvals not to assign any proved
reserves until the development
plan has received all relevant
formal approvals, SPE
definitions require only a
reasonable expectation that the
necessary facilities to process
and transport those reserves
will be installed.

21
 Comparison of Reserves Definitions
Economics/Disclosure Guidelines

Prices & Costs for Proved: Existing economic Not defined. Prices and cost as the
defining reserves conditions (year-end or Associated costs may be date the estimate is
economic limit. appropriate period* average) accumulated in a cost pool. made.
(*SPE recommends prior 12 The source of estimates
month period). should be disclosed together The source of estimates
with a description of the basis should be disclosed
used to arrive at net together with a
Unproved: reserves may be quantities. description of the basis
based on forecast prices and used to arrive at net
costs. quantities.

Abandonment Costs Economic limit calculated FRS 12 specifically relates See Proved and Probable
including abandonment and this concept to oil installations
reclamation costs. by examples, requiring
provision for
decommissioning costs.

Net Present Value of Not defined Not defined Not defined

Future Net Revenue
(FNR).

Audit Requirements No requirement for use of P.248 Although the Not required
external evaluators. SPE determination of the reserve
Standards Pertaining to the quantities disclosed will be
Estimating and Auditing of Oil the responsibility of the
and Gas Information directors, the source of the
recommends standards for estimates should be
training, experience levels, and disclosed together with a
sets independence criteria for description of the basis used
evaluators and auditors to arrive at net quantities.(No
whether internal or external. audit requirements)

SPE Regards Royalty

Within the U.S., royalty volumes are strictly omitted from reported reserves (that is, they are
reported on a net basis). In some cases outside the U.S., where royalty is paid in cash and the
cash flow from the royalty is reflected in the companys accounts, the corresponding royalty may
be included in reserves

SORP Regards Royalties:

P. 111 Government and other royalties payable are sometimes excluded from both the value of
reported turnover and cost of sales on the basis that the reporting company has no legal right to
the royalty oil or gas. In other cases all invoiced quantities are included in turnover, and royalty
payments are charged to cost of sales. Variations in treatment render comparisons difficult, not
only as regards turnover but also as regards the relationship between turnover, production and
net oil and gas reserve quantity movements

P.247 Net quantities should only include amounts that may be taken by Governments as
royalties-in-kind where it is the companys policy (see paragraph 198) to record as turnover the
value of production taken as royalty-in-kind.

22
 Canadian Security Administrators (CSA -2002)

Effective September 30, 2003, annual and ongoing oil and gas reserves disclosures by
Canadian companies are governed by National Instrument (NI) 51-101 as issued by the
Canadian Securities Administrators (CSA). The disclosure regulations reference
guidelines as contained in the Canadian Oil and Gas Evaluation Handbook (COGEH)
Volume 1 Reserves Definitions and Evaluation Practices and Procedures co-authored
by the Society of Petroleum Evaluation Engineers (Calgary Chapter) and the Canadian
Institute of Mining, Metallurgy, and Petroleum (CIM Petroleum Society) published in
June 2002. The contained reserves definitions are referred to as CIM 2002.

For purposes of this comparison, the Canadian definitions are those stated in
CIM 2002 with additional criteria taken from the Canadian Oil and Gas Evaluation
Handbook Volume 1 and referred to hereafter as the CIM definitions. The base
reserve and resource definitions are designed to be applicable independent of the
regulatory disclosure rules applied, that is, they can be used whether filing under SEC or
CSA regulations. While COGEH supplies standards to be used within the Canadian oil
and gas industry in evaluating reserves and resources, the actual reporting
requirements are contained in the NI 51-101 regulations; several key features of these
rules are supplied as background.

Under NI 5101, the statement of reserves data must include proved, proved plus
probable (proved plus probable plus possible is optional) and the accompanying future
net revenue at multiple defined discount rates. Issuers also have the option to disclose
Contingent and Prospective Resources. The proved (developed producing and non-
producing, undeveloped, and total) reserves are defined under both evaluation date (that
is year-end/constant) and defined forecast cost/price scenarios; the proved plus
probable estimates use forecast cost/prices schedules only. Reserve impairment [ceiling
test and depletion] is calculated using the 2P/forecast case. Reserves in each certainty
class must be reported by product type and country; price and costs schedules for each
product type must be disclosed. NI 51-101 reserves disclosures include both
conventional and unconventional hydrocarbons (including mined bitumen).

CSA regulations require that, for non-exempt Canadian issuers, independent qualified
evaluators (external consultants) be employed to evaluate or audit, annually, at least
75% of each companys properties based on proved plus probable future net revenue.
The remaining 25% must be independently reviewed. NI-51-101 recommends (but does
not require) that each issuers board should appoint a Reserves Committee to
coordinate interaction between the directors, management and the independent
evaluators. Exemption from independent evaluation is only available to companies with
more than 100,000 boe per day production, and must be applied for, but is neither
certain, nor in perpetuity. Separate exemptions, to be able to report using US
requirements (FASB/SEC) are also available, but there is no production threshold. None
of these exemptions provide an exemption from CSA review.

CSA NI 51-101 regulations and the CIM reserves definitions can be accessed on the
internet at: http://www.albertasecurities.com/index.php?currentPage=3954

Dr. David Elliott with the Alberta Securities Commission reviewed this summary and
provided assistance in completing a detailed comparison to the SPE definitions.

23
Comparison to SPE Definitions

CIM has adopted the overall 2001 SPE/WPC/AAPG reserves and resource
classification; as illustrated in figure 1; it is identical with one exception. The CIM
classification allows the subdivision into Developed (separated into Developed
Producing and Developed Non-producing) and Undeveloped at all reserves certainty
levels whereas the current SPE definitions apply these status categories only to proved
reserves but has developed their own reserve definitions and assessment guidelines.
The sum of prior production and reserves is defined as the ultimate reserves. Reserves
by definition must be remaining, recoverable with established technology under specified
economic conditions, which are reasonable and disclosed. Note the quantitative
certainty terms applied to 1P, 2P and 3P reserves are identical to those applied to low,
best and high estimate for Contingent and Prospective Resources. It is emphasized that
allocation to a resource category is based on information available as of the date of the
evaluation.
Total Petroleum
Initially-in-Place

Discovered Petroleum Undiscovered Petroleum

Initially-in-Place Initially-in-Place

Commercial Sub-commercial

Production Reserves Contingent Unrecoverable Prospective Unrecoverable

Resources Resources

Proved Proved + Probable Proved + Probable

Estimate Estimate + Possible Estimate
(conservative) (realistic) (optimistic)

Developed Undeveloped
Low Best High
Estimate Estimate Estimate
(conservative) (realistic) (optimistic)
Developed Producing

Developed Non-producing Low Best High

Estimate Estimate Estimate
(conservative) (realistic) (optimistic)

Figure 1: Canadian CIM Classification

While the reserves definitions are very similar to those of the SPE, the following issues
are noted:

- For proved reserves, the CIM definitions use the quantitative term high degree
of certainty to be recoverable versus the SPE term reasonable certainty
(although the SPE defines reasonable certainty as expressing a high degree of
confidence that the quantities will be recovered).

- The CIM defines Probable reserves are those additional reserves that are less
certain to be recovered than proved reserves. Some users interpret that this
implies that no probable reserves can be estimated without associated proved
reserves. This may be contradicted with separate CIM guidance that in the

24
 absence of production or formation testing, probable and/or possible reserves
may be assigned to an accumulation based on well logs and/or cores that
support an analogy to other reservoirs in the area that have produced or been
tested. (There is still debate on this issue)

- The CIM definitions state that the qualitative certainty levels are applicable to
both individual Reserve Entities and to Reported Reserves being the sum of
entity level estimates used in disclosures. While defining the same probability
targets (P90, P50, P10) as the SPE, the CIM apply these at the reporting level
(country or corporation) while the SPE applies them at the entity level (field,
property or project). In large portfolios the central limit theorem would allow lower
confidence targets at the entity level. (although COGEH still requires a high
degree of certainty at the entity level). Both SPE and CIM guidance prohibits
fully probabilistic aggregation beyond the field/project level. However, since the
CIM claims that even deterministic estimates have an inferred confidence level,
the same portfolio effect may be reflected in their deterministic estimates. While
acknowledging the use of fully probabilistic analyses, the CIM expects that most
Canadian assessments will use deterministic methods.

- SPE guidelines are designed to incorporate both conventional and

unconventional reserves, but do not specifically list bitumen as a hydrocarbon
type nor do they address in situ versus mining extraction methods. Although NI
51-101 does specifically include bitumen (including mined bitumen) as reserves,
the CIM definitions do not address the issue and COGEH guidelines do not
include bitumen or synthetic oil as product types.

- Similar to the SPE approach, under the CIM guidelines undeveloped recoverable
volumes must have a sufficient return on investment to justify the associated
capital expenditure in order to be classified as reserves as opposed to
Contingent Resources. The CIM definitions further state that reserves may be
assigned only in instances where production or development of these reserves is
not prohibited by government regulations (e.g. where environmental conditions
can not be satisfied).

- The CIM reserves definitions state that, the fiscal conditions under which
reserve estimates are prepared should generally be those which are considered
to be a reasonable outlook on the future. Security regulators or other agencies
may require that constant or other prices and costs be used in the determination
of reserves and value. In such circumstances, the estimated reserve quantities
must be recoverable under those conditions and should also be recoverable
under fiscal conditions considered to be a reasonable outlook on the future. In
any event, the fiscal assumptions used in the preparation of reserves estimates
must be disclosed. As opposed to the SPE definitions, the same fiscal
conditions are assumed for proven and unproven reserves.

The following chart compares in more detail SPE /WPC reserves and resource
definitions (including 2001 clarifications) to the Canadian CIM Definitions.

25
 Comparison of Reserves Definitions
Reserves Definitions/Proved Criteria

SPE/WPC Canadian
(1997) CIM (2002)

Intended purpose General application not country General application and securities
specific reporting in Canada

Qualitative Reasonable certainty to be High degree of certainty to be

description of commercially recoverable recoverable [target for Entity]
certainty- proved

Qualitative Not proved, but more likely than Additional reserves less certain to be
description of not to be recoverable recovered than proved. Equally likely
certainty- probable that remaining reserves will be higher
or lower than 2P [target for Entity]

Qualitative Less likely to be recovered than Additional to 2P. Unlikely that the
description of probable actual recovery will exceed the 3P
certainty- possible estimate [target for Entity]

Quantification of Proved =/> P90 Proved =/> P90

probabilities 2P =/> P50 2P =/> P50
associated with 3P =/>P10 3P =/>P10
estimates. (target at field/property level) (target for reported reserves)

Proved reserves No proved reserves below LKH as No proved reserves below LKH as
relative to lowest defined by well logs, core analysis defined by well logs, core analysis or
known hydrocarbon or formation testing. formation testing.
(LKH)
Proved reserve Directly offsetting DSUs and/or Generally limited to directly offsetting
extensions on where reasonably certain of spacing units (DSUs) with a high
undrilled acreage continuity and commercial degree of geologic continuity.
recovery.
Proved reserves Generally require actual production Confirmation of commercial
requirements for or a conclusive flowing well test. In productivity of an accumulation by
testing certain cases, proved reserves can production or formation testing is
be based on logs and/or cores and required for classification of reserves
is analogous to producing or tested as proved.
reservoirs.

Classification of Successful pilot or existing project Successful pilot or existing project in

enhanced recovery in subject or analogous reservoir. subject or analogous reservoir.
mechanism as Commitment demonstrated by project
proved funding, regulatory approvals.

26
 Comparison of Reserves Definitions
Development Status

Development and Developed producing and non- Developed producing and non-
production status producing. Undeveloped. producing. Undeveloped.
categories Development status can also be
applied to probable and possible.

Developed Reserves expected to be Reserves that are expected to be

recovered from existing wells recovered from existing wells and
including reserves behind pipe. installed facilities or if facilities have
Improved recovery reserves not been installed, that would involve
require that necessary equipment a relatively low expenditure.
has been installed or when costs
to do so are relatively minor.

Developed - Reserves expected to be Reserves expected to be recovered

Producing recovered from completion from completion intervals open at the
intervals which are open and time of the estimate. May be
producing at the time of the currently producing or if shut-in, must
estimate. Improved recovery have been previously on production
reserves are considered and the date of resumption of
developed producing only after the production must be known with
improved recovery project is certainty,
operational.

Developed Non- Includes shut-in (open but not Reserves that either have not been
Producing producing, waiting on on production or have previously
market/pipeline connections, or been on production but are shut-in
mechanical problems) and behind and the date of resumption of
pipe (requires additional production is unknown.
completion or future recompletion)
reserves

Undeveloped Reserves to be recovered from Reserves expected to be recovered

additional drilling, deepening from known accumulations where a
existing wells to a different significant expenditure (when
reservoir or where a relatively compared to the cost of drilling a
large expenditure is required to well) is required to render them
complete an existing well or install capable of production. (NI 51-101
production or transportation requires reasons that a property will
facilities. not be developed within 2 years)

Allocation in Multi-well Not Defined If appropriate, allocate total pool

Pools reserves between developed
(producing and non-producing) and
undeveloped categories based on
recoverable estimates from specific
wells, facilities and completion
intervals in the pool.

27
 Comparison of Reserves Definitions
Unproved Reserves

Unproved Reserves Technical, contractual, economic, or In the absence of production or

regulatory uncertainties preclude formation testing, probable and/or
reserves being classified as proved. possible reserves may be assigned
Unproved reserves may be on the basis of well log and/or core
estimated assuming future analysis which indicates that the
economic conditions (and zone is hydrocarbon bearing and is
technological development) analogous to productive reservoirs in
different from those prevailing at the the immediate area.
time of the estimate.

Probable Reserves Includes: 1) step-out areas from Probable reserves may be assigned
proved 2) formations that appear when a planned enhanced recovery
productive on logs but lack core, project does not meet proved
definitive tests, or productive requirements but the project can be
analogs 3) incremental reserves shown to be practically and
attributable to infill drilling 4) technically reasonable, commercial
reserves attributable to improved success has been demonstrated in
recovery methods but lack pilot 5) reservoirs with analogous rock and
adjacent fault blocks up-dip to fluid properties and it is reasonably
proved 6) reserves attributable to certain that the project will be
future workover treatments or other implemented. (COGEH does not
procedures without successful detail requirements for assigning
analogs 7) incremental reserves in Probable to primary recovery
proved reservoirs through projects)
alternative interpretations.

