SPE 63202
Adapting Probabilistic Methods to Conform to Regulatory Guidelines
Herman G. Acuña, SPE, and D.R. Harrell, SPE, Ryder Scott Company Petroleum Consultants L.P.
Copyright 2000, Society of Petroleum Engineers Inc.
This paper was prepared for presentation at the 2000 SPE Annual Technical Conference and
Exhibition held in Dallas, Texas, 1–4 October 2000.
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Abstract
Probabilistic methods have introduced inconsistent
interpretations of how to apply these methods while
complying with reserve certification guidelines. The objective
of this paper is to present and discuss some pitfalls commonly
encountered in the application of probabilistic methods to
evaluate reserves. Several Regulatory Guidelines that should
be followed during the generation of recoverable hydrocarbon
distributions are discussed. An example also is given to
understand the evolution of reserve categories as a function of
probabilities.
Most of the conflicting reserve interpretations can be
attributed to the current SPE/WPC reserve definitions where
reserve categories are expressed in terms of probabilities of
being achieved. For example, proved reserves are defined as
those hydrocarbon volumes with at least a 90 percent
probability of being equaled or exceeded (P-90).
Unfortunately, these definitions alone fall short as guidance on
how to derive the distributions from which these percentiles
will be calculated. A simple example of this problem is the
derivation of an exploratory prospect hydrocarbon resource
distribution. While a P-90 can be calculated from this
distribution, no proved reserves should be assigned to the
prospect until it has actually been drilled and proven
economical.
Introduction
In 1997 new reserve definitions were drafted and introduced
by the SPE and the World Petroleum Congress (WPC). For the
first time, these reserve definitions included some language to
address the increased interest in probabilistic analysis to
estimate hydrocarbon reserves.
Proved reserves were defined, in part, as those volumes of
recoverable hydrocarbons with “... 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.” This definition implies that satisfying the P-90
criteria is sufficient to define proved reserves. We will discuss
later in this paper why defining proved reserves as the P-90 of
any distribution is not always appropriate. Also, the
definitions do not specify at what level the evaluator should
apply the P-90 test (i.e. is it at the field level or the total
portfolio level).
Probable reserves were then described in the SPE/WPC
definitions as those recoverable hydrocarbon volumes that “...
are more likely than not to be recoverable. In this context,
when probabilistic methods are used, there should be at least
a 50% probability that the quantities actually recovered will
equal or exceed the sum of estimated proved plus probable
reserves.”
Possible reserves were defined as those recoverable
hydrocarbon volumes that “... are less likely to be recoverable
than probable reserves. In this context, when probabilistic
methods are used, there should be at least a 10% probability
that the quantities actually recovered will equal or exceed the
sum of estimated proved plus probable plus possible
reserves.”
The United States Securities and Exchange Commission
(SEC) does not recognize probable and possible reserves. The
SEC’s guidelines for reporting proved reserves are set forth in
its Regulation S-X, Rule 4-10 and subsequent clarifying
bulletins. In Regulation S-X, Rule 4-10 there are no guidelines
for the interpretation of probabilistic analysis. The Regulation
defines proved reserves as those recoverable hydrocarbon
volumes with “... reasonable certainty to be recoverable in
future years from known reservoirs ...”
Both the SPE/WPC and SEC proved reserve definitions have
several other requirements that are usually applicable to
2 H. G. ACUÑA, D. R. HARRELL
deterministic methods that may conflict with probabilistic
analysis if not properly incorporated. Evaluators of reserves
should exercise caution when using probabilistic methods to
ensure compliance with the definitions of reserves adopted by
the SEC and the SPE/WPC. Caution is required because there
are certain situations where indiscriminate application of
probabilistic methods may produce results that are inconsistent
with the reserve definitions. For example, the SEC definition
of proved reserves does not explicitly recognize the use of the
probabilistic method, and in no way allows for the
probabilistic method to be used in such a manner as to violate
any term of that definition.
In this paper, we will first present a short definition of
probabilistic analysis and the risks and benefits of using this
technique. Next, we will address some significant
shortcomings in the current reserve definitions, and then, we
will present some examples on how some of these
shortcomings can be addressed in the evaluation of reserves.
