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PRMS – Status & Plans

by: John Ritter, Occidental John Etherington, PRA International Ltd

Ryder Scott 11th Annual Reserves Conference , Texas - September 2, 2015

1 Agenda

Background - Resource Classification History - PRMS Development/Implementation

PRMS 2015 Status

PRMS Update Project

Future View

2 Petroleum Resources Classification

1907 Mines Institute

1937 API 1955 World Geological Congress 1961 AGA

1965 SPE (OGRC) 1972 USGS 1985 SPEE McKelvey 1978 SEC 1987 SPE

1997 SPE/WPC

2000 SPE/WPC/AAPG 2004

2009 SEC 2007 SPE/WPC/AAPG/SPEE/SEG ‐ PRMS

2011 PRMS Application Guidelines

3 “Vision” for Reserves/Resources (developed by OGRC – Sept 2004) Part 1

SPE/WPC/AAPG/SPEE definitions and classification system (and associated estimating guidelines) will continue to be maintained evergreen and enhanced to incorporate new best practices, and unconventional resources, and will be recognized as the premier classification standard.

Part 2

Actively promote and facilitate in-depth understanding of the definitions and their adoption by the oil, gas, and related industries; international financial organizations; governments; regulatory agencies; and reporting bodies.

4 Petroleum Resources Management System

Published in April 2007; maintained by SPE OGRC; co- sponsored by:

Society of Petroleum Engineers (SPE)

World Petroleum Council (WPC)

American Association of Petroleum Geologists (AAPG)

Society of Petroleum Evaluation Engineers (SPEE)

Endorsed by Society of Exploration Geophysicists (SEG)

5 2007 Petroleum Resources Management System

PRODUCTION RESERVES P90 P50 P10

1P 2P 3P COMMERCIAL Proved Probable Possible PLACE (PIIP) - IN

- CONTINGENT DISCOVERED PIIP RESOURCES

1C 2C 3C SUB-COMMERCIAL UNRECOVERABLE

PROSPECTIVE RESOURCES Increasing Chance of Commerciality TOTAL PETROLEUM INITIALLY TOTAL PETROLEUM Low Best High Estimate Estimate Estimate UNDISCOVERED PIIP UNDISCOVERED UNRECOVERABLE

Range of Uncertainty Not to scale

6 PRMS Official Reference (www.spe.org)

(all documents in pdf – free downloads)

Also See: Mapping of Reserves Definitions & Estimating and Auditing Standards for Reserves 7 The PRMS Document “Consolidated Format”

Section 1. Basic Principles & Definitions Discussion of Principles Section 2. Classification and Categorization Guidelines

Section 3. Evaluation and Reporting Guidelines.

Section 4. Estimating Recoverable Quantities

23 pages Resource Table I: Classes & Sub-classes Definitions & Table II: Resource Status Modifiers Guidelines Table III: Category Definitions & Guidelines 6 pages

Auxiliary Appendix A: Glossary Cross-referenced to Text Definitions 20 pages

8 Guidelines for Application of PRMS

PUBLISHED November 2011 (221 pages) Updates and replaces 2001 SPE “ Guidelines for the Evaluation of Petroleum Reserves and Resources” Contents Chapter 1 Introduction Chapter 2 Petroleum Resources Definitions, Classification, and Categorization Guidelines Chapter 3 Seismic Applications Chapter 4 Assessment of Petroleum Reserves using Deterministic Procedures Chapter 5 Probabilistic Reserves Estimation Chapter 6 Aggregation of Reserves Chapter 7 Evaluation of Petroleum Reserves and Resources Chapter 8 Unconventional Reserves Estimation Chapter 9 Production Measurement and Operational Issues Chapter 10 Reserves Entitlement and Recognition

9 Fulfilling the Vision

Part 1: Publish the Standard Create and maintain an international standard petroleum reserves and resources classification system.