Possible Reserves Includes: 1) areas beyond probable Possible reserves may be assigned
potentially productive based on when a planned enhanced recovery
geological interpretations 2) project does not meet proved or
formations that appear petroleum probable requirements but the project
bearing in cores and logs but may can be shown to be practically and
not be commercially productive on technically reasonable, commercial
tests 3) reserves attributable to infill success has been demonstrated in
drilling that are subject to technical reservoirs with analogous rock and
uncertainty 4) improved recovery fluid properties but there is some
reserves where no pilot is doubt of success in the subject
operational and reservoir reservoir, and it is reasonably certain
characteristics may not support that the project will be implemented.
commercial application 5) adjacent (COGEH does not detail
fault blocks down-dip to proved requirements for assigning Possible
areas. to primary recovery projects)

28
 Comparison of Reserves Definitions
Deterministic vs Probabilistic Methods

Deterministic vs Reserve estimates may be Reserve estimates may be prepared

Probabilistic prepared using wither deterministic using either deterministic or
Methods or probabilistic methods. Reserve probabilistic methods; the methods
numbers are generally defined are not distinct and separate. A
within a range, not as one fixed deterministic estimate is a single
quantity. The range may be value within a range of outcomes that
described qualitatively by could be derived from probabilistic
deterministic methods or analysis. There should be no material
quantitatively by probabilistic difference between Reported
methods. reserves prepared using
(the probabilistic limits (e.g. Proved deterministic and probabilistic
=/> P90) can only be specifically methods. It is required that the
applied when the probabilistic guidelines (e.g. LKH) be met
method is applied) regardless of the analysis method
used.

Deterministic Deterministic estimates do not The discrete value for each

Method address uncertainties in terms of parameter is selected based on the
probabilities; they require that estimators determination of the value
volumes be described in terms of that is most appropriate for the
discrete estimates using defined corresponding reserves category. (all
criteria (e.g. LKH) including deterministic estimates have an
qualitative certainty. inferred probability)

Probabilistic Method If probabilistic methods are used If probabilistic methods are used the
the defined quantitative limits (e.g. defined quantitative limits (e.g.
Proved =/> P90) apply at the entity Proved =/> P90) apply at the
level (before aggregation). Reporting Level (after aggregation).

Application of Numerical probabilities are only Since probability criteria target the
probability criteria applied in probabilistic method and aggregate reporting level, estimates
and aggregation. probability limits apply at the entity of reserves and future net revenue
level. Probabilistic aggregation for individual properties may not
allowed to the field level only, then reflect the same confidence level as
arithmetic summation to reporting estimates for the aggregate. Fully
level. Dependencies between probabilistic aggregation may not be
entities and their distributions must applied beyond the field level.
be modeled in probabilistic Dependencies between entities and
aggregation. their distributions must be modeled in
probabilistic aggregation. (each entity
level proved estimate must still have
a high degree of certainty although
specific confidence levels are not
quantified)

29
 Comparison of Reserves Definitions
Special Issues

Treatment of Classification applies to all Not defined in CIM (NI 51-101

Unconventional petroleum deposits. includes all conventional and
Hydrocarbons unconventional hydrocarbons
including mined bitumen)

Fuel Gas Reserves Issuers have the option to include Fuel gas consumed before the first
Status gas volumes consumed in point of sale is treated as production
operations in production and shrinkage and is not included in
reserves if an appropriate reserves.
expense is allocated.

Natural Gas Injection To include injection gas as Not Defined

reserves, the volumes would have
to meet the normal criteria
(economic when available for
production, existence of a firm
market, available pipeline or other
export option, part of established
development plan).

Gas Sales Volumes Reported gas reserves reflect the Oil, gas, and by-product reserves
condition of the gas at the point of must be reported on a marketable
sale. If sold as wet gas, associate basis. This refers to the volume of
liquids reserves are not reported reserves that changes ownership at
separately. If sold with a non- the custody transfer point, The
hydrocarbon gas content, the full composition or quality may vary
volume as sold is included in considerably; however the price
reserves. The price received will received reflects the quality of the
reflect quality. product that is being sold.

Infill Drilling Reserves assigned to infill drilling The estimator must quantify from well
with low uncertainty are Probable, interference effects that portion which
infill areas with technical represents accelerated production
uncertainty are Possible. and that portion which represents
(acceleration issue not addressed) incremental recovery. (Treated as
improved recovery for annual
reconciliations in NI 51-101).

Compression Not Defined Not addressed in CIM definitions. (NI

51-101 guidance: Installation of field
facilities such as compression, line
lopping, etc are treated as a form of
improved recovery for annual
reconciliations.

30
 Comparison of Reserves Definitions
Special Issues

Net Profits Interests Not defined A net profits interest is an interest in

production income only and not in
production or reserves.

Production-Sharing Under a PSC the host government Not Addressed in COGEH Vol 1
Contracts retains ownership, however the [Currently being addressed by a
contractor receives a stipulated COGEH sub-committee]
share of production remaining
after cost recovery. Reported
reserves are based on the
economic interest held subject to
the specific terms and time frame
of the agreement. Being tied to
economic interest, reserves must
be re-calculated annually based
on product price and operating
costs and may vary considerably.
Under SPE definitions, an average
price over the term of the contact
may be used to define reserves.

Contract Extensions Where agreements allow Not Addressed in COGEH Vol. 1

extension through negotiation of (For securities disclosure, it would
renewed contract terms, exercise depend on the likelihood of contract
of options to extend or other extension. CSA would require a
means additional reserves (of discussion of the issue so that an
various categories) or contingent investor is aware of the pros and
resources may be assigned cons.)
depending on the level of certainty
and commercial viability
associated with the contract
extension.

Product categorization Not Defined Reserves must be categorized

according to their physical properties
and their association with other
products as the uses and values of
the commodities will differ. See Note
2.

31
 Comparison of Reserves Definitions
Economics/Commerciality

Commerciality In order to assign reserves of any Reserves may only be assigned to

category, a project needs to be those volumes that are economically
defined in terms of a commercially recoverable and where development
viable development plan and there is not prohibited by government
should be evidence of firm intent regulation.
to proceed.

Commitment If the degree of commitment is not In general, quantities must not be

such that an accumulation is classified as reserves unless there is
expected to be developed and a reasonable expectation that the
placed on production within a accumulation will be developed and
reasonable time frame (e.g. 5 place on production within a
years), the estimated recoverable reasonable timeframe. (No time
volumes should be classified as defined, but it depends on the area.
contingent resources (not A full discussion of the issue is
reserves). required in securities disclosures).

Economics The underlying economic The fiscal conditions under which

evaluation based on perception reserve estimates are prepared
(best estimate) of future costs and should generally be a reasonable
prices together with best-estimate outlook on the future.
production profile expected to
equate to a proved plus probable Reserves are those volumes
scenario. To limit downside recovered before a project reaches
exposure the low case scenario its economic limit, that is, the
should be at least break-even, production rate that provides
which is consistent with the revenues (net of royalties) equal to
requirement that proved reserves operating costs.
are viable under current
economic conditions.

Development Plan While some companies choose Not Defined in COGEH

Approvals not to assign any proved reserves (Security regulators would apply the
until the development plan has standard of a reasonable expectation
received all relevant formal of approval.)
approvals, SPE definitions require
only a reasonable expectation that
the necessary facilities to process
and transport those reserves will
be installed.

32
 Comparison of Reserves Definitions
Economics/Disclosure Guidelines

Prices & Costs for Proved: Existing economic The fiscal conditions under which
defining reserves conditions (year-end or reserve estimates are prepared
economic limit. appropriate period* average) should generally be those which are
(*SPE recommends prior 12 considered to be a reasonable
month period). outlook on the future. COGEH uses
same forecast for proved & unproved.
(NI 51-101 requires 2 disclosures:
Unproved: reserves may be 1) proved at year-end costs & prices
based on forecast prices and conditions 2) proved and probable
costs. (and 2P) using forecast case (if
disclosed possible and 3P use
forecast case)

Abandonment Costs Economic limit calculated Economic limit calculated including

including abandonment and abandonment and reclamation costs.
reclamation costs.

Net Present Value of Not defined COGEH provides instruction on

Future Net Revenue calculating cash flows and computing
(FNR). net present value but defers to the NI
51-101 to define required discount
rates.

Audit Requirements No requirement for use of COGEH recommends standards for

external evaluators. SPE training, experience levels, and sets
Standards Pertaining to the independence criteria for evaluators
Estimating and Auditing of Oil and and auditors whether internal or
Gas Information recommends external. COGEH further describes
standards for training, experience levels of evaluations, audits and
levels, and sets independence reviews.
criteria for evaluators and (NI 51-101 requires Canadian issuers
auditors whether internal or to submit 75% of their properties
external. based on 2P value for evaluation by
external consultants)

Gross vs Net See Note 1 See Note 1

Reserves

33
Note 1:
Gross vs Net from CIM
Gross: In relation to the reporting issuers interest in production or reserves, company gross
reserves are the issuers working interest share before the deduction of royalties and without
including any royalty interests of the reporting issuer.

Net: In relation to the reporting issuers interest in production or reserves, company gross
reserves are the issuers working interest share after deduction of royalty obligations plus any
royalty interests of the reporting issuer.

SPE Regards Royalty

Within the U.S., royalty volumes are strictly omitted from reported reserves (that is, they are
reported on a net basis). In some cases outside the U.S., where royalty is paid in cash and the
cash flow from the royalty is reflected in the companys accounts, the corresponding royalty may
be included in reserves.

Note 2: Product Categorization (as used in COGEH)

Under COGEH guidelines, reserves must be categorized according to their physical properties
and their association with other products as the uses and values of the commodities will differ.
The recommended categories are:

Oil By-Products
a) Light, Medium a) Ethane
b) Heavy (less than 250 API) b) Butanes
c) Propanes
d) Pentanes Plus (Condensate)

Natural Gas Non-Hydrocarbons

a) Associated a) Sulphur
- Gas Cap b) Carbon Dioxide
- Solution Gas
b) Non-Associated

NI 51-101 defines the following Production Groups and Product Types:

Conventional Production Groups Product Types

Light & Medium Oil Light and Medium Oil, Gas, Natural Gas Liquids
and Sulphur

Heavy Oil Heavy Oil , Solution Gas, Natural gas Liquids

and Sulphur

Associated and Non-Associated Gas Associated and Non-Associated Gas, Natural

Gas Liquids, Sulphur and other by-products

Non-Conventional Production Groups

In Situ Bitumen Recovery Bitumen, Synthetic Oil
Oil Sands Mining Projects Bitumen, Synthetic Oil
Coal Bed Methane Natural Gas

The SPE guidance does not address product categorization

34
 Russian Ministry of Natural Resources (RF-2005)

Russian reserve guidelines are in a state of transition from the system utilized within
Soviet state companies to a new system more closely aligned with the needs of private
industry.).

Figure 1 illustrated the nomenclature in three vintages of Russian classifications and

their approximate correlation:

Total Initial Resources

Total Current Resources

Reserves Resources

GKZ 1983 Classification (Grace et al September 1993))

Cumulative Production

A B C1 C2 C3 D1 D2

GKZ 2001 Provisional Classification (Poroskun et al, January 2004)

A B C1 C2 C3 D1L D1 D2

(RF 2005) Proposed Russian Federation Classification (Gabrielyants et al, Nov 2004)

A B C1 C2 D1 D2 D3

Reasonably Identified Estimated Inferred Localized Prospective Predicted

Assured

Degree of Geological Exploration Knowledge and Maturity for Production (field project status)

Figure 1: Russian Reserves Classifications

GKZ 1983 being that applied within the former Soviet Union (FSU) and as described
by Grace et al September 1993 article in the SPE Journal of Petroleum Technology
Comparative Reserves Definitions: U.S.A., Europe, and the Former Soviet Union.

GKZ 2001 being the Provisional Classification of Oil and Gas Reserves as adopted
in 2001 and utilized by the State Committee for Reserves of the Russian Federation
(GKZ) to certify discoveries and approve development plans within the Russian
Federation as described in Poroskun et al Reserves/Resource Classification
Schemes Used in Russia and Western Countries: A Review and Comparison,
Journal of Petroleum Geology, Vol. 27 (1), January 2004.

RF 2005 being the Proposed New Russian Federation Classification as described

in a presentation made by G.A. Gabrielyants to the UNECE Ad Hoc Groups of
Experts on Supply of Fossil Fuels in November 2004 plus a draft classification
submitted by G. Malukhin to the SPE subcommittee on February 24, 2005.

35
GKZ 1983 provides background to the reserves and resource assessment approach
historically applied in Russia. GKZ 2001 is a revised version and is that currently applied
in the Russian Federation. RF 2005 is in advanced draft stages and we are advised that
it will be implemented in the near future; thus it is this classification that we have utilized
in this comparison to the current SPE reserves and resource classification.

RF 2005 Classification
RF 2005 establishes uniform principles for classification of reserves/resources of oil and
natural combustible gas in the Russian Federation. Based on geological exploration
knowledge and degree of maturity for economic development, oil and gas quantities
found in the subsoil are divided into geological reserves (discovered) and geological
resources (undiscovered). Geological Reserves are used in development planning
including processing and transportation to forecast production and assess
socio/economic impact. Geological Resources are estimated separately for oil and gas
by province, region, districts, zones, areas and individual traps; such information is used
in planning future exploration activities.

(Note that the Russian term Geological Reserves (Resources) refers to in-place volumes.
Recoverable Reserves would match Western usage of the term reserves).

A subject of reserves calculation is normally an accumulation of oil and/or gas (or a part
of it) for which commercial hydrocarbon content has been proved (thus the reserves entity
level is a reservoir, field, or project).

Produced Reserves

Geological Exploration Knowledge & Degree of Maturity for Economic Development

Recoverable Reserves
Economic
Reasonably

Normally
GEOLOGICAL RESERVES
Discovered Petroleum IIP)

Estimated
TOTAL PETROLEUM-INITIALLY-IN-PLACE (IIP)

Identified
Assured

Inferred

Inferred

Profitable
C1

C2

C2
A

Economic Contingent Recoverable Reserves

Contingent
Profitable Low Best High
Estimate Estimate Estimate

(in-place estimates only)

Sub-economic

Unrecoverable Reserves
((undiscovered Petroleum IIP)

Potentially Recoverable Resources

GEOLOGICAL RESOURCES

Profitable
Localized D1

Prospective D2 (in-place estimates only)

Indefinitely
Profitable Predicted D3 (in-place estimates only

Unrecoverable Resources

Degree of Geological Exploration Knowledge

And Maturity for Production (field project status)

Figure 2: Proposed New Russian Federation Classification (RF 2005)

36
Referring to Figure 2, reserves are subdivided according two main aspects: commercial
and geologic uncertainty/project status:

Commercial Producibility and Economic Efficiency based on level of commercial

producibility of a deposit and future net discounted cash flow (NPV) based on predicted
performance indicators and fixed discount rates. Resources are grouped by Expected
Monetary Value (EMV). Reserves are separated into three groups:

Economic Normally Profitable are reserves which according to technical/economic

calculations have been assessed, on a given date, to be commercially recoverable if
brought to production under competitive market conditions, with use of equipment
and technology of recovery and treatment ensuring that the requirements for rational
use of the subsoil and environmental protection are observed.

