1. Reservas: Impacto de los últimos cambios en las definiciones
Herman G. Acuña
Managing International V.P.
Ryder Scott Company

2. Agenda Introductory Comments 2007 SPE/WPC/AAPG/SPEE PRMS
2009 SEC Rules Modernization
Side-by-Side Comparison of SPE and SEC Definitions

3. The Definitions 2009 SEC’s Modernization 2007 SPE PRMS
Of Oil and Gas Reporting
2007 SPE PRMS

4. WHY IS A RESERVES DEFINITION NEEDED?
Most of the parameters that define the reserves of a Reservoir cannot be measured directly, and must be determined indirectly through geologic and reservoir engineering analysis and interpretations.
As a result, the estimates of oil and gas reserves have an intrinsic uncertainty.
The Definitions of reserves are designed to promote uniformity and a standard measurement of the assets, providing a structure to quantify risk and uncertainty through its categorization.

5. Audiences E&P Company Tolerance to Uncertainty Access to upside
Investing Public
Financial Institutions
Government Interests
Tolerance to Uncertainty
Access to upside
Exposure to downside
Economic indicators

6. The term “reserves” is generally applied to the discovered quantities of petroleum anticipated to be commercially recoverable from known accumulations from a given date forward under defined conditions.
The term “resources” is generally applied to all quantities of petroleum (recoverable and unrecoverable) naturally occurring on or within the Earth’s crust, discovered and undiscovered, plus those quantities already produced.
Ref.: Sections 2.1.1, & PRMS

7. Commerciality hurdle Discovery hurdle Project Based System
Ref.: Sections 2.1.1, & PRMS
Commerciality hurdle
Discovery hurdle
Project Based System

8. Project Maturity Sub-Classes: Play
Project associated with prospective trend
Requires additional data acquisition and/or evaluation
Activities focused on identifying leads or prospects for more detailed analysis
Chance of discovery, range of potential recovery under hypothetical development scenarios
Let's keep
looking!

9. Project Maturity Sub-Classes: Lead
Poorly defined potential accumulation
Requires more data acquisition or evaluation
Activities include further analysis to confirm whether or not the lead can be mature into a prospect
Chance of discovery, range of potential recovery under feasible development scenarios
Is that a
target?

10. Project Maturity Sub-Classes: Prospect
Potential accumulation sufficiently defined as a viable drilling target
Project focus on assessing chance of discovery
Evaluating range of potential recoverable quantities under commercial program
Move the
Rig Boys!

11. Project Maturity Sub-Classes: Development Not Viable
Discovery with limited production potential
No current plans to appraise
Project not seen as having commercial potential for eventual development
Keep theoretical recoverable quantities in the event of major technology or commercial conditions
Project decision gate not to undertake any further actions for the foreseeable future
Wish had not
spent that money!

12. Company Prospector after receiving “Development not Viable” status on pet project
At least I kept
the dog!

13. Project Maturity Sub-Classes: Development Unclarified or on Hold
Discovery with activities on hold and commercial development may be significantly delayed
Project seen as having eventual commercial development potential
Pending removal of significant contingencies
Substantial further appraisal is necessary to clarify potential
Project decision gate proceed or suspend appraisal with temporarily suspension outcome
Tempting,
let's wait & spend
somewhere else. ? ?

14. Project Maturity Sub-Classes: Development Pending
Discovery with enough hydrocarbons to justify ongoing activities to confirm commercial development in the foreseeable future
Reasonable potential for development subject to confirmation with ongoing data acquisition and investigations
Critical contingencies identified and reasonable expectations to resolve them
Disappointing appraisal may lead to downgrading to “On-hold” or “Not Viable”
Project decision gate is decision to move forward with appraisal and confirmation
Actively
Appraising

15. Project Maturity Sub-Classes: Justified for Development
Projects justified economically based on reasonable commercial forecast
Reasonable expectation that all approvals will be obtained
Development plan with sufficient detail to support claim of commerciality
Reasonable expectations to obtain regulatory approvals and sales contracts
Project decision gate is notification of project maturity to proceed with development at that point in time
Will Spend
Money

16. Company prospector after receiving “Justified for Development” status on pet project.
I knew it all along,
those were reserves
not resources!