Part 2: Implement the Standard Actively promote and facilitate in-depth understanding of the definitions and their adoption by the oil, gas, and related industries; international financial organizations; governments; regulatory agencies; and reporting bodies.

 Technical Presentations  Training Sessions  Mapping Projects  Applied Technology Workshops

10 PRMS – Sharing the Vision Globally

SPE Reserves ATW’s To Feb 2015 PRMS Training Sites PRMS Presentations

11 PRMS “Mapping” Projects

(updates to 2005 Mapping Study)

PRMS to CRIRSCO* (Minerals Classification) 2006 for International Accounting Standards Board

PRMS to COGEH** ( guidelines) (completed 2008)

PRMS to New SEC Rules – Completed 2009

PRMS to United Nations Framework Classification (UNFC) (UNFC_PRMS Bridging Document completed 2013)

PRMS to Russian Federation Classification 2013 (Update ongoing 2015)

PRMS to Chinese Classification (work in progress - 2015)

*Committee for Mineral Reserves International Reporting Standards **Canadian Oil and Gas Evaluation Handbook 1212 • PRMS Status

• PRMS Future Plans

13 PRMS Adoption Status - 2015

PRMS is implicitly or explicitly referenced by:

Securities Oil & Gas Regulators Companies Government USA (SEC) Reporting Canada (CSA) Hong Kong (HKEX) BOEM Australia (ASX) PRMS ANP UK (LSE-AIM) EBN Singapore CNH UNFC Financial OPEC IASB (ESMA) ESMA = European Securities and Markets Authority BOEM = Bureau of Ocean Energy Management ANP = Brazil Agencia National do Petroleo EBN = European Business Network CNH = Mexican Comision Nacional de Hidrocarburos 14 IASB Extractive Activities Project 2011 Discussion paper

(accounting interface)

15 Applying PRMS Unconventional Resources Conventional Resources PRMS

Fundamental to a standard is that the classification and categorization of the estimated marketable quantities derived from an evaluation does not depend on the method of evaluation or on the type of resource being evaluated. PRMS is being applied to the full range of unconventional resource projects: Heavy & Extra-Heavy Oil Bitumen  & Gas  Coal Bed Methane

16 PRMS Update Project

February 2013 – Establish OGRC Update Committee Terms of Reference:

1. Improve clarity and, potentially, granularity

2. Align with COGEH and other systems

3. Potential revision of definitions (e.g. discovered)

4. Maintain core principles

5. Expand for other stakeholders (e.g. national inventories)

This is an update – not a “rewrite” – part of “system maintenance” Target a draft report in late 2015

17 Main Issues to be Addressed in “PRMS Update”

Incremental vs Scenario Methods Integrating Deterministic and Probabilistic Methods

Clarify project definition Clarify the “5 year rule”

Accommodating unconventional resources (statistical analyses?)

Merge COGEH and PRMS

Standardized Risking (discovery .. development)

Incorporating national inventory requirements (UERR, reserves growth…)

18 Unconventional Resources

What’s Different?

Different trapping mechanisms & production processes affect evaluation procedures:

 Relatively limited production history and relatively few analogs on which to base evaluations.

 Traditional petrophysical analysis may not be relevant - log analysis models are still evolving.

 Porosity and water saturation may be of little relevance in some unconventional reservoirs - parameters such as total organic carbon or mechanical rock properties may be critical.

 Production mechanisms are not the same. Stimulation is generally required.

 Unconventional reservoirs may be very thick and laterally extensive, with ill-defined boundaries and variable mineralogy and mechanical properties.

