OIL AND GAS RESERVES

ESTIMATING
WE HAVE MET THE ENEMY,
AND HE IS US
Peter R. Rose
Senior Associate, Rose & Associates, LLP.,
and President AAPG
Austin, Texas

RULES OF THE GAME

1.

Write your name on the form

2.

Follow instructions

3.

Try hard to answer objectively

4.

Write your answers down

5.

No joint ventures -- work independently

6.

P90 is a small number; P10 is a large

number

DETERMINISTIC ESTIMATE
A single number (best guess) among
a wide range of possible real
outcomes.
Low confidence in being precisely
correct.
Amount of uncertainty affects
willingness to invest in your estimate.

UNCERTAINTY & CONFIDENCE

FOR $20, HOW MUCH ARE YOU PREPARED
TO BET THAT YOUR BEAN-ESTIMATE IS
EXACTLY CORRECT?

$10?
$5?
$2?
$1?
50?
Chance of estimating

20?
10?
5?

the exact number of beans?

!REMOTE!

EXPRESSING CONFIDENCE I
Traditional Engineering Convention -- 10%?
Ranges of Numbers Corresponding to
Confidence:
Confidence (=,>)

Confidence (=,>)

> 10 beans

very, very high

> 200 beans

fairly high

> 100 beans

high

> 2,000 beans

low

> 1,000 beans moderate

> 20,000 beans very, very low

EXPRESSING CONFIDENCE II
LET US SPECIFY:

High Confidence = 90% sure

=, > P90 value

Low Confidence = 10% sure

=, > P10 value

50/50 Confidence = 50% sure

=, > P50 = Median

Superiority Of Probabilistic Method

. . . still just estimates cloaked in probabilities?
Advantages:
1. Measure our estimating accuracy by comparing
probabilistic forecasts against actual outcomes
2. Use statistical principles to make better estimates
(lognormal expectation, calculate mean of
distribution, defined low-side & high-side criteria

PRACTICAL ATTRIBUTES OF
KEY PARAMETERS
P1
P10
P50
P90
P99

Geologically possible; but extremely unlikely

Reasonable Maximum
Half below, Half above, the Median
Reasonable Minimum
As small as it could be . . . Yet detectable

Boundary
Conditions

80% confidence level

Superiority Of Probabilistic Method

. . . still just estimates cloaked in probabilities?
Advantages:
1. Measure our estimating accuracy by comparing
probabilistic forecasts against actual outcomes
2. Use statistical principles to make better estimates
(lognormal expectation, calculate mean of
distribution, defined low-side & high-side criteria
3. Reality-checks -- natural limits, unrealistic extremes,
analog distributions
4. Faster, more efficient

 Compare your original best

estimate (circled number, item 2,
colored form) with your neighbor
Does anyone in the audience have a
circled number that is EXACTLY

Another bean slide . . .

New confidence-level:

NOTE: REASONABLE CERTAINTY BEST GUESS

I am Reasonably Certain that there are

44
________
beans or more.
6

NOTE: THIS IS A PROBABILITY STATEMENT, ALTHOUGH

NO PROBABILITY (= CONFIDENCE LEVEL) IS SPECIFIED

WHAT IS YOUR REASONABLE CERTAINTY?

50%? 67%? 75%? 80%? 90%? 95%? 99%?
HOW CAN YOU MEASURE YOUR ESTIMATING
ABILITY USING AN UNDEFINED CRITERION?

COMPLICATIONS
1. A larger estimate may be in your personal
interest
2. Your boss may prefer larger to smaller
estimates
3. Possible consequences if actual result is less
than your estimate
a) Negative Press
b) Employer Disciplines
c) State Penalizes

90%?
98% ?
75%?
?
%
50

U.S. SEC REFUSES TO SPECIFY

THE CONFIDENCE-LEVEL OF
REASONABLE CERTAINTY
99
80
%

?
%

95% ?

67%
?