17. Project Maturity Sub-Classes: Approved for Development
All approvals obtained, capital funds committed & project is underway
Certainty that project is going forward
No outstanding approvals or sales contracts
Committed budget should be part of the approved budget
Project decision gate is to start investments and construction
Spending
Money

18. Project Maturity Sub-Classes: On Production
Project is on production and selling hydrocarbons
Receiving income versus simply a completed project
Project chance of commerciality is 100%
Project decision gate is the decision to initiate commercial production
Making
Money

19. Securities and Exchange Commission (SEC) Reserves Definitions

20. SEC Mission and Objectives
SEC administers federal securities laws and issue rules and regulations to provide protection for investors and ensure the securities markets are fair and honest.
Its main objective is to protect shareholders by providing a homogeneous base for comparison among the various Companies.
SEC promotes the full and effective disclosure to the investing public.
SEC does not conduct merit review – does not guarantee the value or merit of an investment.
SEC cannot prohibit the sale of securities of questionable value. The investor must make the ultimate judgment of the worth of any securities offered for sale.

21. 2009 SEC Reserves Definitions Modernization
Now covers Proved, Probable and Possible Reserves, previously only Proved Reserves
Use of 12 month average price for the first day of each month versus fiscal year end price
Allows booking of “non-conventional” hydrocarbons
Ability to use new technology if reliable and repeatable.
“Certainty” criteria for PUDs now use “reasonable certainty” criteria.
Analogous reservoir properties must be in the aggregate be no more favorable than the reservoir of interest.
Allows for Deterministic and Probabilistic methods
It does not reflect the global position of the Company in the area of Resources

22. Side By Side Comparison of U.S. SEC vs. SPE-PRMS Reserves Definitions

23.  SEC RESOURCES SEC RESERVES Classify by Chance of Commerciality
Categorize estimates based on Uncertainty of sales volumes

24. Definition of Reserves
SEC (a)(26):
Reserves are estimated remaining quantities of oil and gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and gas or related substances to market, and all permits and financing required to implement the project.
SPE-PRMS Appendix A:
Reserves are those quantities of petroleum anticipated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions. Reserves must further satisfy four criteria: They must be discovered, recoverable, commercial, and remaining (as of a given date) based on the development project(s) applied.

25. Economically Producible vs. Commercially Recoverable
SEC (a)(10):
The term economically producible, as it relates to a resource, means a resource which generates revenue that exceeds, or is reasonably expected to exceed, the costs of the operation. The value of the products that generate revenue shall be determined at the terminal point of oil and gas producing activities as defined in paragraph (a)(16) of this section.
SPE-PRMS 3.1, Commercial Evaluations:
Resources evaluations are based on estimates of future production and the associated cash flow schedules for each development project. While each organization may define specific investment criteria, a project is generally considered to be “economic” if its “best estimate” case has a positive net present value under the organization’s standard discount rate, or if at least has a positive undiscounted cash flow.

26. Existing Economic Conditions vs. Defined Economic Conditions
SEC (a)(22)(v):
Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
SPE-PRMS 3.1.2:
The economic evaluation underlying the investment decision is based on the entity’s reasonable forecast of future conditions, including costs and prices, which will exist during the life of the project (forecast case). Such forecasts are based on projected changes to current conditions; SPE defines current conditions as the average of those existing during the previous 12 months. Alternative economic scenarios are considered in the decision process and, in some cases, to supplement reporting requirements. Evaluators may examine a case in which current conditions are held constant (no inflation or deflation) throughout the project life (constant case).

27. Definition of Proved Reserves
SEC (a)(22):
Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.
SPE-PRMS Appendix A:
Proved Reserves are those quantities of petroleum, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods, and government regulations.

28. Reasonable Certainty For Proved Reserves
SEC (a)(22):
If deterministic methods are used, reasonable certainty means a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate. A high degree of confidence exists if the quantity is much more likely to be achieved than not, and, as changes due to increased availability of geoscience (geological, geophysical, and geochemical), engineering, and economic data are made to estimated ultimate recovery (EUR) with time, reasonably certain EUR is much more likely to increase or remain constant than to decrease.
SPE-PRMS Appendix A:
If deterministic methods are used, the term reasonable certainty is intended to express a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate.

