Reserves Estimation: The Challenge for the Industry

Ferruh Demirmen, SPE, Petroleum Consultant

Reserves estimation is one of the most essential tasks in the petroleum industry. It is the process by which the economically recoverable hydrocarbons in a field, area, or region are evaluated quantitatively. Downward revisions of U.S. Security and Exchange Commission (SEC)-booked reserves by some oil companies in 2004 brought the topic under public scrutiny.

Confidence in reserves disclosures became a public issue,and there were calls from investors and lending institutions for more-reliable reserves estimates. Oil companies have responded by revisiting reserves-estimation procedures, and SPE, American Association of Petroleum Geologists (AAPG), World Petroleum Council (WPC), and Society of Petroleum Evaluation Engineers (SPEE) have launched a joint project to train reserves evaluators. A major goal in this initiative is preparation of training modules that represent industry’s “recommended practices.”

Long before the issue caught the public’s attention, however, reserves estimation was a challenge for the industry. The challenge stems from many factors, tangible and intangible, that enter the estimation process, and judgment is an integral part of the process. Uncertainty, along with risk, is an endemic problem that must be addressed. Consequently, the industry’s record of properly predicting reserves has been mixed. Despite appeals from some quarters, there currently is no standardized reserves-estimation procedure.

The purpose of this paper is to discuss various issues related to reserves, review reserves-estimation procedures, and make suggestions for improvements. Emphasis will be placed on reserves evaluation at the preproduction stage in which estimation errors generally have the highest economic effect. The discussed procedures pertain to conventional oil and gas reserves. Specific rules relating to booking reserves
for regulatory purposes are outside the scope of this paper.

SPE 103434 - Distinguished Author Series as published in JPT.

Ferruh Demirmen, SPE, is an independent petroleum consultant dealing, in part, with reserves estimation. He has 40 years of upstream experience, mostly in production. Demirmen retired from Shell Intl. Petroleum Mij. as a corporate consultant in production geology responsible for Europe/North Sea, southeast Asia, and South America. He holds a BS degree from the U. of Kansas and MS and PhD degrees from Stanford U., all in geology.