. . . BUT SEC will not specify

confidence level assigned to PROVED

Proved Reserves
reasonable certainty

www .sec.gov / divisions / corpfin / forms / regsx. htm

. . . are the estimated quantities which geological

and engineering data demonstrate with
reasonable certainty to be recoverable. . .
This is the foundational statement of what
we think is an outdated (1978) system.
Lets take a look at the evolution of the wording

reasonable certainty

Proved Reserves
Yergin and Hobbs, 2005 ogj

API 1936
Every reasonable
probability

Capen
SPE 5579

1964

SPE

Reasonable
certainty

US SEC

Proved
probable &
possible

1976

1981

1987

Revised def.
for proved

1978

1982

Proved w Year-end
reasonable pricing
certainty

1997
Probabilistic
methods
guidelines
published

DETERMINISM GETS
INCREASINGLY COMPLEX
Proved, Probable, Possible
Developed & Undeveloped
Weighting schemes to account for
uncertainty
? Applicability to Undrilled Prospects
and Plays?

PROBABILISTIC ESTIMATING COMES TO

PETROLEUM EXPLORATION ( 1985 )
Exploration is a repeated-trials game of
many uncertain ventures
Statistical treatment is appropriate
Statistics = Language of Uncertainty
Aids to Improved Estimating -Lognormality
Reality Checks
Project post-audits improved estimating skills

Leads to Portfolio Management

PROBABILISTIC ESTIMATING:
STANDARD EXPLORATION PRACTICE
Tipping Point mid-1990s
SPE/WPC acknowledged in 1997,
recognizing both Deterministic and
Probabilistic approaches
SPE/WPC recommendation:
Proved = 90% Confidence

Reserves Estimating: A Divided Industry

Exploration: Fully Probabilistic

Production: Mostly Deterministic
(Proved, Probable, Possible,
Developed, Undeveloped, etc.)

TWO VIEWS OF E&P WORK:

Deterministic View:

STOP!
Use this time &
$$ to find other
prospects
THE ANSWER
(Determinism)

TIME & $$

P10

P50

UNCERTAINTY

P90

TIME & $$

UNCERTAINTY

Probabilistic View:

Determinism Promotes Unaccountability

Attempts to represent highly uncertain parameters with
a single, precise number, and without expressing
how much uncertainty surrounds it.
Proved, Probable, Possible: terms not defined
quantitatively, so impossible to measure and calibrate
estimating abilities objectively

So the Deterministic Method is

unaccountable to:
Professionals
Clients and Employers
Investors
General Public

PROBABILISTIC METHODS
PROMOTE ACCOUNTABILITY
All possible outcomes are assigned likelihood of
occurrence
Compare estimates with outcomes:
Detects and measures bias
Encourages learning and improved estimating
Compatible with Portfolio Management
Adaptable to considerations of Chance of Success
Can be universally applied to all E&P projects
(Plays, Prospects, Developments, Workovers, EORs, etc.)

? Resistance to change?
? Propped up by SEC?
? Accountants cant deal with uncertainty?
? Encourages false confidence?
? Desire to remain unaccountable?

DETERMINISM ENCOURAGES
UNREALISTIC THINKING ABOUT HIGHLY
UNCERTAIN RESOURCE VALUES
Executives, Board Members, Bankers,
Analysts, Stockholders
Enables Decision-makers to maintain
unwarranted confidence
Discourages realistic assessments of
uncertainty and risk

One Simple Remedy to Start Fixing the Problem

A unified statement from the E&P professional
community that Proved = 90% confidence.
Imposed Definition on SEC
Support of Professional Societies?
Support of Influential Companies?
Industry professionals created this problem -Why dont we, as responsible Professionals, change it?

(Walt Kelly, POGO)

OIL AND GAS RESERVES

ESTIMATING
WE HAVE MET THE ENEMY,
AND HE IS US
Peter R. Rose
Senior Associate, Rose & Associates, LLP.,
and President AAPG
Austin, Texas