29. Discounted Future Net Revenue or Net Present Value
FASB Topic 932:
This amount shall be derived from using a discount rate of 10 percent a year to reflect the timing of the future net cash flows relating to proved oil and gas reserves.
SPE-PRMS 3.1.1:
When the cash flows are discounted according to a defined discount rate and time period, the summation of the discounted cash flows is termed net present value (NPV) of the project. The calculation shall reflect:
•The application of an appropriate discount rate that reasonably reflects the weighted average cost of capital or the minimum acceptable rate of return applicable to the entity at the time of the evaluation.

30. Proved Reserves and Expiration of Existing Contracts
SEC (a)(22):
“prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain”
SPE-PRMS & 3.3.3:
The calculation shall reflect:
•A project life that is limited to the period of entitlement or reasonable expectation thereof.
Reserves should not be claimed for those volumes that will be produced beyond the ending date of the current agreement unless there is reasonable expectation that an extension, a renewal, or a new contract will be granted. Such reasonable expectation may be based on the historical treatment of similar agreements by the license-issuing jurisdiction. Otherwise, forecast production beyond the contract term should be classified as Contingent Resources with an associated reduced chance of commercialization.

31. Reserves and Constraints for Project Financing
SEC (a)(26):
Reserves are estimated remaining quantities of oil and gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and gas or related substances to market, and all permits and financing required to implement the project.
Author’s Note: This applies to SEC Reserves of any category.
SPE-PRMS 3.1.2:
While SPE guidelines do not require that project financing be confirmed prior to classifying projects as Reserves, this may be another external requirement. In many cases, loans are conditional upon the same criteria as above; that is, the project must be economic based on Proved Reserves only. In general, if there is not a reasonable expectation that loans or other forms of financing (e.g., farm-outs) can be arranged such that the development will be initiated within a reasonable timeframe, then the project should be classified as Contingent Resources. If financing is reasonably expected but not yet confirmed, the project may be classified as Reserves, but no Proved Reserves may be reported as above.
SPE-PRMS Reasonable Expectation:
Indicates a high degree of confidence (low risk of failure) that the project will proceed with commercial development or the referenced event will occur.

32. Proved Reserves and Constraints for Project Timing
SEC (a)(22) Proved Reserves:
“The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.”
SEC (a)(31)(ii) Undeveloped Reserves:
Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances, justify a longer time.
Author’s Note: The SEC regulations do not define what constitutes acceptable instances of “specific circumstances that justify a longer time. Guidance, however, is provided in the SEC 26 October 2009 Website Release “Compliance and Disclosure Interpretations: Oil and Gas Rules”.
SPE-PRMS Table 1 & Appendix A Commercial:
There must be a reasonable expectation that all required internal and external approvals will be forthcoming, and there is evidence of firm intention to proceed with development within a reasonable time frame.
In addition, a project is commercial if the degree of commitment is such that the accumulation is expected to be developed and placed on production within a reasonable time frame. While 5 years is recommended as a benchmark, a longer time frame could be applied where, for example, development of economic projects are deferred at the option of the producer for, among other things, market-related reasons, or to meet contractual or strategic objectives. In all cases, the justification for classification as Reserves should be clearly documented.

33. Proved Reserves and Constraints for Project Timing
SEC (a)(22) Proved Reserves:
“The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.”
SEC (a)(31)(ii) Undeveloped Reserves:
Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances, justify a longer time.
Author’s Note: The SEC regulations do not define what constitutes acceptable instances of “specific circumstances that justify a longer time. Guidance, however, is provided in the SEC 26 October 2009 Website Release “Compliance and Disclosure Interpretations: Oil and Gas Rules”.
SPE-PRMS Table 1 & Appendix A Commercial:
There must be a reasonable expectation that all required internal and external approvals will be forthcoming, and there is evidence of firm intention to proceed with development within a reasonable time frame.
In addition, a project is commercial if the degree of commitment is such that the accumulation is expected to be developed and placed on production within a reasonable time frame. While 5 years is recommended as a benchmark, a longer time frame could be applied where, for example, development of economic projects are deferred at the option of the producer for, among other things, market-related reasons, or to meet contractual or strategic objectives. In all cases, the justification for classification as Reserves should be clearly documented.
Oh, my!
5 years –
nobody told me.