Economic Contingent Profitable are reserves not considered, on a given date, to

ensure viability under competitive market conditions due to low performance
characteristics but the development of which may be feasible through changing
prices, new markets, or new technologies.

Sub-economic are reserves the development of which, on a given date, is not

considered feasible for economic, technical, or technological reasons. This includes
not only non-commercial accumulations also those shut-in within the limits of water
protection zones, populated areas, national parks, historical/cultural monuments, and
deposits located far from transportation lines and producing infrastructure.

In economic deposits, on the basis of technological and technical/economic

assessments, recoverable reserves are calculated and booked. Recoverable reserve is
that portion of geological reserves which, on a date of calculation, proves commercially
efficient for recovery under competitive market conditions with up-to-date equipment and
technologies rationally applied and subsoil and environmental protection requirements
are observed.

In sub-economic deposits geologic reserves (in-place) are calculated and booked but no
estimates of recoverable reserves are made.

Petroleum Resources are subdivided into Potentially Profitable (positive EMV) and
Indefinitely Profitable (insufficient information to compute EMV). Recoverable resources
are only calculated for Potentially Profitable.

Degree of Geological Knowledge (geological structure and petroleum content) and

Maturity For Production (field project status = degree to which a reservoir has been
developed and prepared to become producing) is used to subdivide reserves into 4
categories:

Category A (reasonable assured) includes actually producing reserves of a

petroleum accumulation (or its portion) drilled on the basis of exploitation grid of
wells in compliance with the appropriate production design document. All geology,
rock and fluid characteristics (including fluid contacts) confirmed by drilling, sampling
and well logging sufficient for building multidimensional simulation models. Profitable

37
 exploitation is determined by an appropriate technological design document and
confirmed by actual recovery operations. Category A includes:

o reserves in commercially developed reservoirs being drained by

production wells with the use of established recovery technologies
o reserves in commercially developed reservoirs which for various reasons
are not being drained at the date of calculation for which bringing to
production is economically justified and will not require any essential
additional expenditure
o incremental reserves which can be profitably recovered from geological
reserves (in-place) through the application of established improved
recovery methods
o incremental reserves which can be profitably recovered from geological
reserves (in-place) through infill drilling within the primary grid of
production wells

Category B (identified) includes reserves of a petroleum accumulation which have

been explored and matured for development, studied by seismic and drilled by
wildcat, appraisal, and production wells from which commercial flows were obtained.
All geology, rock and fluid characteristics are known reasonably well and sufficient
for building reliable simulation models. Commercial producibility of a reservoir has
been confirmed by pilot production data, geophysical well logging and justified by a
technological development design document. Category B includes reserves of the
reservoir portions in drainage zones of wells from which commercial flows have been
obtained by testing and/or trial production.

Category C1 (estimated) includes reserves of a petroleum accumulation studied by

seismic and adjacent to reserves of A and B categories provided that geological and
geophysical information indicates with reasonable certainty that the objective
formation is laterally continuous and there is a high degree of probability to
commercial producibility from the objective formation in this portion of the reservoir.
Production performance and profitability of development and production are
determined/inferred by analogy with the explored portions of the reservoir. Category
C1 includes reserves

o in undrilled portion of the reservoir immediately adjacent to A and B

categories at the distance equal to possible drainage zone (one spacing
unit).
o in portions of the reservoir in an area of unsampled wells in case
producibility has been proved by sampling or production form other wells
(adjacent analogs).

Category (C2) (inferred) includes reserves of undrilled portions of the reservoir

beyond one drainage zone offset to wells where A and B reserves are established.
Geological and reservoir performance parameters are assumed by analogy with the
explored part of the same reservoir or other accumulations within the same region.
The information available is sufficient for generating preliminary geological simulation
models and reserve calculation. C2 includes reserves:

38
 o in reservoir portions between its proved outlines and boundaries of blocks
with higher category reserves if there is enough geological and
geophysical evidence to confirm continuity of the objective formation.
o in formations with unproved producing capability but explored with well
logs in intervening wells that indicate productivity
o in undrilled tectonic blocks of productive reservoirs provided geological
information is indicative of similar potentially productive formations.

Reserves estimated with categories A, B, and C1 should not be aggregated with those
estimated as C2.

Category (D1) (localized) includes petroleum resources in potentially producible

formations confined to traps matured for drilling. Outlines, size and structure have
been determined from geological and geophysical studies. Formation thickness,
hydrocarbon pore volume of the reservoir, composition of oil and gas are assumed
by analogy with explored deposits.

Category D2 (prospective) includes petroleum resources of lithological/stratigraphic

complexes and horizons with proved commercial hydrocarbon content confined to
large regional structures (proven petroleum system). Quantitative estimation of
prospective resources is based on results of regional studies and analogies to
discovered accumulations in the region.

Category D3 (predicted) includes petroleum resources of lithological/stratigraphic

complexes and horizons for which commercial hydrocarbon content has not yet been
established (unproven petroleum system). Quantitative estimation of predicted
resources is based on presumed reservoir parameters from regional analogies and
conceptual geologic interpretations.

RF 2005 reporting requires additional subdivisions of reserves and resources by:

Types of Oil and Natural Gas Deposits by Phase Relationship using the following
classification for petroleum deposits (accumulations)
o Oil - with dissolved gas to saturation (no gas cap)
o Oil and Gas with a gas cap not exceeding 50% on a fuel equivalent basis
o Gas and Oil - with oil fringe less than 50% by volume of equivalent fuel
o Gas containing only gas (dry gas)
o Gas Condensate gas with condensate further subdivided by C5+b content (from
low (below 25 g/m3 ) to unique (over 500 g/m3) condensate
o Oil-Gas-Condensate

By Size of Recoverable Reserves subdivided according to:

o Unique over 300 Mt (2.1 billion bbls) oil or 500 BCM gas (17.5 tcf)
o Large 30 (210 mmb) to 300Mt oil, 30 (1.1 tcf) to 500 BCM gas
o Medium 3 (21 mmb) to 30 Mt oil, 3 (105 bcf) to 30 BCM gas
o Small 1 (7 mmb) to 3 Mt oil, 1 (35 bcf) to 3 BCM gas
o Very Small below 1 MT (7 mmb) oil, less than 1 BCM (35 bcf) gas

By Complexity of Geologic Structure subdivided according to:

39
 o Simple one phase accumulations associated with weakly deformed structures;
productive formation continuous (thickness, porosity, permeability) areally and
vertically
o Complicated one and two phase accumulations; productive formation
discontinuous (thickness, porosity, permeability) areally and vertically with
intervening seals (or tectonic dislocations)
o Very complicated - one and two phase accumulations; both productive formation
discontinuous (thickness, porosity, permeability) areally and vertically and
intervening seals (or tectonic dislocations), also includes heavy oils

RF 2005 specifies that calculation of reserves and estimation of resources may be

carried out by deterministic or probabilistic methods. If deterministic methods are used, it
is suggested to evaluate an associated error based on the accuracy of determining
calculation parameters. When probabilistic methods are used, the following estimates of
reserves/resources may be derived:
- a low estimate (P90) with 0.9 probability of being confirmed
- a best (or basic) estimate (P50) with a 0.5 probability of being confirmed
- a high estimate (P10) with a 0.1 probability of being confirmed

(At this time, the probabilistic method is not routinely applied in Russia, and if applied is
most often confined to resource estimates. However, it is expected its use will increase
throughout all phases of exploration and exploitation.)

The following url accesses the slides used by Gabrielyants in his 2004 presentation to
the UNECE on the new Russian Federation Classification:
http://www.unece.org/ie/se/pdfs/adclass/day2/GabrielyantsRussianFed_UNFC.pdf

Mr. Grigoriy Malukhin provided extensive support in our understanding of the Russian
Federations classification and its detailed comparison to the SPE definitions. He was
assisted by a national group consisting of Y. Podturkin, M. Zykin, V. Poroskun, I Gutman
and K. Kavun.

The SPE does not represent the above summary as being definitive guidance for those
required to report reserves and resources under criteria set by the Russian Federation.
Analysts should obtain guidelines documentation directly from the appropriate agencies.

40
Comparison of SPE to Russian Federation Classification Scheme (RF 2005)

Comparisons of the new Russian Federation and SPE/WPC/AAPG classifications can

be best approached by first examining separation into categories based on the
commercial axis (figure 3):

Russian Federation SPE

Produced Reserves Production

Geological Exploration Knowledge & Degree of Maturity for Economic Development

Recoverable Reserves

Commercial
Economic
Normally Reasonably
GEOLOGICAL RESERVES
Discovered Petroleum IIP)

Estimated
Reserves
TOTAL PETROLEUM-INITIALLY-IN-PLACE (IIP)

Identified
Assured

Inferred

Inferred
Profitable

C1

C2

C2
A

Commercial Risk (project status/maturity)

Economic Contingent Recoverable Reserves
Contingent

Sub-commercial
Profitable Low Best High
Estimate Estimate Estimate
Contingent
Resources

(in-place estimates only)

Sub-economic

Unrecoverable Reserves Unrecoverable

((undiscovered Petroleum IIP)

Potentially Recoverable Resources

GEOLOGICAL RESOURCES

Profitable
Localized D1 Prospective
Resources
Prospective D2 (in-place estimates only)
Indefinitely
Profitable Predicted D3 (in-place estimates only

Unrecoverable Resources Unrecoverable

Degree of Geological Exploration Knowledge

And Maturity for Production (field project status)

Figure 3: Comparison of New Russian Federation (RF 2005) and SPE Categories

There is overall alignment at major boundaries. The Russians split the undiscovered into
3 categories that can be roughly described as prospects (D1), leads (D2), and plays
(D3). Other organizations such as the NPD apply a project maturity axis to describe a
similar approach.

While the SPE classification refers to recoverable volume throughout, the Russians
estimate only in-place volumes for their D3 and D2 classes and the sub-economic
portion of their Contingent Recoverable Reserves. The logic is that lacking sufficient
definition for computing development plan economics, it is not feasible to forecast
recovery to an economic limit. In the SPE approach, analogous developments would be
used to estimate recovery efficiency.

The overall intent of the Contingent Recoverable Reserves category is similar to the
SPEs Contingent Resources, that is, these are discovered volumes that because of
some contingency (economics and/or technology), it is not currently feasible to proceed
with development. Those volumes categorized as sub-economic by RF 2005 due to
access constraints such under parks, cities, or in water protection zones (environmental)
or lack of local pipelines and/or infrastructure may still have economic potential and

41
would not be segregated in the SPE classification. The RF 2005 proposal also includes
shut-in wells in their sub-economic Contingent category; without further clarification it is
not obvious why this is not classified as developed but non-producing.

Gabrielyants presentation infers that a portion of volumes classified as possible reserves

under SPE guidelines may fall in the Russian Contingent category. This may refer to
volumes in adjacent undrilled fault blocks and satellite features that are often included in
Possible reserves.

Figure 3 also highlights some terminology differences. The Russians use the term
reserves for all types of discovered volumes (in-place, economic, sub-economic)
whereas the SPE uses the term reserves only for the remaining, commercially
recoverable portions of discovered volumes. (This may be typical of linguistic difficulties
that are encountered internationally when technical terms are translated using their
general meaning.)

SPE RESERVES
COMMERCIAL

1P 2P 3P

Proved Probable Possible

PDP PNP PUD

Range of (technical) Uncertainty

Low Best High

Estimate Estimate Estimate
P90 P50 P10

RF 2005 RECOVERABLE RESERVES

Economic

Profitable
Normally

Reasonably

Estimated
Identified
Assured

Inferred
C1
A

C2

Degree of Geological Exploration Knowledge

And Maturity for Production (field project status)

Figure 4: Comparison of New Russian Federation (RF 2005) and SPE Reserve Classes

Figure 4 shows that the Russian reserves classes A, B, and C1 grossly correlate to SPE
Proved Developed Producing (PDP), Proved Developed Non-Producing (PNP) and
Proved Undeveloped (PUD), respectively.

Recoverable estimates in their Category B have all the certainty of Category A but are
not on production for some reason. It is not explicitly stated that the capital required to
reach production status is not significant and there is some confusion in that category
A includes reservoirs that are temporarily shut-in and can be reactivated with minimal
expenditures. Category B definitions probably include reserves existing behind pipe
waiting future re-completions.

Category C1 correlates to SPE PUD in areas one drainage unit offset to Proved
Developed but does not specifically address proved reserves in deeper reservoirs or the

42
case where a relatively large expenditure is required to a) re-complete an existing well or
b) install production or transportation facilities for primary or improved recovery projects.

Category C2 encompasses SPE probable and possible (unproven) and can only be
dissected by detailed examination of the information available. Although probabilistic
methods are rarely applied in Russia, this could be used as a basis for defining a 2P
(best) versus 3P (high) estimate. The RF 2005 requires reporting by field/reservoir and
thereafter aggregations to various levels and ultimately total Russia; current aggregation
is arithmetic by category based on the deterministic method. The Russian guidelines do
not address the issue of portfolio effect in probabilistic aggregations.

RF 2005 classification applies to all reserves/resources of oil and natural combustible

gas. It is not clear if the classification applies to unconventional hydrocarbons (tight gas,
coal bed methane, bitumen). The only reference to unconventional hydrocarbons is that
heavy oils should be classified as very complicated accumulations.

Significant differences versus SPE guidelines include:

- RF 2005 includes incremental reserves due to application of established

improved recovery methods and infill drilling in Category A (equivalent to SPE
PDP) without the requirement for a successful pilot in the subject reservoir or a
commitment to proceed with the incremental development.
- In historical Russian classifications, one value of recovery ratio was established
in the original development plan and there was no provision to forecast a range
of resulting recovery efficiencies. This is still true, although incremental reserves
from forecast application of a new recovery method can be included in category
C1.
- The Russian classification does not provide for using a more conservative price
forecast for proved versus unproved reserves. It appears as if all reserves are
evaluated using the criteria commercially recoverable if brought to production
under competitive market conditions, with use of equipment and technology of
recovery and treatment ensuring that the requirements for rational use of the
subsoil and environmental protection are observed.
- When reviewing their mapping to UNFC, Category B is considered contingent or
undefined under project feasibility. Under SPE guidelines both B and C1
reserves can be brought to producing status without significant capital investment
and thus there is no significant feasibility contingency.

Since the Russian classification is based on geologic certainty of in-place volumes, there
is a much greater emphasis on volumetric analysis in all categories whereas most
Western analysts would focus on production performance-based estimates (decline,
material balance) in Proved and Probable estimations for mature properties.

The referenced Gabrielyants presentation to the UNECE

(http://www.unece.org/ie/se/pdfs/adclass/day2/GabrielyantsRussianFed_UNFC.pdf)
includes several examples that illustrate overall alignment of SPE and RF 2005
classifications.