Discussion of Probabilistic Analysis of Reserves
The probabilistic analysis of reserves relies on the use of
probabilistic techniques to estimate the uncertainty of the
recoverable hydrocarbon volumes. In its purest sense, these
probabilistic methods are used to collect and organize,
evaluate, present and summarize data. These methods provide
the tools to analyze large amounts of representative data so
that the significance of that data’s variability and
dependability can be measured and understood.
Probabilistic analysis should be considered an important tool
for internal company analysis to understand and rank its
hydrocarbon reserves and resources and associated risks. This
method provides the tools to identify the upside and the
downside hydrocarbon potential to better organize the
company’s portfolio and to more efficiently allocate capital
and manpower resources. However, it should be understood
that the objectives of a hydrocarbon property ranking study
and a SPE/WPC or SEC reserve reporting evaluation might be
different. For example, companies may have their own
guidelines to group and analyze hydrocarbon assets to allocate
company resources or for property acquisitions. These
company guidelines may vary from project to project or year
to year (depending on pricing assumptions) and may be
different from those guidelines provided in the SPE/WPC and
SEC definitions. It becomes then the primary challenge of the
evaluator to reconcile both evaluations.
E.C. Capen1 discussed this issue of having different objectives
and different audiences for the evaluation of reserves. He
correctly remarked that the evaluation needs of the
explorationists, geologists and geophysicists may not
1
E. C. Capen: “A Consistent Probabilistic Definition of
Reserves,” SPE Reservoir Engineering Journal, February
1996, pp 23-28.
SPE 63202
necessarily be the same as the needs arising from lending
institutions or stockholders. While the reserve evaluation
should allow the explorationists “... to dream a little but still
hold them accountable,” the lenders should be able to “...
sleep well at night knowing their money takes no inordinate
risks.” This is an obvious conclusion since the lenders’
exposure to the downside risk is much greater than their
exposure to the upside. Lending institutions do not particularly
benefit from having large project upsides with low
probabilities since they generally lend money at fixed rates. It,
thus, follows that lending institutions are much more
interested in the quantification of the downside risks and not
so for the upside. About the stockholder, Capen wrote that he
“... cannot afford biased estimates lest the buy and sell signals
get all confused and cost him money.”
Probabilistic analysis is not a substitute for the reserve
guidelines adopted by the SPE/WPC and the SEC. A common
but, in our opinion, unacceptable trend in reserve evaluations
has been to rely on probabilistic evaluations to boost reserve
values if they cannot be supported by deterministic methods.
This generally results from the aggregation of various
distributions as will be discussed later in this paper.
Probabilistic methods should not be considered as a sequence
of simple mechanical steps to reach the desired outcomes. In
fact, probabilistic analysis requires as much, if not more, good
judgement than deterministic methods for assigning reserves.
Probabilistic methods are most suitable for early hydrocarbon
resource/reserve evaluation. They provide flexible modeling
techniques to evaluate variable interactions and outcome
options. Therefore, these methods require a customized
approach to correctly model the variable interactions.
Unfortunately, the great flexibility of probabilistic analysis
makes this method easy to abuse. Restricting the probabilistic
analysis to the guidelines provided by the reserve definitions
can help to standardize the results for reserve reporting
purposes. In the next section we first explore some of the
shortcomings of the current definitions and then we will
present some examples for the practical application of reserve
definitions and probabilistic analysis.
Conforming with the Reserve Definitions
The primary factor for inconsistent reserve reporting
evaluations is the description of reserves as percentiles of a
distribution. In the current SPE/WPC definitions, proved
reserves are defined as P-90, the proved plus probable as P-50,
and the proved plus probable plus possible (3P) as P-10.
These percentiles for the different reserve categories have
been interpreted by some as finally quantifying the meaning of
the phrases, “high degree of confidence,” “more likely than
not” and “less likely to be recoverable than probable”
reserves. The industry was quick to adopt these percentile
definitions at face value. Unfortunately, the SPE/WPC
 SPE 63202 ADAPTING PROBABILISTIC METHODS TO CONFORM TO REGULATORY GUIDELINES
definitions do not provide direct guidance on how the
distributions are to be generated. Consequently, what may be a
P-90 to one evaluator may be something else to another
evaluator.