34. Definition of Proved Area
SEC (a)(22)(i)Proved Reserves:
The area of the reservoir considered as proved includes:
(A) The area identified by drilling and limited by fluid contacts, if any, and
(B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data.
SPE-PRMS Table 3 Proved Reserves:
The area of the reservoir considered as Proved includes
the area delineated by drilling and defined by fluid contacts, if any, and
(2) adjacent undrilled portions of the reservoir that can reasonably be judged as continuous with it and commercially productive on the basis of available geoscience and engineering data.

35. Proved Area In the Absence of Established Fluid Contacts
SEC (a)(22) Proved Reserves:
(ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons (LKH) as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty.
(iii) Where direct observation from well penetrations has defined a highest known oil (HKO) elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable certainty.
SPE-PRMS Table 3 Proved Reserves:
In the absence of data on fluid contacts, Proved quantities in a reservoir are limited by the lowest known hydrocarbon (LKH) as seen in a well penetration unless otherwise indicated by definitive geoscience, engineering, or performance data.

36. Proved Area In the Absence of Established Fluid Contacts
SEC (a)(25) Reliable Technology:
Reliable technology is a grouping of one or more technologies (including computational methods) that has been field tested and has been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation.
SPE-PRMS Table 3 Proved Reserves:
In the absence of data on fluid contacts, Proved quantities in a reservoir are limited by the lowest known hydrocarbon (LKH) as seen in a well penetration unless otherwise indicated by definitive geoscience, engineering, or performance data. Such definitive information may include pressure gradient analysis and seismic indicators. Seismic data alone may not be sufficient to define fluid contacts for Proved reserves (see “2001 Supplemental Guidelines,” Chapter 8).

37. Definition of Undeveloped Reserves
SEC (a)(31):
Undeveloped oil and gas reserves are reserves of any category that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.
(i) Reserves on undrilled acreage shall be limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances.
(ii) Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances, justify a longer time.
(iii) Under no circumstances shall estimates for undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, as defined in paragraph (a)(2) of this section, or by other evidence using reliable technology establishing reasonable certainty.
SPE-PRMS Table 2 & Appendix A:
Undeveloped Reserves are quantities expected to be recovered through future investments: (1) from new wells on undrilled acreage in known accumulations, (2) from deepening existing wells to a different (but known) reservoir, (3) from infill wells that will increase recovery, or (4) where a relatively large expenditure (e.g., when compared to the cost of drilling a new well) is required to (a) recomplete an existing well or (b) install production or transportation facilities for primary or improved recovery projects.
SPE-PRMS Table 3 Proved Reserves:
Reserves in undeveloped locations may be classified as Proved provided that:
•The locations are in undrilled areas of the reservoir that can be judged with reasonable certainty to be commercially productive.
•Interpretations of available geoscience and engineering data indicate with reasonable certainty that the objective formation is laterally continuous with drilled Proved locations.

38. Definition of Proved Reserves for Improved Recovery
SEC (a)(25) Proved Reserves:
(A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and
(B) The project has been approved for development by all necessary parties and entities, including governmental entities.
SPE-PRMS Improved Recovery:
The judgment on commerciality is based on pilot testing within the subject reservoir or by comparison to a reservoir with analogous rock and fluid properties and where a similar established improved recovery project has been successfully applied. Incremental recoveries through improved recovery methods that have yet to be established through routine, commercially successful applications are included as Reserves only after a favorable production response from the subject reservoir from either (a) a representative pilot or (b) an installed program, where the response provides support for the analysis on which the project is based.

39. Conclusions
Reserves definition provide a framework to classify reserves according to the uncertainty level in the evaluation.
The SPE and SEC definitions are more similar than you think.
The SPE and SEC definitions are more different than you think.
The perception of the consequences of non-compliance may affect how we perceive the different guidelines.

40. Managing International V.P. (Herman_Acuna@RyderScott.com)
Questions?
Herman G. Acuña
Managing International V.P.
Ryder Scott Company