43
 Comparison of Reserves Definitions
Reserves Definitions/Proved Criteria

SPE/WPC New Russian

(1997) Proposed (RF 2005)

Intended purpose General application not country Government reporting in Russia

specific

Qualitative Reasonable certainty to be A - reasonably assured + B- identified +

description of commercially recoverable C1- Estimated
certainty- proved

Qualitative Not proved, but more likely than Part of C2- inferred
description of not to be recoverable
certainty- probable

Qualitative Less likely to be recovered than Part of C2- inferred

description of probable
certainty- possible
Quantification of Proved =/> P90 Low Est =/> P90
probabilities 2P =/> P50 Basic Est =/> P50
associated with 3P =/>P10 High Est =/>P10
estimates. (target at field/property level) (levels not clearly defined)

Proved reserves No proved reserves below LKH as Category A has fluid contacts delimited
relative to lowest defined by well logs, core analysis by drilling, sampling and well logging.
known hydrocarbon or formation testing.
(LKH)
Proved reserve Directly offsetting DSUs and/or C1 - geological and geophysical
extensions on where reasonably certain of information indicates reasonable
undrilled acreage continuity and commercial certainty that the objective formation is
recovery. laterally continuous. Includes undrilled
portion of the reservoir immediately
adjoining the reserves of A+B categories
at the distance equal to possible
drainage zone.

Proved reserves Generally require actual production Attributed to drainage area and offsets
requirements for or a conclusive flowing well test. In for wells from which commercial flows
testing certain cases, proved reserves can have been obtained by testing and/or
be based on logs and/or cores and trial production.
is analogous to producing or tested
reservoirs.

Classification of Successful pilot or existing project Included in Category A based on original

enhanced recovery in subject or analogous reservoir. development plan no pilot required for
mechanism as established methods (e.g. waterfloods).
proved

44
 Comparison of Reserves Definitions
Development Status

Development and Developed producing and non- Category A - producing, category B -

production status producing. Undeveloped. non-producing, category C1-
categories undeveloped

Developed Reserves expected to be Category A represents developed

recovered from existing wells producing (and some non-producing)
including reserves behind pipe. and includes incremental reserves from
Improved recovery reserves established improved recovery methods
require that necessary equipment as contained in the original
has been installed or when costs development plan.
to do so are relatively minor.

Developed - Reserves expected to be A - includes incremental reserves from

Producing recovered from completion established improved recovery.
intervals which are open and
producing at the time of the
estimate. Improved recovery
reserves are considered
developed producing only after the
improved recovery project is
operational.

Developed Non- Includes shut-in (open but not B - includes reserves in drainage zones
Producing producing, waiting on of wells from which commercial flows
market/pipeline connections, or have been obtained.
mechanical problems) and behind
pipe (requires additional
completion or future re-
completion) reserves.

Undeveloped Reserves to be recovered from C1- assigned undrilled portions

additional drilling, deepening immediately adjoining the reserves of
existing wells to a different category A+B categories at a distance
reservoir or where a relatively equal to possible drainage zone
large expenditure is required to
complete an existing well or install
production or transportation
facilities

Allocation in Multi-well Not Defined Not Defined

Pools

45
 Comparison of Reserves Definitions
Unproved Reserves

Unproved Reserves Technical, contractual, economic, or Category C2 (inferred) includes all

regulatory uncertainties preclude portions between accumulation outline
reserves being classified as proved. and blocks with higher categories,
Unproved reserves may be untested formations with continuity to
estimated assuming future producing wells based on seismic and
economic conditions (and untested fault blocks deemed
technological development) productive when compared to
different from those prevailing at the productive areas
time of the estimate.

Probable Reserves Includes: 1) step-out areas from Not defined that portion of C2 with
proved 2) formations that appear less uncertainty.
productive on logs but lack core,
definitive tests, or productive
analogs 3) incremental reserves
attributable to infill drilling 4)
reserves attributable to improved
recovery methods but lack pilot 5)
adjacent fault blocks up-dip to
proved 6) reserves attributable to
future workover treatments or other
procedures without successful
analogs 7) incremental reserves in
proved reservoirs through
alternative interpretations.

Possible Reserves Includes: 1) areas beyond probable Not defined- that portion of C2 with
potentially productive based on more uncertainty.
geological interpretations 2)
formations that appear petroleum
bearing in cores and logs but may
not be commercially productive on
tests 3) reserves attributable to infill
drilling that are subject to technical
uncertainty 4) improved recovery
reserves where no pilot is
operational and reservoir
characteristics may not support
commercial application 5) adjacent
fault blocks down-dip to proved
areas.

46
 Comparison of Reserves Definitions
Deterministic vs Probabilistic Methods

Deterministic vs Reserve estimates may be Calculations/estimations may use either

Probabilistic prepared using wither deterministic deterministic or probabilistic methods.
Methods or probabilistic methods. Reserve (probabilistic methods are currently
numbers are generally defined rarely applied).
within a range, not as one fixed
quantity. The range may be
described qualitatively by
deterministic methods or
quantitatively by probabilistic
methods.
(the probabilistic limits (e.g. Proved
=/> P90) can only be specifically
applied when the probabilistic
method is applied)

Deterministic Deterministic estimates do not If deterministic methods are used it is

Method address uncertainties in terms of suggested to evaluate an error based
probabilities; they require that on accuracy of determining calculation
volumes be described in terms of parameters.
discrete estimates using defined
criteria (e.g. LKH) including
qualitative certainty.

Probabilistic Method If probabilistic methods are used For probabilistic methods use targets
the defined quantitative limits (e.g. (see above). (Level not defined)
Proved =/> P90) apply at the entity
level (before aggregation).

Application of Numerical probabilities are only Aggregation not specifically addressed.

probability criteria applied in probabilistic method and However, calculation and booking of
and aggregation. probability limits apply at the entity reserves of oil and gas having
level. Probabilistic aggregation commercial significance shall be
allowed to the field level only, then implemented separately for each
arithmetic summation to reporting individual accumulation and the deposit
level. Dependencies between as a whole in terms of quantities in-
entities and their distributions must place, with no account taken of possible
be modeled in probabilistic losses at the production stage.
aggregation.

47
 Comparison of Reserves Definitions
Special Issues

Treatment of Classification applies to all Not clear if reserve definitions include

Unconventional petroleum deposits. unconventional deposits beyond heavy
Hydrocarbons oil.

Fuel Gas Reserves Issuers have the option to include Classification includes all production
Status gas volumes consumed in and losses for mass balance. Not clear
operations in production and if fuel gas is included in recoverable
reserves if an appropriate reserves
expense is allocated.

Natural Gas Injection To include injection gas as Not Defined

reserves, the volumes would have
to meet the normal criteria
(economic when available for
production, existence of a firm
market, available pipeline or other
export option, part of established
development plan).

Gas Sales Volumes Reported gas reserves reflect the Natural gas and helium reserves are
condition of the gas at the point of calculated in terms of volumes adjusted
sale. If sold as wet gas, associate to standard conditions (pressure 0.1
liquids reserves are not reported uPa, temperature 20o C).
separately. If sold with a non-
hydrocarbon gas content, the full
volume as sold is included in
reserves. The price received will
reflect quality.

Infill Drilling Reserves assigned to infill drilling Incremental reserves associated with
with low uncertainty are Probable, infill drilling are included in Category A.
infill areas with technical
uncertainty are possible
(acceleration issue not addressed)

Compression Not Defined Not Defined

48
 Comparison of Reserves Definitions
Special Issues

Net Profits Interests Not defined Not defined

Production-Sharing Under a PSC the host government Not defined

Contracts retains ownership, however the
contractor receives a stipulated
share of production remaining
after cost recovery. Reported
reserves are based on the
economic interest held subject to
the specific terms and time frame
of the agreement. Being tied to
economic interest, reserves must
be re-calculated annually based
on product price and operating
costs and may vary considerably.
Under SPE definitions, an average
price over the term of the contact
may be used to define reserves.

Contract Extensions Where agreements allow Not defined

extension through negotiation of
renewed contract terms, exercise
of options to extend or other
means additional reserves (of
various categories) or contingent
resources may be assigned
depending the level of certainty
and commercial viability
associated with the contract
extension.

Product categorization NA See Note 2.

49
 Comparison of Reserves Definitions
Economics/Commerciality

Commerciality In order to assign reserves of nay Recoverable reserves must prove

category, a project needs to be commercially efficient for recovery
defined in terms of a commercially under competitive market conditions,
viable development plan and there with up to date equipment and
should be evidence of firm intent technologies rationally applied.
to proceed.

Commitment If the degree of commitment is not Not defined

such that an accumulation is
expected to be developed and
placed on production within a
reasonable time frame (e.g. 5
years), the estimated recoverable
volumes should be classified as
contingent resources (not
reserves).

Economics The underlying economic Economic Normally Profitable are

evaluation based on perception reserves assessed on a given date
(best estimate) of future costs and according to be commercially
prices together with best-estimate recoverable if brought to production
production profile expected to under competitive market conditions
equate to a proved plus probable with use of equipment and technology
scenario. To limit downside of recovery and treatment ensuring that
exposure the low case scenario the requirements for rational use of
should be at least break-even subsoil and environmental protection
which is consistent with the are observed.
requirement that proved reserves
are viable under current
economic conditions.

Development Plan While some companies choose Not defined

Approvals not to assign any proved reserves
until the development plan has
received all relevant formal
approvals, SPE definitions require
only a reasonable expectation that
the necessary facilities to process
and transport those reserves will
be installed.

50
 Comparison of Reserves Definitions
Economics/Disclosure Guidelines

Prices & Costs for Proved: Existing economic Pricing not specifically addressed but
defining reserves conditions (year-end or reserves are as assessed on a given
economic limit. appropriate period* average) date to be commercial under competitive
(*SPE recommends prior 12 market conditions. Appear to use same
month period). assumptions for all reserves categories

Unproved: reserves may be

based on forecast prices and
costs.

Abandonment Costs Economic limit calculated Not defined

including abandonment and
reclamation costs.

Net Present Value of Not defined Future Net Discounted cash flow (NPV)
Future Net Revenue based upon predicted performance
(FNR). indicators and fixed discount rates.

Audit Requirements No requirement for use of To be addressed in final version

external evaluators. SPE
Standards Pertaining to the
Estimating and Auditing of Oil and
Gas Information recommends
standards for training, experience
levels, and sets independence
criteria for evaluators and
auditors whether internal or
external.

Gross vs Net See Note 1 See Note 1

Reserves

51
Note 1:
Gross vs Net: Not addressed in Russian classification

SPE Regards Royalty

Within the U.S., royalty volumes are strictly omitted from reported reserves (that is, they are
reported on a net basis). In some cases outside the U.S., where royalty is paid in cash and the
cash flow from the royalty is reflected in the companys accounts, the corresponding royalty may
be included in reserves.

Note 2: Product Categorization Reporting Required in RF 2005

Categorize Types of Oil and Natural Gas Deposits by Phase Relationship using the following
classification for petroleum deposits (accumulations)

o Oil - with dissolved gas to saturation (no gas cap)

o Oil and Gas with a gas cap not exceeding 50% on a fuel equivalent basis
o Gas and Oil - with oil fringe less than 50% by volume of equivalent fuel
o Gas containing only gas (dry gas)
o Gas Condensate further subdivided by C5+b content
o Low by condensate contained (below 25 g/m3)
o Medium by condensate contained (25 -100 g/m3)
o High by condensate contained (100 - 500 g/m3)
o Unique by condensate contained (over 500 g/m3)
o Oil-Gas-Condensate

The SPE has no requirements for product categorization.

52
 China Petroleum Reserves Office (PRO2005)

The current classification system was approved and issued in 2004 by the General
Administration of Quality Supervision, Inspection and Quarantine of the Peoples
Republic of China with implementation to be effective in 2005. Reserves and resource
reporting is administered by the Petroleum Reserves Office of the Ministry of Land and
Resources. Each Chinese company must report annually detailed volumes (by field,
block, and reservoir) under this classification that are associated with new discoveries,
extensions and changes in development plans on properties within the borders of China.

China began developing a modern oil and gas industry in the 1950s and utilized the
petroleum classification system from the former Soviet Union (FSU). Several revisions of
the classification and guidelines culminated in the adoption of the China National
Reserves Committee recommendations in 1988. In this classification, discovered oil and
gas resources are referred to as Discovered Geological Reserves and the assignment
of oil and/or gas in-place volumes to reserves classes is based on the phase of
exploration or development and the amount of information available. The three classes
are:
Inferred Early Exploration and discovery
Indicated Exploration Well Test with Industrial Flows
Measured End of Exploration to Development

In the Chinese 1988 definition of reserves, economic viability was not emphasized or
lacked clarification. However, an element of economics was included through the
industrial flows criteria are defined in the following table relating well test/production
rate to reservoir depth:

Reservoir Depth Well Test Production

(meters) Oil Gas
(tonne/d) (104m3/d)
<500 0.3 0.05
500 - 1000 0.5 0.1
1000 2000 1.0 0.3
2000 3000 3.0 0.5
3000 4000 5.0 1.0
>4000 10.0 2.0

The classes of recoverable reserves are the same as the corresponding geologic
reserves (in-place). Estimated Ultimate Recoverable (EUR) volumes are computed as
the product of estimated in-place volumes times the estimated recovery efficiency. This
volumetric approach is continued even into the production decline phase.

In 1998, the Ministry of Land and Resources was set up with mineral resources/reserves
management as one of its main responsibilities. The current classification (hereafter
referred to as the China 2005 definitions) is the result of work by their Petroleum
Reserves Office and takes into consideration criteria contained in the SPE/WPC/AAPG
and the United Nations Framework Classification (UNFC) systems. It keeps the basic
features of the 1988 classification but incorporates SPE terminology. Figure 1 illustrates
the overall classification and the category names and acronyms.

53
In general, discovered in-place volumes are first classified as measured, indicated or
inferred geologic reserves based on the phase of exploration and development. That
portion that is estimated to be theoretically recoverable under given technological
conditions is termed technically EUR (estimated ultimate recoveries) or TEUR. The
equivalent recoverable reserve categories are defined as Proved, Probable and Possible
based on the degree of geological confidence. Economic initially recoverable reserves
(EIRR) are those quantities of petroleum that are anticipated to be economically
recoverable under existing economic conditions and under current executed or planned
to be established technical operating conditions.

