Environmental Engineering Reference
In-Depth Information
The black art of estimating reserves
The business of estimating reserves begins with science. Oil explorers take
seismic surveys, or acoustic reflections, of cross-sections of the earth's
crust, both onshore and offshore. But while these may provide a promis-
ing picture of oil and gas deposits, they are only clues - not proof - of oil
and gas deposits. Only drilling can provide hard evidence of the presence
of oil or gas. This is why the US Securities and Exchange Commission
insists on seeing drilling evidence to back up companies' reserve claims.
As financial regulator of the world's first international oil companies, the
SEC has traditionally led the way in setting standards and definitions of
reserves for publicly-listed oil companies.
But just because an oil deposit exists doesn't mean it is extractable by a
reasonable means or at a reasonable price. This is where objective science
begins to give way to subjective judgement. On a series of assumptions
which take into account marketability and future prices as well as cost,
geology and technology, oil and gas reserves are divided into:
Proven reserves:
a ninety percent probability of being extracted
profitably
Probable reserves:
a fifty percent likelihood of profitable extraction
Possible reserves:
a ten percent chance of profitable extraction
This requirement of a degree of commerciality for reserves is essential
for investors to be able to gauge the practical value of the reserves held
by publicly listed oil companies. Commerciality is subjective and can
sometimes appear to exist only in the eye of the reserve-holder. In 2004,
for instance, Royal Dutch Shell was fined by the US and UK regulatory
authorities for deliberately overstating its reserves. To some extent, this
was an attempt to make up on paper for reserves that the company had
failed to find underground with the drillbit. But there were also issues of
commerciality and marketability. The company was forced to take off its
balance sheet some twenty percent of its reserves, including gas reserves
from its Gorgon gasfield in Australia for which there was no firm buyer,
and some oil in Nigeria whose export was constrained by that country's
OPEC membership.
Calculations of the reserves of national oil companies, in particular
those owned by OPEC governments, are even more arbitrary. Because they
are not listed on stock exchanges, most of them do not require any outside
audit of their reserve claims. For the same reason, the reserve claims of