Expect significant variability of productivity & recovery efficiency

19 Classification - Does PRMS Still Apply? Do we need to modify the basic matrix?

PRODUCTION

RESERVES

1P 2P 3P COMMERCIAL Proved Probable Possible PLACE (PIIP) PLACE -

IN CONTINGENT - RESOURCES DISCOVERED PIIP DISCOVERED (DPIIP) classify by 1C 2C 3C Chance of Commerciality SUB-COMMERCIAL UNRECOVERABLE (1- Risk) of project applied PROSPECTIVE RESOURCES Increasing ChanceCommerciality of TOTAL PETROLEUM INITIALLY PETROLEUM TOTAL

Low Best High

(UPIIP) Estimate Estimate Estimate

UNDISCOVERED PIIP UNRECOVERABLE

Range of Uncertainty Not to scale categorize estimates based on uncertainty of sales quantities associated with a project

20 Relook at Basic Definitions

Net Pay is not defined in PRMS but is one of the most important parameters in the estimation of PIIP : the net portion of a reservoir from which petroleum can be produced or extracted, given a specific recovery technology.

Cutoff is not defined in PRMS and is now defined as:

A limiting value of a reservoir parameter that removes non- contributing intervals from resource calculations.

(from COGEH ROTR study)

21 Relook at Basic Definitions

Reservoir: A subsurface rock formation containing an individual and separate natural accumulation of moveable petroleum that is confined by impermeable rocks/formations and is characterized by a single-pressure system. A subsurface rock unit that contains an accumulation of petroleum.

Discovered: A discovery is one petroleum accumulation, or several petroleum accumulations collectively, for which one or several exploratory wells have established through testing, sampling, and/or logging the existence of a significant quantity of potentially moveable hydrocarbons.

(from COGEH ROTR study)

22 “Known Accumulations”

What’s the Issue?

The and most shale gas reservoirs were penetrated by 100’s of wells before the technology was available to recover petroleum.

We knew it was there but we could not justify technical recovery. Thus is cannot be Contingent Resources. It was in effect “known” but was “unrecoverable” with current technology.

This is common in early stages of unconventional resource exploration/exploitation.

The PRMS bucket is Discovered Unrecoverable (or does it just remain as “Discovered PIIP”?) (from COGEH ROTR study) 23 Use of Analogs

Analogy is the process of transferring information on a subject accumulation or reservoir to another accumulation or reservoir

Two intimately related components:

 Reservoir analog: A reservoir with similar rock properties, fluid properties, reservoir conditions and drive mechanisms, that can be used as a model for the subject reservoir that is being evaluated.

 Process analog: A recovery process that is an Established Technology or is Technology under Development in the analogue reservoir that can be applied to the subject reservoir that is being evaluated.

These analogues cannot be considered separately. It cannot be assumed that a recovery process that is applicable in one reservoir will be applicable in a different one.

(from COGEH ROTR study)

24 Clearly Define the Project(s)

A Recovery Project is an activity or set of activities which provides the basis for the assessment and classification of recoverable resources to support decision-making related to capital investments.

Assess the PIIP

Alternatives ? Select a Technology Project Phases

Define a Project Scenario [Expected production, capital, operating costs and product prices ..and timing..]

Estimate Recoverable Quantities & Value

25 Focus on Petroleum Initially-in-Place

Data TPIIP Gas content A Sorption isotherm DPII UPIIP Gas composition P Well penetration? Geological and seismic mapping Rock‐eval pyrolysis A Well Tests (Frac?) Analogs – cutoffs – net pay Mineralogical Local stress field/fractures Basin analysis – regional tectonics analyses Analogs – cutoffs – net pay Vitrinite A reflectance Deterministic & Core description V Probabilistic Assessments Probabilistic Assessments 3D seismic Kerogen types Routine core Sufficient info to analysis declare a “discovery”? Conventional logs

Key information varies with Special logs Unconventional resource type

(from COGEH ROTR study)

26 Focus on Petroleum Initially-in-Place

TPIIP

DPIIP UPIIP

those regions that are distant from tested wells should be classified as undiscovered, pending more proximate evidence of both the existence of petroleum and of its productivity

there is a tendency for evaluators to consider reservoirs – or, more particularly, productivity - to be continuous over large areas and to extrapolate limited data over those areas, in spite of evidence of heterogeneity from the existence of “sweet spots”

(from COGEH ROTR study)

27 Discovered but not Recoverable?

UNRECOVERABLE is that portion of Discovered (DPIIP) which is estimated, as of a given date, not to be recoverable by future development projects.