Chinese Newly Amended System Total Petroleum

Initially-in-Place (TPIIP)
(implemented 2005)
Discovered - Undiscovered Petroleum
Geological Reserves (GR) Initially-in-Place (UPIIP)

Measured Geological Indicated Geological Inferred Geological

Reserves (MEGR) Reserves (IDGR) Reserves (IFGR)

Proved Residual Probable Residual Possible Residual

Technically (RUV) Technically (RUV) Technically (RUV)
EUR (PVTEUR) EUR (PBTEUR) EUR (PSTEUR)

Economic Sub-economic Economic Sub-economic

(PVEIRR) (PVSEIRR) (PBEIRR) (PBSEIRR)

Proved Proved
Developed Undeveloped In Prospects Unmapped
(PDEIRR) (PUDEIRR) (PIIPIP) (UMPIIP)

Production Remaining* Recoverable Residual Recoverable Residual

(PDRER) Resources (RUV) (RUV)
Resources
(RRIP) (URR)
* Proved Developed Remaining Economic Reserves

Figure 1: Classification Framework of Chinese Petroleum Resources/Reserves

Measured Geological Reserves are estimated with a high level of confidence after the
reservoirs have been proved economically recoverable by appraisal drilling. A
reasonable well spacing should be used in the delineation of measured limits. All
parameters in the volumetric approach should have a high degree of certainty.

That portion of Measured Geological Reserves that can be technically recovered is

termed proved technically EUR (PVTEUR); these ultimate recoveries are based on:
primary and improved recovery technologies that have been operated or are
planned to be operated in the near future
already have a development plan in progress or to be carried out in the near future
are economic based on existing being recent average prices and costs.

This category has an economic and sub-economic component. For proved economic
initially recoverable reserves (PVEIRR):
use unescalated prices and costs from the date of the evaluation
the technology is operational or has been demonstrated by a pilot or is successful in
an analogous field and is assured to be installed

54
 the development plan will be carried out in the near future (for gas, there should be
existing or contracted pipelines and firm sales contacts).
reserve boundaries are based on fluid contacts or reliable pressure data, or the
lowest known hydrocarbons encountered in a well; confined to an area with reasonable
well control
economic productivity is confirmed by actual production or conclusive test or such
evidence in the same formation in offset wells or similar formations in the same well
feasibility studies show the development is economic
there should be at least 80% probability that the quantities actually recovered in the
future will equal or exceed the estimated initially recoverable reserves

The economic portion can be split into Proved Undeveloped and Proved Developed with
the latter composed of cumulative production and remaining economically recoverable
reserves. (Thus, once adjusted for prior production, the economic recoverable measured
is generally equivalent to SPE proved.)

The sub-economic portion is defined as the difference between the proved technically
estimated ultimate recoveries (PVTEUR) and the proved economic initially recoverable
reserves (PVEIRR) and includes two parts:
sub-economic PVTEUR volumes
those PVTEUR volumes anticipated to be economic but the uncertainties of
contractual and/or technical recoveries preclude such volumes being classified as
PVEIRR.
(These sub-economic/technically proved volumes thus correlate closely to SPE low
estimate Contingent Resources and part of SPE Probable Reserves.)

Indicated Geological Reserves are estimated with a moderate level of confidence when
economic flow is obtained from a prospect well at the general exploration phase. That
portion yielding technically estimated ultimate recoveries is called Probable (PBTEUR)
and presumes the probably executed operation technology. Similar to the preceding,
these estimates are split into economic and sub-economic. Economic may be based on
recent average prices and costs or given forecast prices and costs. For the economic
portion, there should be at lest 50% probability that the quantities actually recovered in
the future will equal or exceed the estimated initially recoverable reserves (EIRR). (This
category is grossly similar to SPE Probable reserves. The uneconomic portion is the
difference between the Probable TEUR and EIRR and may be generally correlated to
that portion of SPE Contingent Resources between the low and best estimate.)

Inferred Geological Reserves are estimated with a rather low level of confidence
characteristic of an early discovery phase or in the case where interpretations indicate
that additional oil and/or gas layers exist. That portion yielding technically estimated
ultimate recoveries is called Possible (PSTEUR) and optimistically presumes the
probably adopted operation technology. There should be at least a 10% probability that
the quantities actually recovered in the future will equal or exceed the estimated initially
recoverable reserves (EIRR). The Chinese classification considers that Inferred
reserves have undetermined economics and thus, it is not possible to define economic
and sub-economic categories of Possible. (Thus this category may correlate to SPE
Possible reserves or high minus best estimate Contingent Resources, or some
combination of the two.)

55
Comparison to SPE Definitions

As illustrated in figure 2, there is a broad general agreement between the new Chinese
(2005) and the SPE classification systems. However, there are some interpretational
differences:

Chinese Newly Amended System Total Petroleum

Initially-in-Place
(implemented 2005)
Discovered Undiscovered
(Geological Reserves) (Initially-in-place)

Measured Indicated Inferred

Geological Reserves Geological Reserves Geological Reserves

Proved Residual Probable Residual Possible Residual

Technically Technically Technically
EUR EUR EUR
SPE Prospective
Resources
Sub-
Economic Economic Sub-
economic
economic
SPE Possible Reserves
and/or
Proved Proved High minus Best Est
Developed Undeveloped Contingent Resources
SPE SPE Best
Probable minus
Production Remaining Reserves Low Est
Contingent
Resources
SPE Proved SPE Proved SPE Low Est
Developed Undeveloped Contingent
Reserves Reserves Resources

Figure 2: Comparison of Chinese (2005) and SPE Classifications

a) It is key to remember that under the Chinese classification system:

1) The term reserves is used for both discovered in-place volumes and technically
recoverable volumes in addition to economically recoverable volumes.
2) Further, all certainty criteria are assigned to estimated in-place volumes and
ultimate recoverable volumes, not restricted to remaining volumes.
3) The Chinese Proved and subset Proved Developed Estimated Initially
Recoverable Reserves must be reduced by prior cumulative production before
comparison to SPE reserves.

b) The Chinese have retained their industrial flows criteria as a reference to define a
commercial discovery but staff are encouraged to estimate local or field-wide criteria as
well. In general, a commercial rate would allow recovery of the cost of drilling a
producing well (excluding abandonment costs).

c) For Proved Technical Estimated Ultimate Recovery (PTEUR), the feasibility studies
assume recent average prices and costs but for Proved Economic Initially Recoverable
Reserves (PVEIRR), more stringent criteria include use of prices and costs as of the
assessment date. (In practice, Chinese companies may apply their internal forecast
prices in feasibility studies to define PTEUR.)

56
d) For PBEIRR/Probable, Chinese guidelines allow use of either historical average or
forecast costs and prices whereas the SPE Probable and Possible apply forecast costs
and prices.

e) Although not discussed above, the Chinese subdivide the undiscovered resources
(comparable to SPE/WPC/AAPG Prospective Resource) into two categories: Petroleum
Initially-in-place in Prospects at early stages of exploration and Unmapped Petroleum
Initially-in-place that is based on regional reconnaissance mapping only.

f) While the China classification makes reference to probability targets, their post-
discovery assessments are usually based on deterministic scenarios and it is rare that
probabilistic analyses are used. While 2P and 3P match SPE guidance at P50 and P10,
the Chinese definitions for Proved reference a target of P80 versus the SPE P90. The
Chinese documents include phrases such as indicated geological reserves are
estimates with a moderate level of confidence with a relative error not more than +/-
50%. This does not relate to actual probabilistic targets and is supplied as a general
guide. It would appear that this implies a higher degree of uncertainty than normally
associated with SPE probable estimates.

g) In the detailed definition of LKH, there is an indication that the Chinese specifically
state that they would accept reliable pressure data as a primary criteria; the SPE
requires a lowest penetration unless otherwise indicated by definitive geological,
engineering or performance data.

The Chinese expect that there should be no material difference between SPE Proved
Ultimate and their PVEIRR. However, it should be noted that it is common for the
feasibility studies to include waterflood in the initial plans for oil reservoir development
and improved recovery volumes may not be uniquely identified.

The Proved Reserves of the three major national oil companies that are disclosed to
investors are in compliance with SEC guidelines since the estimations were performed
by independent consulting firms. These quantities may not be equivalent to those
reported by the same companies to the government under the above Chinese 2005
classification system.

The issue of combining a range of recovery efficiencies in combination with in-place

uncertainties to define proved versus probable and possible recoverable volumes is
problematical in the Chinese system. In practice, the probable (indicated) and possible
(inferred) in-place volumes are estimated by exploration geologists using volumetric
methods. When data meet the requirements of Measured, the property is turned over
to a production company who define Measured In-place and associated Proved
recoverable based on a development plan and debook the appropriate area of prior
Probable in-place reserves. Typically the production company does not concern itself
with probable and possible reserves estimates.

Once on production, the production company staff typically uses decline and/or material
balance methods to estimate recoverable reserves but do not usually go back and revise
the original in-place volume estimates. If the development drilling demonstrates that the
original estimates of in-place volumes exceed the error limits (20% 0f Measured in-place
volumes), it is referred to the Ministry (Petroleum Reserves Office) for review (audit) and
changes.

57
Regarding non-conventional hydrocarbons, the same classification is applied to Coal
Bed Methane reserves. The Chinese have not yet developed regulations for bitumen or
oil sands.

Information on the Chinese classification system was supplied courtesy of Hu Yundong,

China Petroleum Reserves Office, Ministry of Land and Resources. For a complete
description of this classification and associated guidelines, contact the China Petroleum
Reserves Office directly.

58
 Comparison of Reserves Definitions
Reserves Definitions/Proved Criteria

SPE/WPC China
(1997) (2005)

Intended purpose General application not country Government reporting

specific

Qualitative Reasonable certainty to be High level of confidence and relative

description of commercially recoverable error not more than +/- 20%
certainty- proved

Qualitative Not proved, but more likely than Presumes the probably executed
description of not to be recoverable operational technology. Feasibility
certainty- probable study shows development is
economic.

Qualitative Less likely to be recovered than Optimistically presume the probably

description of probable adopted operation technology. (No
certainty- possible economic qualification.)

Quantification of Proved =/> P90 EIRR=/> P80

probabilities 2P =/> P50 EIRR=/> P50
associated with 3P =/>P10 EIRR=/>P10
estimates. (EIRR = economical initially
recoverable reserves).

Proved reserves No proved reserves below LKH as No proved reserves below LKH as
relative to lowest defined by well logs, core analysis defined by well logs, core analysis
known hydrocarbon or formation testing. formation testing, or pressure data.
(LKH)
Proved reserve Directly offsetting DSUs and/or A reasonable well spacing should be
extensions on where reasonably certain of used in the delineation of measured
undrilled acreage continuity and commercial limits.
recovery.

Proved reserves Generally require actual production Confirmation of economic productivity

requirements for or a conclusive flowing well test. In in the objective formation by actual
testing certain cases, proved reserves can production or a conclusive test. Or is
be based on logs and/or cores and similar to the same formation in an
is analogous to producing or tested offset or similar formation in the same
reservoirs. well with economic production.

Classification of Successful pilot or existing project Technology has been operated or

enhanced recovery in subject or analogous reservoir. demonstrated favorable by pilot or is
mechanism as successful in analogous field.
proved Project assured to be installed.

59
 Comparison of Reserves Definitions
Development Status

Development and Developed producing and non- Developed and Undeveloped.

production status producing. Undeveloped. (no sub-categories of developed)
categories

Developed Reserves expected to be Reserves fully put into production

recovered from existing wells after completing development well
including reserves behind pipe. pattern drilling and associated facility
Improved recovery reserves installment.
require that necessary equipment Improved recovery reserves require
has been installed or when costs that necessary equipment is
to do so are relatively minor. operational. Must subtract prior
production to get remaining.

Developed - Reserves expected to be Not Defined (same as Developed)

Producing recovered from completion
intervals which are open and
producing at the time of the
estimate. Improved recovery
reserves are considered
developed producing only after the
improved recovery project is
operational.

Developed Non- Includes shut-in (open but not Not Defined

Producing producing, waiting on
market/pipeline connections, or
mechanical problems) and behind
pipe (requires additional
completion or future recompletion)
reserves.

Undeveloped Reserves to be recovered from Recoverable reserves in oil and/or

additional drilling, deepening gas reservoirs which have completed
existing wells to a different appraisal drilling or have a pilot
reservoir or where a relatively project but the production pattern is
large expenditure is required to not fulfilled.
complete an existing well or install
production or transportation
facilities.

Allocation in Multi-well Not Defined Not Defined

Pools

60
 Comparison of Reserves Definitions
Unproved Reserves

Unproved Reserves Technical, contractual, economic, or Discovered recoverable portions of

regulatory uncertainties preclude Indicated or Inferred Geological
reserves being classified as proved. Reserves.
Unproved reserves may be
estimated assuming future
economic conditions (and
technological development)
different from those prevailing at the
time of the estimate.

Probable Reserves Includes: 1) step-out areas from

proved 2) formations that appear Only the recoverable portion of
productive on logs but lack core, Indicated in-place volumes and the
definitive tests, or productive recovery efficiency may be estimated
analogs 3) incremental reserves assuming probably operation
attributable to infill drilling 4) technology different from those
reserves attributable to improved prevailing at the time of the estimate.
recovery methods but lack pilot 5)
adjacent fault blocks up-dip to
proved 6) reserves attributable to
future workover treatments or other
procedures without successful
analogs 7) incremental reserves in
proved reservoirs through
alternative interpretations.

Possible Reserves Includes: 1) areas beyond probable

potentially productive based on Only the recoverable portion of
geological interpretations 2) Inferred in-place volumes and the
formations that appear petroleum recovery efficiency may be estimated
bearing in cores and logs but may optimistically assuming possible
not be commercially productive on operation technology different from
tests 3) reserves attributable to infill those prevailing at the time of the
drilling that are subject to technical estimate.
uncertainty 4) improved recovery
reserves where no pilot is
operational and reservoir
characteristics may not support
commercial application 5) adjacent
fault blocks down-dip to proved
areas.

61
 Comparison of Reserves Definitions
Deterministic vs Probabilistic Methods

Deterministic vs Reserve estimates may be (Although probability targets are

Probabilistic prepared using wither deterministic defined, Chinese post-discovery
Methods or probabilistic methods. Reserve estimates are almost entirely based
numbers are generally defined on the deterministic methods. There
within a range, not as one fixed is nothing in the definitions that would
quantity. The range may be prevent probabilistic analyses)
described qualitatively by
deterministic methods or
quantitatively by probabilistic
methods.
(the probabilistic limits (e.g. Proved
=/> P90) can only be specifically
applied when the probabilistic
method is applied)
Deterministic Deterministic estimates do not Not Defined
Method address uncertainties in terms of
probabilities; they require that
volumes be described in terms of
discrete estimates using defined
criteria (e.g. LKH) including
qualitative certainty.

Probabilistic Method If probabilistic methods are used Not Defined

the defined quantitative limits (e.g.
Proved =/> P90) apply at the entity
level (before aggregation).

Application of Numerical probabilities are only Not Defined

probability criteria applied in probabilistic method and
and aggregation. probability limits apply at the entity
level. Probabilistic aggregation
allowed to the field level only, then
arithmetic summation to reporting
level. Dependencies between
entities and their distributions must
be modeled in probabilistic
aggregation.

62
 Comparison of Reserves Definitions (draft version Mar 7-05)
Special Issues

Treatment of Classification applies to all Classification applies to all

Unconventional petroleum deposits. petroleum deposits.
Hydrocarbons
Fuel Gas Reserves Issuers have the option to include Not Defined
Status gas volumes consumed in
operations in production and
reserves if an appropriate
expense is allocated.

Natural Gas Injection To include injection gas as Not Defined

reserves, the volumes would have
to meet the normal criteria
(economic when available for
production, existence of a firm
market, available pipeline or other
export option, part of established
development plan).

Gas Sales Volumes Reported gas reserves reflect the Not Defined
condition of the gas at the point of
sale. If sold as wet gas, associate
liquids reserves are not reported
separately. If sold with a non-
hydrocarbon gas content, the full
volume as sold is included in
reserves. The price received will
reflect quality.

Infill Drilling Not Defined Not Defined

Compression Not Defined Not Defined

63
 Comparison of Reserves Definitions
Special Issues

Net Profits Interests Not Defined Not Defined

Production-Sharing Under a PSC the host government Not Defined

Contracts retains ownership, however the
contractor receives a stipulated
share of production remaining
after cost recovery. Reported
reserves are based on the
economic interest held subject to
the specific terms and time frame
of the agreement. Being tied to
economic interest, reserves must
be re-calculated annually based
on product price and operating
costs and may vary considerably.
Under SPE definitions, an average
price over the term of the contact
may be used to define reserves.

Contract Extensions Where agreements allow Not Defined

extension through negotiation of
renewed contract terms, exercise
of options to extend or other
means additional reserves (of
various categories) or contingent
resources may be assigned
depending the level of certainty
and commercial viability
associated with the contract
extension.

Product Not Defined Not Defined

Categorization

64
 Comparison of Reserves Definitions
Economics/Commerciality

Commerciality In order to assign reserves of any The feasibility study indicates that the
category, a project needs to be development is economic.
defined in terms of a commercially
viable development plan and there
should be evidence of firm intent
to proceed.

Commitment If the degree of commitment is not Program assured to be installed

such that an accumulation is
expected to be developed and
placed on production within a
reasonable time frame (e.g. 5
years), the estimated recoverable
volumes should be classified as
contingent resources (not
reserves).

Economics The underlying economic Based on market conditions of the

evaluation based on perception time, i.e. oil and /or gas prices and
(best estimate) of future costs and development costs at the time of
prices together with best-estimate reserve estimation, oil and gas
production profile expected to production is believed technically
equate to a proved plus probable feasible with the other conditions
scenario. To limit downside allowable, such as environment, etc.
exposure the low case scenario The economic viability refers to the
should be at least break-even reserves revenue being able to return
which is consistent with the the investment.
requirement that proved reserves
are viable under current
economic conditions.

Development Plan While some companies choose Not Defined

Approvals not to assign any proved reserves
until the development plan has
received all relevant formal
approvals, SPE definitions require
only a reasonable expectation that
the necessary facilities to process
and transport those reserves will
be installed.

65
 Comparison of Reserves Definitions
Economics/Disclosure Guidelines

Prices & Costs for Proved: Existing economic To be classified as economic, both
defining reserves conditions (year-end or Proved and Probable must be
economic limit. appropriate period* average) economic under current conditions of
(SPE *recommends prior 12 prices and costs. Current may be
month period). defined by recent average prices and
costs. (no provisions for escalation
noted)
Unproved: reserves may be (Unproved my use historical averages
based on forecast prices and or defined forecasts prices and costs)
costs.

Abandonment Costs Economic limit calculated Not Defined

including abandonment and
reclamation costs.

Net Present Value of Not Defined Not Defined

Future Net Revenue
(FNR).

Audit Requirements No requirement for use of Not Defined

external evaluators. SPE
Standards Pertaining to the
Estimating and Auditing of Oil and
Gas Information recommends
standards for training, experience
levels, and sets independence
criteria for evaluators and
auditors whether internal or
external.

Gross vs Net Note 1 Note 1

Note 1:

Gross vs Net Gross: The Chinese definitions do not address the issue of royalties.

SPE Regards Royalty

Within the U.S., royalty volumes are strictly omitted from reported reserves (that is, they are
reported on a net basis). In some cases outside the U.S., where royalty is paid in cash and the
cash flow from the royalty is reflected in the companys accounts, the corresponding royalty may
be included in reserves.

66
 Norwegian Petroleum Directorate (NPD2001)

One of the principal tasks of the Norwegian Petroleum Directorate (NPD) is to maintain
an overview of petroleum resources so that authorities can have the best possible basis
for planning measures to ensure that they are well managed, and to forecast future
production and activity.

The NPDs annual updating of the resource account for expected recoverable resources
focuses on classification by maturity. This system was developed in 1997. Based on
experience gained in using the system and in cooperation with several oil companies,
the NPD developed and published its current revised system in 2001. The current
system builds on the SPE/WPC/AAPG 2000 classification but expands on the project
maturity aspect.

The main principal in the NPD classification system is that originally recoverable
resources in a field or discovery must be classified according to their position in the
development chain, either from a discovery being made, or a new opportunity to
increase recoverable resources in a field being identified, until production of the
resources is complete. The system is designed to allow a single field or discovery being
able to contain resources in different project status categories, i.e. resources at different
stages of maturity in the development chain.

All resources must, as far as possible, be reported with a high and a low estimate in
addition to the base estimate. This allows an opportunity to describe the uncertainty in
the resource quantities in both the individual fields and the full resource account (total
portfolio).

The resources are divided into ten different project status categories (Figure 1).

Resource class Project status category

Historical Production [S] 0 Sold and delivered petroleum

1 Reserves in production
TOTAL RECOVERABLE PETROLEUM RESOURCES

RESERVES [R] 2 F/A Reserves with an approved plan

for development and operation

Discovered 3 F/A Reserves which the licensees

have decided to recover

4 F/A Resources in the planning phase

CONTINGENT Resources where recovery is

5 F/A
likely but not clarified
RESOURCES [C]
6 Resources whose recovery is
not very likely

7F/A Resources that have not

yet been evaluated

8 Resources in Prospects
UNDISCOVERED
Undiscovered RESOURCES [P] Resources in leads, and
9 unmapped resources.

F= First oil/gas
A = Additional oil/gas

Figure 1: Norwegian Petroleum Directorate Classification

67
Categories 0 to 7 cover the discovered, recoverable resources, Possible future
measures to improve the recovery factor are placed in category 7 along with discoveries
that have not yet been evaluated. Categories 6 and 9 cover undiscovered resources.

The F label identifies quantities linked to the initial recovery project while A are
additional quantities from improved recovery projects. There are cases where A can be
negative; for example, oil recovery improvements may involve gas consumption.

All companies operating in Norway must annually submit resource information according
to this classification. Moreover, the major Norwegian-based oil and gas companies have
adopted the same or similar system for internal resource management.

A complete description of the NPD classification can be found on their website at:
http://www.npd.no/regelverk/r2002/frame_e.htm

Comparsion to SPE Definitions

The Norwegian Petroleum Directorate classification (NPD 2001) is based on the

SPE/WPC/AAPG 2000 classification (figure 2) with a modification to utilize project status
categories to differentiate projects based on their commerciality, that is, their maturity
towards full producing status. These categories can also be viewed as qualitative
measures of commercial risk or chance of commerciality.
SPE/WPC/AAPG NPD

PRODUCTION 0 Sold and Delivered

COMMERCIAL
DISCOVERED PETROLEUM-INITIALLY-IN-PLACE

P90 P50 P10 1 On Production

TOTAL PETROLEUM-INITIALLY-IN-PLACE

RESERVES 2 F/A Under Development

1P 2P 3P 3 F/A Development Committed

4 F/A Resources in Planning

SUB-COMMERCIAL

5 F/A Development Likely

CONTINGENT
RESOURCES 6 Development Unlikely

7F/A Being Evaluated

UNRECOVERABLE

PROSPECTIVE 8 Prospect
INITIALLY-IN-PLACE

RESOURCES
UNDISCOVERED
PETROLEUM-

9 Play and Lead

UNRECOVERABLE

F= First recovery
Range of Uncertainty
A = Advanced recovery

Figure 2: Comparison of SPE and NPD Classifications

The NPD classification is a good example of a modified application of the SPE 2000
classification. It adheres to the guidelines provided, in that it is project status based. This
means in principle that the uncertainty on the horizontal axis relates to the outcomes of
specified recovery projects, and that there is one line for each project.
While the project status categories follow the illustrative example provided in the SPE
guidelines (shown above) to a great extent, they have been adapted to match the
requirements of the Norwegian legal and regulatory system.

68
It follows from the project status approach that there may be several projects recovering
oil and gas from the same accumulation, and these may be in different stages of
maturity, and thus in different categories. The NPD has found it to be convenient to
distinguish between the first (F) project and additional (A) projects.

Probabilistic quantification is provided for, following the SPE scheme, but also allowing
other legacy fractile to be used, in order not to unnecessarily burden companies who
were using P80 and P20 when the existing classification was introduced. With time, P90,
best estimates and P10 have prevailed and the P80 and P20 fractiles are no longer used
as standards.

The NPD substitutes the term base estimate for best estimate. It reflects the current
understanding of the extension, characteristics and recovery factor of the reservoir. The
base estimate can be calculated deterministically or stochastically. If the base estimate
is calculated by a stochastic method, it should correspond to the mean value (not the
median/P50).

As the NPD classification is developed for the resource management needs of the
Norwegian Government and the business process management needs of the Norwegian
companies, emphasis has been more on reflecting relevant quantities that comparable
ones. The latter is of course of the essence in financial reporting. As a consequence, the
NPD classification is lacking in precision when it comes to technical and economic
criteria defining reserves. The concept of proved reserves according to deterministic
criteria is not recognized as we know it from the SEC or SPE definitions. P90 reserves
are however both a reasonable and simple, well-defined substitute, remembering that
future, uncommitted projects are not allowed to contribute to the 2P nor 3P reserves.
While the terms Proved, Probable and Possible are not utilized, the definitions of low/1P,
base/2P, and high/3P estimated quantities allow derivation of these entities if required
(notwithstanding that the base is the mean and not P50).

The NPD defines a discovery as one petroleum deposit, or several petroleum deposits
collectively, which have been discovered in the same wildcat well, in which through
testing, sampling, or logging there has been established a probability of the existence of
mobile hydrocarbons (includes both a commercial and a technical discovery).

The NPD does not give definitions of commercial/economic or sub-commercial/sub-

economic but depends on the status categories to segregate Reserves from Contingent
Resources. Contingent Resources are defined as petroleum resources that have been
discovered but no decision has yet been taken regarding their development. It is noted
that their category 3 (reserves which the licensees have decided to recover) may include
projects for which the authorities have not yet approved a Plan of Development (PDO) or
granted exemption therefrom. Thus the differentiation of Reserves from Contingent
resources may seem to rest solely on the licensees internal commitment to proceed with
development. Under the petroleum law, the licensees are however given the right to
produce the petroleum. The government approval of the PDO is an occasion to align
interests in the way development will take place and not an occasion to remove a right
already granted.

There being no further definitions of technical or commercial criteria for reserves or

uncertainty classes, no detailed comparison table has been prepared.

69
 United States Geological Survey (USGS - 1980)

The United States Geological Survey (USGS) was created by an act of congress in 1879
as as an independent fact-finding agency that collects, monitors, analyzes, and provides
scientific understanding about natural resource conditions, issues, and problems. The
USGS stands as the sole science advisory agency for the U.S. Department of the
Interior. Because it has no regulatory or management mandate, the USGS provides
impartial science that serves the needs of our changing world.

As part of its mandate, the USGS periodically assesses both U.S. and worldwide
petroleum resources. Their latest world survey was completed in 2000
(http://pubs.usgs.gov/dds/dds-060/index.html#TOP). The USGS has developed
methodologies to estimate the total hydrocarbon volumes that will be available for
production. This includes volumes projected to be associated with existing discoveries
and future discoveries.

Volumes within existing discoveries are based on published information collated from
vendors (NRG and IHS) or other government agencies (U.S. Department of Energy).
The USGS does not change, process, alter, redefine, or systematically check the
accuracy of this data. This known discovered volumetric data is accepted in the
classification as presented. Most are classifed using the general SPE definitions and are
normally proved for the US and proved plus probable in other areas of the world. The
focus of USGS reports is to forecast ultimate potential by assessment units which sum
three resource elements:
- prior production and known reserves (from vendor data)
- projected field growth in these known/discovered accumultions
- predicted undiscovered potential in both proved and unproven plays.

USBM/USGS(1980) Classification

The current official classification scheme is that jointly developed by the USGS and the
US Bureau of Mines and referred to as the USBM/USGS (1980) system (figure 1).

Figure 1: USBM/USGS (1980) Classification of Oil & Natural Gas Resources

70
This same classification is applied to both petroleum accumulations and mineral
deposits. While the USGS does not actually apply this classification to discovered
accumulations since they rely on vendor data (which generally use SPE defintions), the
concepts contained are still useful as historical perspective and to explain their global
assessment methodolgies.

Resources include reserves and all other petroleum accumulations that may eventually
become available - including known accumulations that are not recoverable under
current economic conditions or current technology, or unknown accumulations of varying
degrees of richness that may be inferred to exist, but not yet discovered. Therefore,
resources can be classified in terms of geologic assurance as discovered (identified) and
undiscovered.

According to the USBM/USGS (1980), identified resources are those whose location,
grade, quality, and quantity are known or estimated from specific geologic evidence.
Undiscovered resources are those whose existence are only postulated from geologic
information and theory and comprise accumulations that are separate from identified
resources [that is, existing outside of known oil and (or) natural gas accumulations].

Resources are also classified in terms of feasibility of economic recovery as economic,

marginally economic and sub-economic (Fig. 1). Marginal reserves are defined as
that part of the reserve base which, at the time of determination, borders on being
economically producible. Its essential characteristic is economic uncertainty. Included
are resources that would be producible, given postulated changes in economic or
technologic factors.

A degree of uncertainty is typically reported for the estimated quantities of discovered

and undiscovered resources that are potentially recoverable. The uncertainty of
estimated resource quantities may be expressed probabilistically, either as a range or
single-value statistic such as a mean, mode, median (P50), or some other percentile.

Discovered (identified ) resources are divided according to geological (in-place)

assurance into measured and indicated, and inferred classes defined as follows:

o Measured - Quantity is computed from dimensions revealed in outcrops,

trenches, workings, or drill holes; grade and (or) quality are computed from the
results of detailed sampling. The sites for inspection, sampling, and
measurement are spaced so closely and the geologic character is so well-
defined that size, shape, depth, and mineral content of the resource are well
established.

o Indicated - Quantity and grade and (or) quality are computed from information
similar to that used for measured resources, but the sites for inspection,
sampling, and measurement are farther apart or are otherwise less adequately
spaced. The degree of assurance, although lower than that for measured
resources, is high enough to assume continuity between points of observation

o Inferred - Estimates are based on an assumed continuity beyond measured and

(or) indicated resources, for which there is geologic evidence. Inferred resources
may or may not be supported by samples or measurements.