A portion of these quantities may become recoverable in the future as commercial circumstances change or technological developments occur; the remaining portion may never be recovered due to physical/chemical constraints represented by subsurface interaction of fluids and reservoir rocks.

Production

Commercially Recoverable Reserves

Technically Recoverable C. Resources

No technically viable* * Residual of PIIP using recovery plan Discovered Total Discovered Total Unrecoverable Established Technology Physically or Technology Under Unrecoverable Petroleum Initially-in-Place Development

28 Sub-classify as Specific as Possible

PRODUCTION  Economic On Production

Approved for  Economic Undetermined RESERVES Development  Sub-economic

COMMERCIAL Justified for Development

Development Pending  Development DISCOVERED PIIP DISCOVERED CONTINGENT Development On Hold RESOURCES  Pre-Development Development Unclarified Development not Viable  Conceptual Plan SUB-COMMERCIAL UNRECOVERABLE

Prospect  Established Technology TOTAL PETROLEUM INITIALLY-IN-PLACE (PIIP) INITIALLY-IN-PLACE PETROLEUM TOTAL PROSPECTIVE Lead RESOURCES Increasing Chance of Commerciality  Technology Under Development Play  Experimental Technology UNRECOVERABLE UNDISCOVERED PIIP UNDISCOVERED Not to scale Range of Uncertainty

29 Pulling it all Together

Qualitative to Quantitative Risk for Discovered Resources

Established Technology Reserves Not addressed in PRMS Repeated Commercial Success

CR Development Pending Economic Technology CR Development On Hold Under Economics COC% Development Undetermined CR Development Unclarified

Not Economic CR Development Not Viable

[CR = Contingent Resources] Technically Viable Experimental technology Not technically Viable Discovered Unrecoverable

30 Risking Volume and Value

Chance of Commerciality (COC) = Chance of Discovery * Chance of Development

Success Case(s) * COC % Best Est

EV/EMV You estimate the risk! Failure Case * (1- COC%)

“Because an evaluator with access to all available data for a prospect (or project) should have an informed opinion of the chance of discovery (and development), it can be potentially misleading to disclose unrisked estimates without quantifying the risk.”

Not addressed in PRMS

31 Assessment Methods

Deterministic Methods Probabilistic Methods

incremental scenario 100% 1P 2P P90 Cum Prod 3P

Proved ProbablePossible reasonably certain Proved P50 1P scenario – high degree of confidence Less likely than Proved More Likely than Possible EUR Probable

2P scenario – more likely than not P10 % probability of value or more

Less likely than Probable 0% Possible

cum prod 1P 2P 3P 3P scenario - unlikely EUR

3232 The “5 Year Rule”

Is the project a well or a program? Does it apply to Reserves or Proved Reserves?

Stale PUD’s (not developed within 5 years)

Re-categorize PUD to Probable Undeveloped?

Reclassify project Reserves to Contingent Resources?

“Split Conditions” 1P 2P 3P RESERVES Different rules for PROVED Proved vs Probable PROBABLE POSSIBLE COMMERCIAL (& Possible)

33 PRMS_COGEH Merger_

SPEE are currently “riding two horses”! SPEE – maintain COGEH SPEE International – co-sponsor PRMS

COGEH/PRMS Merger PRMS partners input “one piece of the puzzle”

Global Industry Feedback

34 Mapping to National Inventories/Energy Studies

Risking? Chance of Development Chance of Commerciality Chance of Discovery

35 - Future View - An Evolving Industry Model

Regime Specific Requirements Base Document Supplemental (International Standards) Detailed Guidance User/Country Specific

Detailed Evaluation Disclosure Guidelines Guidelines Fundamentals & Examples

Generic – Global Application Template Based on Science

36 QUESTIONS & DISCUSSION

37