71
Demonstrated resources are the sum of measured and indicated resources. The
estimated economically recoverable portion of discovered (identified) is classified as
reserves. These are the quantities that can be economically produced at the time of the
determiniation. The part of the discovered (identified) from which reserves growth is
estimated is called the reserves base (sum of shaded and hachured areas in fig 1).

Successive estimates of the total crude oil, natural gas, and natural gas liquids to be
recovered in fields and reservoirs generally increase through time with continued
development and production, the result commonly being additions of reserves. These
additions are directly related to increases in the total size (cumulative production plus
remaining reserves) of the field or reservoir. Reserve growth (also called field growth,
reserve appreciation, and ultimate recovery appreciation) is therefore that part of the identified
resources, over and above measured reserves, estimated to be added to existing fields
and reservoirs within a defined timeframe (usually 30 years). Reserve growth occurs for a
variety of geologic, engineering, operational, and economic reasons, including: (1)
delineation of additional in-place hydrocarbons, including addition of new reservoirs and
extensions (2) improved recovery efficiency, and (3) revisions resulting from
recalculation of viable reserves under changing economic and operating conditions.

The USGS divides undiscovered resources into hypothetical and speculative classes to
reflect geologic assurance. Hypothetical resources are undiscovered resources that may
be reasonably expected to exist under geologic conditions analogous to those in known
producing districts or regions. Speculative resources are undiscovered resources that
may exist elsewhere, in districts or regions with no discovered.

Recent USGS assessments consider three types of technically recoverable resources:

(1) undiscovered conventional accumulations of oil and natural gas, (2) additions of oil
and natural gas from untested cells within continuous accumulations (unconventionals),
and (3) the potential future additions to reserves of known conventional accumulations
by reserve growth. Each of these resource types requires a different technique for
evaluation and assessment. The oil and natural gas from undiscovered conventional
accumulations clearly equate to the undiscovered resource classification, whereas oil
and natural gas from development of continuous accumulations may equate to both
discovered and undiscovered classes.

Although based on the best geologic and historical information and theory available,
petroleum volumes assessed are unknown quantities, not measurements, and therefore
should be expressed with probability distributions of uncertainty.

USGS assessment methodology is described within their World Assessment 2000 report
available at their website: http://pubs.usgs.gov/dds/dds-060/index.html#TOP

Dr. Timonthy R. Klett assisted in our understanding of the USBM/USGS reserves and
resource classification and further provided two key references:

U.S. Bureau of Mines and U.S. Geological Survey, 1976, Principles of the mineral
resource classification system of the U.S. Bureau of Mines and U.S. Geological Survey:
U.S. Geological Survey Bulletin 1450-A, 5p.

U.S. Bureau of Mines and U.S. Geological Survey, 1980, Principles of a

reserve/resource classification for minerals: U.S. Geological Survey Circular 831, 5p.

72
Comparison to SPE Definitions

Figure 2 graphically illustrate the overall comparison of the USBM/USGS (1980) and the
SPE/WPC/AAPG (2000) classifications for the discovered portion of total resources.

USBM/USGS (1980) SPE/WPC/AAPG (2000)

Discovered

1P 2P 3P
Economic feasibility
Increasing degree of

Proved Probable Possible

Reserves
Low Best High
Est Est Est

Contingent Resources

Unrecoverable

Increasing degree of Increasing degree of

geologic assurance technical certainty

Figure 2: Comparison of USGS and SPE Classification (discovered portion)

The USGS classification is based on two parameters whereby resources are classified
by feasibility of economic recovery and degree of geologic certainty. The SPE system
classifies resources based on 3 parameters: feasibility of economic recovery
(commerciality) in the y-axis and a combination of degree of geologic assurance and
degree of recovery efficiency termed technical uncertainty on the x-axis. Although some
differences exist, the classification schemes are comparable.

As shown in the previous figure 1, the USGS hypothetical and speculative undiscovered
resources combined correlate to SPE Prospective Resources; they can be classified by
technical uncertainty (low/best/high estimate or a probability distribution) but there is no
attempt to segregate undiscovered volumes according to commercial certainty.

The shaded area in Figure 2 is termed the reserves base. It may encompass that part
of the resources that has a reasonable potential for becoming economical within the
planning horizons (30 years) beyond those that assume proven technology and current
economics. Thus, it appears that inferred reserves may be based on forecast conditions
while demonstrated (measured and indicated) are based on current conditions. This
contrasts with SPE guidance that proved is based on current conditions while probable
and possible are based on forecast conditions.

Although the USGS measured, indicated, and inferred classes of reserves are assigned
to reflect geologic assurance, these classes have been loosely interchanged with,
respectively, the proved, probable, and possible classes. While measured and proved
are comparable, probable and possible may not be directly interchangeable with
indicated and inferred. Some earlier publications suggest that USGS inferred is not a
high side estimate of indicated but refers to only unexplored deposits for which estimates
of the quality and quantity are based on geologic evidence and projections and may not
have any direct sampling or measurements. Later publications indicate closer alignment

73
with SPE possible reserves that may be a combination of high side estimates of drilled
(sampled) areas and adjacent undrilled areas (fault blocks and satellite features).

Users should be aware of the reserves terminology used in current USGS reports as
illustrated in figure 3:
World Excluding United States (conventional)

Oil - billion barrels

F95 F50 F5 Mean
1- Cumulative Production 539
2 Remaining Reserves 859
3 Known Reserves (1+2) 1398
4 Reserves Growth 192 612 1031 612
5 - Undiscovered 334 607 1107 649
6 Future Volumes (2+5) 1508
7 Future Grown Volumes (2+4+5) 2120
8 Total Endowment (1+2+4+5) 2659

Figure 3: USGS World Petroleum Assessment 2000 Results Summary

Remaining reserves are taken from NRG Associates and Petroconsultants (IHS)
reports and may represent proved or proved plus probable reserves as defined in their
data sources (typically using SPE definitions). Reserves Growth as discussed above is
based on USGS projections of future (30 year) additions from new recovery methods,
improved prices, satellite development, etc. using proprietary algorithms derived from
analog fields of similar maturity. The volumes may include what would be currently
classified under SPE guidelines as possible, contingent resources and even some
portions of unrecoverable and speculative potential (for satellite accumulations). The
USGS does not quote reserve growth for individual fields, it is only statistically
meaningful for large aggregations; the 2000 report only quotes reserves growth on a
total world basis. The SPE term estimated ultimate recovery may be applied to either
USGS terms known reserves or future endowment.

The reserves growth and undiscovered resource aggregations use probabilistic models
and will have portfolio effects. The USGS uses P95 for the lowside and P05 for the
upside with two measures of central tendency being the median (P50) and the mean.
Cumulative production and remaining reserves are aggregated arithmetically.

The 2000 USGS world assessment does not include unconventional hydrocarbons
(continuous accumulations) from tight gas, coal bed methane, heavy oil (<150 API), and
tar sands but do recognize their potential. As extraction and processing technology
develops, the geologic descriptions are matured and their recovery becomes
economically feasible, and they will be assessed in the same manner as conventional
hydrocarbons.

USGS economic implies that profitable extraction or production under defined

investment assumptions has been established, analytically demonstrated, or assumed
with reasonable certainty. This would not conflict with SPE guidance. The USGS
definitions do not include more detailed guidance on such issues as pricing, discovery
criteria and proved (measured) limits (e.g. LKH, DSU offsets).

Given that the USBM/USGS (1980) classification is only used as a concept reference, a
detailed SPE/USGS comparison table is not appropriate.

74
 United Nations Framework Classification (UNFC2004)

The United Nations Framework Classification (UNFC) for Energy and Mineral Resources
is a universally applicable scheme for classifying/evaluating energy and mineral reserves
and resources.

The classification was originally focused on coal resources and was adopted by the
United Nations Economic Commission for Europe (UNECE) in 1997. It was expanded to
include all mineral reserves and resources in 1999. In 2001, the UNECE created an
Intergovernmental Ad Hoc Group of Experts on the Harmonization of Energy
Reserves/Resources Terminology to extend the principles of UNFC to other energy
resources (oil, natural gas, and uranium). Regards petroleum, the group focused on full
compatibility with the SPE/WPC/AAPG classification. In addition, several national
classification systems played an important role in the harmonization process including
the recently revised classification of the Russian Federation.

The current classification has been endorsed by the United Nations Economic and
Social Council (ECSOC) and recommended for adoption as a worldwide standard. It has
been reviewed and endorsed by the Organization of Petroleum Exporting Countries
(OPEC), and is being considered for adoption as a reporting standard by the Committee
of European Security Regulators (CESR) and the International Accounting Standards
Board s working group on extractive industries.

The classification is designed to allow incorporation of currently existing terms and

definitions into this framework and thus make them comparable and compatible on an
international basis. The approach has been simplified through the use of a three-digit
code clearly indicating the essential characteristics of extractable energy and mineral
commodities in market economies, notably (i) degree of economic/commercial viability
(ii) field project status and feasibility, and (iii) level of geological knowledge. The three
criteria are easily visualized in three dimensions as shown in Figure 1.

E 1 Economic
E 2 Potentially economic
E 3 Intrinsically economic

F 1 Mining
report/Feasibility
F 2 Pre-feasibility
F 3 Geological Study

G1 Detailed Exploration
G2 General Exploration
G3 Prospecting
G4 Reconnaissance

Figure 1: The UNFC for Solid Fuels and Mineral Commodities

To aid in understanding the numeric code sequence is always fixed, that is EFG and a
quantity can be characterized numerically as 1:1:1: and the numeric value indicates the

75
degree of quality where 1 is the highest quality. Thus, 1:1:1 refers to quantities that are:
economically and commercially recoverable (E1), have been justified by means of a
feasibility study or actual production to be technically recoverable (F1) and are based on
reasonably assured geology (G1).

Subcategories may be added under the main categories when required in the following
format: 1.1;1;1 where a subcategory E1.1 has been defined. Semicolons now separate
the main category codes. Figure 2 illustrates the codes and sub-codes as defined for
petroleum classifications:

E1 Economic F1 Justified Development G1 Reasonably Assured

and/or Production Geological Conditions
Project
E1.1 Normal Economic F1.1 Project in Production
E1.2 Exceptional Economic F1.2 Committed Development
Project
F1.3 Uncommitted Development
Project
E2 Potentially Economic F2 Contingent Development G2 Estimated Geological
Project Conditions
E2.1 Marginal Economic F2.1 Under Justification
E2.2 Sub-marginal Economic F2.2 Unclarified or On hold
F2.3 Not Viable
E3 Intrinsically Economic F3 Project Undefined G3 Inferred Geological
Conditions
E3.1 Non-sales
E3.2 Undetermined
E3.3 Unrecoverable
G4 Potential Geological
Conditions

Figure 2: UNFC Petroleum Categories and Sub-Categories

Assistance in promoting our detailed understanding of UNFC was provided by Sigurd

Heiburg, Chairman of the UN Ad Hoc Group of Experts on the Harmonization of Energy
Reserves/Resources Terminology

A complete description of the UNFC including definitions of the above terminology can
be accessed at the following website address:
(http://www.unece.org/ie/se/pdfs/UNFC/UNFCemr.pdf)

Additional descriptions have been published in:

SPE 84124: The United Nations Framework Classification for World Petroleum
Resources; T.S. Ahlbrandt et al, 2003
SPE 90839: Updated United Nations Framework Classification for Reserves and
Resource of Extractive Industries; T.S. Ahlbrandt et al, 2004

UNFC is functional in its basic form. In defining key concepts, such as proved reserves,
the more prescriptive requirements are left to be included in specifications/guidelines.
Note that the Ad Hoc Group of Experts has been charged with developing application
guidelines and that project is ongoing in liaison with the SPE Oil and Gas Reserves
Committee.

76
Comparison to SPE Definitions

The SPE/WPC/AAPG (1997 and 2000) classification was initially developed

independently of the UNFC pattern (1997). SPE and UNECE joined forces in 2001
through the UNECE Ad Hoc Group of Experts on the Harmonization of Energy
Reserves/Resources Terminology where there was both formal and real representation
of the SPE/WPC/AAPG Oil and Gas Reserves Committee. The result was the UN
Framework Classification for Energy and Mineral Resources (UNFC), developed over
the 1997 UNFC pattern.

The SPE classification and the UNFC differ in appearance in that economic, field project
status and geologic criteria all are explicit in the UNFC, while the SPE is implicit on the
field project status and explicit or verbal on the two others. Most importantly, the
structure of the SPE classification reappears in the UNFC, primarily through the shared
use of the field project status criterion and through identical design for the
communication of uncertainty. Figure 3 illustrates mapping of the two classifications.

UNFC 2004 SPE/WPC/AAPG 2000

Reserves
1P 2P 3P
Proved Probable Possible
P90 P50 P10
111 112 113

Contingent Resources
Low Est Best Est High Est

P90 P50 P10

121 122 123

231 232 233

Prospective Resources
Low Est Best Est High Est

P90 P50 P10

334

Figure 3: Comparison of UNFC and SPE/WPC/AAPG Classification

The graphical representation of the two classifications differs in that the UNFC is three-
dimensional with three explicit criteria:
1. Economic
2. Field project status/Feasibility
3. Geological

This makes UNFC a more differentiated, and thus in some respects a stronger code, but
also one that may appear to require complex routines in practical application. The
strength of the UNFC is readily apparent when considering that it may be reduced by
simply combining classes to nearly coincide with the SPE classification.

77
UNFC introduces the principle of a reserves reference point defining produced quantities
and qualities, and thus value more precisely. This is not explicit in the SPE classification.
UNFC introduces the principle of non-sales quantities both to make the material balance
complete and to allow for the use of the UNFC in the management of important
economical resources that are not traded commercially. In oil and gas, this will typically
be fuel, flare and processing losses.

UNFC has taken the full consequence of the introduction by SPE of concept of
contingent resources, and excludes such quantities from reserves. This prevents low
probability future projects from influencing P90 Proved Reserves values. SPE has done
the same, but in indirect ways, as there has not been an opportunity yet to revisit the
reserves definitions.

UNFC has introduced the concept of justified, but not committed projects to define
reserves, but excluded such projects from contributing to committed reserves.
Committed reserves are foreseen as the primary basis for supplementing financial
reports. This allows the identification of large recoverable quantities, such as those
reported from the Middle East, as reserves and not as a high grade of contingent
resources. While important from the point of view of communication, this action is of no
consequence in the numerical treatment of classes in the UNFC.

Neither classification resolves the issue of ownership of reserves, and thus what
quantities a stakeholder may be entitled to. When developing the UNFC, this dimension
was left out on purpose. It was considered appropriate to elaborate ownership issues in
other contexts, primarily that of international financial reporting standards.

An apparent weak point in both classifications (and in current SEC requirements) is the
disconnect that appears when a project is committed and will go ahead, but where the
geologically proved quantities alone are not the basis for the decision. In some cases,
the project may not be economic on the basis of the quantities that are geologically
proved or P90 alone.

One possible solution under the UNFC that should be discussed is the possibility of
applying the subcategory E1.2 Exceptional economic. The initial justification for
introducing this category was precisely to distinguish the production that will occur under
subsidized conditions from normal profitable production. (Much of the strategic uranium
production ended up in this category when the nuclear disarmament flooded the market).
The scheme would be to place proved in E1.2 in those cases where the field itself
(taking the probability distribution or some higher fractile than the P90 value into
account) is economic and E1.1. From a distance, this would all be E1, meaning that
production is committed to occur and will show up in the market.

SPE specifies proved reserves to be limited to those quantities that are commercial
under current economic conditions. The above logic can therefore not be applied there.

The SPE classification maintains the same technical uncertainty classes (low/best/high
estimates) from pre- to post-discovery with the only change being in field status or
discovery risk. The UNFC classifies all undrilled resources as G4; any subdivision by
technical uncertainty is given by non-numeric qualifications.

78
 Comparison of Reserves Definitions
Reserves Definitions/Proved Criteria

SPE/WPC UNFC (2004)

(1997)

Intended purpose General application not country General application not country
specific. specific.

Qualitative Reasonable certainty to be G1 Quantities that are estimated to be

description of commercially recoverable. recoverable from a known (drilled)
certainty- proved accumulation, where sufficient technical
data are available to establish the
geological and reservoir production
characteristics with a high level of
confidence.
Qualitative Not proved, but more likely than G2 Quantities that are estimated to be
description of not to be recoverable recoverable from a known (drilled)
certainty- probable accumulation, where sufficient technical
data are available to establish the
geological and reservoir production
characteristics with a reasonable level of
confidence.
Qualitative Less likely to be recovered than G3 Quantities that are estimated to be
description of probable. recoverable from a known (drilled)
certainty- possible accumulation, where sufficient technical
data are available to establish the
geological and reservoir production
characteristics with a low level of
confidence.
Quantification of Proved =/> P90 Low est =/> P90
probabilities 2P =/> P50 Best Est =/> P50 or median or mean
associated with 3P =/>P10 High Est =/>P10
estimates. (target at field/property level) (target level not defined)
Proved reserves No proved reserves below LKH as To be defined in guidelines
relative to lowest defined by well logs, core analysis
known hydrocarbon or formation testing.
(LKH)
Proved reserve Directly offsetting DSUs and/or To be defined in guidelines
extensions on where reasonably certain of
undrilled acreage continuity and commercial
recovery.
Proved reserves Generally require actual production Have been justified by means of a
requirements for or a conclusive flowing well test. In feasibility study or actual production to
testing certain cases, proved reserves can be technically recoverable (F1)
be based on logs and/or cores and
is analogous to producing or tested
reservoirs.

Classification of Successful pilot or existing project (No specific criteria for enhanced
enhanced recovery in subject or analogous reservoir. recovery projects. To be defined in
mechanism as guidelines)
proved

79
 Comparison of Reserves Definitions
Development Status

Development and Developed producing and non- Proved reserves can be categorized as
production status producing. Undeveloped. developed or undeveloped.
categories

Developed Reserves expected to be Proved developed reserves are quantities

recovered from existing wells of proved reserves that are estimated to
including reserves behind pipe. be recovered from existing wells and will
Improved recovery reserves be processed and transported to market
require that necessary equipment using facilities and infrastructure that exist
has been installed or when costs at the date of the estimate.
to do so are relatively minor.

Developed - Reserves expected to be F1.1 The development project is

Producing recovered from completion completed and the facilities are
intervals which are open and producing.
producing at the time of the
estimate. Improved recovery
reserves are considered
developed producing only after the
improved recovery project is
operational.

Developed Non- Includes shut-in (open but not To be defined in guidelines

Producing producing, waiting on
market/pipeline connections, or
mechanical problems) and behind
pipe (requires additional
completion or future recompletion)
reserves

Undeveloped Reserves to be recovered from See inverse of developed.

additional drilling, deepening
existing wells to a different Undeveloped projects are committed only
reservoir or where a relatively when it can be demonstrated that there is
large expenditure is required to intent to develop them and bring them to
complete an existing well or install production.
production or transportation
facilities.

Allocation in Multi-well Not Defined Not defined

Pools

80
 Comparison of Reserves Definitions
Unproved Reserves

Unproved Reserves Technical, contractual, economic, or Not specifically defined. Unproved

regulatory uncertainties preclude reserves are total reserves minus proved
reserves being classified as proved. reserves by implication
Unproved reserves may be
estimated assuming future In order to make fill use of the precision
economic conditions (and offered by the UNFC, it is recommended
technological development) not to use the broader, and somewhat
different from those prevailing at the ambiguous, terms, probable and possible
time of the estimate. reserves. Instead, the term slow, best and
high estimate may be used stating
precisely the classes of interest.

Probable Reserves Includes: 1) step-out areas from 1.1.2 economically and commercially
proved 2) formations that appear recoverable (E1), have been justified by
productive on logs but lack core, means of a feasibility study or actual
definitive tests, or productive production to be technically recoverable
analogs 3) incremental reserves (F1) and are based on estimated
attributable to infill drilling 4) geological conditions (G2).
reserves attributable to improved
recovery methods but lack pilot 5) Additional deterministic criteria may
adjacent fault blocks up-dip to be defined in guidelines
proved 6) reserves attributable to
future workover treatments or other
procedures without successful
analogs 7) incremental reserves in
proved reservoirs through
alternative interpretations.

Possible Reserves Includes: 1) areas beyond probable 1.1.3 economically and commercially
potentially productive based on recoverable (E1), have been justified by
geological interpretations 2) means of a feasibility study or actual
formations that appear petroleum production to be technically recoverable
bearing in cores and logs but may (F1) and are based on inferred geological
not be commercially productive on conditions (G3).
tests 3) reserves attributable to infill
drilling that are subject to technical Additional deterministic criteria may
uncertainty 4) improved recovery be defined in guidelines
reserves where no pilot is
operational and reservoir
characteristics may not support
commercial application 5) adjacent
fault blocks down-dip to proved
areas.

81
 Comparison of Reserves Definitions
Deterministic vs Probabilistic Methods

Deterministic vs Reserve estimates may be Quantities in classes may be represented

Probabilistic prepared using wither deterministic by one or more discrete estimates or by a
Methods or probabilistic methods. Reserve probability distribution that reflects a
numbers are generally defined range of uncertainty in the estimate of that
within a range, not as one fixed quantity.
quantity. The range may be
described qualitatively by Deterministic estimates shall reflect the
deterministic methods or same principles and approximately the
quantitatively by probabilistic same probabilities as would be associate
methods. with estimates derived from a probability
(the probabilistic limits (e.g. Proved distribution
=/> P90) can only be specifically
applied when the probabilistic
method is applied)

Deterministic Deterministic estimates do not When a quantity is represented by

Method address uncertainties in terms of discrete estimates there shall be quoted
probabilities; they require that as a minimum, a low, a best and a high
volumes be described in terms of estimate.
discrete estimates using defined
criteria (e.g. LKH) including
qualitative certainty.

Probabilistic Method If probabilistic methods are used When a quantity is represented by a

the defined quantitative limits (e.g. probability distribution, a low, a best and a
Proved =/> P90) apply at the entity high estimate shall be quoted (see
level (before aggregation). Quantification of probabilities associated
with estimates.) Target level not defined.

Application of Numerical probabilities are only Not addressed

probability criteria applied in probabilistic method and
and aggregation. probability limits apply at the entity
level. Probabilistic aggregation
allowed to the field level only, then
arithmetic summation to reporting
level. Dependencies between
entities and their distributions must
be modeled in probabilistic
aggregation.

82
 Comparison of Reserves Definitions
Special Issues

Treatment of Classification applies to all (Classification applies to all petroleum

Unconventional petroleum deposits. deposits?) To be addressed in guidelines
Hydrocarbons
Fuel Gas Reserves Issuers have the option to include Included in non-sales quantities produced
Status gas volumes consumed in but not sold (E3.1). (Inclusion in reserves
operations in production and disclosures is based on regulatory
reserves if an appropriate guidelines.)
expense is allocated.

Natural Gas Injection To include injection gas as Not Defined

reserves, the volumes would have
to meet the normal criteria
(economic when available for
production, existence of a firm
market, available pipeline or other
export option, part of established
development plan).

Gas Sales Volumes Reported gas reserves reflect the Not addressed
condition of the gas at the point of
sale. If sold as wet gas, associate
liquids reserves are not reported
separately. If sold with a non-
hydrocarbon gas content, the full
volume as sold is included in
reserves. The price received will
reflect quality.

Infill Drilling Reserves assigned to infill drilling Not addressed.

with low uncertainty are Probable,
infill areas with technical
uncertainty are possible
(acceleration issue not addressed)
Compression Not Defined Not defined

83
 Comparison of Reserves Definitions
Special Issues

Net Profits Interests Not defined Not defined

Production-Sharing Under a PSC the host government Not defined

Contracts retains ownership, however the
contractor receives a stipulated
share of production remaining
after cost recovery. Reported
reserves are based on the
economic interest held subject to
the specific terms and time frame
of the agreement. Being tied to
economic interest, reserves must
be re-calculated annually based
on product price and operating
costs and may vary considerably.
Under SPE definitions, an average
price over the term of the contact
may be used to define reserves.

Contract Extensions Where agreements allow Not defined

extension through negotiation of
renewed contract terms, exercise
of options to extend or other
means additional reserves (of
various categories) or contingent
resources may be assigned
depending the level of certainty
and commercial viability
associated with the contract
extension.

Product categorization Not Defined Not defined

84
 Comparison of Reserves Definitions
Economics/Commerciality

Commerciality In order to assign reserves of any Quantities in classes may be considered

category, a project needs to be commercial if the reporting entity has the
defined in terms of a commercially intention of developing and producing
viable development plan and there them and such intention is based upon:
should be evidence of firm intent a reasonable assessment of future
to proceed. production economics being satisfactory
a reasonable expectation of available
market
evidence that production and
transportation facilities can be made
available
evidence that legal, contractual,
environmental and other concerns will
allow the recovery project to be realized.

Commitment If the degree of commitment is not Development projects for recovery of a

such that an accumulation is commodity are committed when firm
expected to be developed and commitments have been made for the
placed on production within a expenditures and activities needed to
reasonable time frame (e.g. 5 bring a discovered accumulation to the
years), the estimated recoverable production stage (no time frame defined).
volumes should be classified as
contingent resources (not
reserves).

Economics The underlying economic E.1 Production is justified under the

evaluation based on perception technological, economic, environmental
(best estimate) of future costs and and other relevant commercial conditions,
prices together with best-estimate realistically assumed or specified at the
production profile expected to time of the estimation.
equate to a proved plus probable
scenario. To limit downside E1.1 Normal Economic Production is
exposure the low case scenario justified under normal conditions.
should be at least break-even Assumptions regarding future economic
which is consistent with the conditions may be constrained by
requirement that proved reserves regulation.
is viable under current economic E1.2 Exceptional Economic quantities
conditions. are at present not economic to produce
under normal economic conditions their
production is made possible through
government subsidies and/or other
considerations
Development Plan While some companies choose F1.3 Development plans have
Approvals not to assign any proved reserves demonstrated production of the reported
until the development plan has quantities to be justified but commitments
received all relevant formal to carry out the development works have
approvals, SPE definitions require not yet been made (without an approved
only a reasonable expectation that plan of development, legal/regulatory
the necessary facilities to process conditions for commerciality are not met
and transport those reserves will and without commitment, no reserves are
be installed. assigned.

85
 Comparison of Reserves Definitions
Economics/Disclosure Guidelines

Prices & Costs for Proved: Existing economic Proved reserves are a specifically defined
defining reserves conditions (year-end or subset of Committed Reserves.
economic limit. appropriate period* average) Reasonably certain to be commercially
(*SPE recommends prior 12 recoverable under current economic
month period). conditions, operating methods and
government regulations.

Unproved: reserves may be Total Committed Reserves E1.F1

based on forecast prices and E1 see economics
costs. F1 Production is justified under
technological, economic, environmental
and other relevant commercial conditions,
realistically assumed or specified at the
time of estimation.

Abandonment Costs Economic limit calculated Commercial value of quantities includes

including abandonment and estimated project abandonment costs
reclamation costs. Economic limit calculated including
abandonment and reclamation costs.

Net Present Value of Not defined The commercial value of the quantities
Future Net Revenue would generally be the present value of
(FNR). future cash flows obtainable as a result of
production of the recoverable quantities.

(See Note 1 for calculation guidelines)

Audit Requirements No requirement for use of The studies referred to in the UNFC mist
external evaluators. SPE be under taken by a person(s) with the
Standards Pertaining to the appropriate qualifications to assess
Estimating and Auditing of Oil and resources/reserves of the type of
Gas Information recommends commodity in question. The qualifications
standards for training, experience and experience required will vary from
levels, and sets independence country to country. In certain
criteria for evaluators and circumstances licensing may be required.
auditors whether internal or (No requirement for use of external
external. evaluators.)

Gross vs Net See Note 1 See Note 1

Reserves

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Note 1:
UNFC Regards Project Value Calculations
The calculation of commercial value shall reflect:
1. The expected quantities of production whose value is measured.
2. The estimated costs associated with the project to develop, recover and produce the
quantities of production at is reference point, including environmental and abandonment
costs charged to the project based on costs already incurred and the reporters view of
the costs expected to apply in future periods.
3. The estimated revenues from the quantities of production based on the reporters view of
the prices expected to apply to the respective commodities in future periods. Such prices
are to be based on reliable data, the basis of which and reason why the reporter
considers such price assumptions to be appropriate will be disclosed. Examples of such
reliable data are agreed contract prices, the published forward price curve for the
appropriate commodity, an average of a group of analysts forecast prices and an
average of historic achieved prices if this is considered to be a good estimate of the
applicable future price.
4. The portion of costs and revenues accruing to the reporter.
5. Future production and revenue related taxes and royalties expected to be paid by the
reporter.
6. The application of discount factors that reflect a specific risk or uncertainty associated
with the estimated cash flows. Where risk is reflected in the discount rate, estimates of
future revenues and costs should be discounted at a rate appropriate to that cash stream

SPE Regards Royalty

Within the U.S., royalty volumes are strictly omitted from reported reserves (that is, they are
reported on a net basis). In some cases outside the U.S., where royalty is paid in cash and the
cash flow from the royalty is reflected in the companys accounts, the corresponding royalty may
be included in reserves.

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