The definitions state without qualification that the percentile
tests are sufficient for the establishment of reserves if the
probabilistic method is used, irrespective of other aspects of
the definitions. Thus, the definitions permit the calculation of
at least two values of reserves, those estimated by the
deterministic method (honoring all terms of the definitions)
and those estimated by the probabilistic method. Figure 1
illustrates this point.
Figure 1: Example of Early Reserve Assessment
For discussion purposes let us assume that there is 3-D seismic
data over the entire structure shown in Figure 1 and that one
well has been recently drilled and tested oil at economical
rates. The location of the well is represented by the dot in
Figure 1. The lowest known oil (LKO) is represented by the
first contour around the well. The total area on both sides of
the fault represents the area that may be productive as
indicated by seismic analysis. The different contours represent
various degrees of confidence that the reservoir may be
productive from the seismic and geologic analysis.
A distribution of recoverable oil can then be generated to
estimate the reserves attributable to this structure. Figure 2
shows such a distribution.
Figure 2: Example of Recoverable Hydrocarbons Distribution
Cumulative Probability
P-90
P-50
P-10
Recoverable Oil
3
From Figure 2, one can see that there are different values of
recoverable oil that fit the definition of P-90 for proved
reserves. While it is important to generate and understand the
potential for the entire structure, it is obvious from this simple
example that for reserve reporting purposes the definition of
proved reserves based on a P-90 definition may not be enough.
For reserve reporting, one also should incorporate all the
guidelines that traditionally may be associated with
deterministic methods. For example, can the structure on the
opposite side of the tested fault block be considered as a
known reservoir? If not, should it be left out of the analysis of
proved reserves? Similarly, the volumes of rock below the
LKO may not be included.
Application of these guidelines would then result in the
determination of proved reserves from the first distribution in
Figure 2. This distribution is what we would call the proved
reserve distribution. Subsequently, the question is whether
after restricting the distribution to account for various reserve
guidelines, one should still use a P-90 to estimate the proved
reserves. To answer this, let us first examine the approach that
would have been taken in a deterministic analysis.
In a deterministic analysis, the evaluator would have restricted
the reservoir area to conform with the LKO guideline. Then
weighted average values of porosity, water saturation, net-to-
gross ratios and recovery factors would have been applied to
estimate the proved reserves. The deterministic analysis is
therefore arriving at the expected value of reserves of the
proved reserve distribution. Therefore, in probabilistic
analysis, the proved reserves may be represented better by the
P-50 of the proved reserve distribution than the P-90 of that
distribution. However, notice in Figure 2, that the P-50 of the
proved reserve distribution may still only represent a small
fraction, P-98 or less, of the entire recoverable oil distribution.
Two important conclusions can be made from this example.
First, special considerations need to be made when
constructing the distribution of recoverable hydrocarbons to
ensure that the definition guidelines are being honored.
Second, the actual percentile assigned to each of the reserve
categories may be different depending on which distribution
they apply to. Moreover, the distributions of recoverable
hydrocarbons need not be the same for each reserve category.
There are currently at least two acceptable alternatives in the
evaluation of proved reserves using probabilistic analysis to
conform with the regulatory guidelines.
The first alternative would be to proceed as shown in the prior
example. That is to first derive a proved reserve distribution
by conforming to certain variables that cannot be subjected to
speculation based on regulations. Then, selecting the P-50
value from this distribution to estimate proved reserves. After
estimating the proved reserves in this way, the percentile
corresponding to proved reserves from the overall reserve and
4 H. G. ACUÑA, D. R. HARRELL SPE 63202

resource base can be backcalculated from a second for example, that if the exercise at hand is to evaluate field
distribution that has not been constrained by the proved level reserve potential, then the distributions of reservoir
guidelines. If the opportunity for upside is large or if the field properties should be the distribution of average field
is in the very early stages of development, reportable proved properties.
reserves may only represent a small fraction of the overall
distribution (i.e., a percentile higher than P-90). This paper deals, however, with the restrictions that may be
imposed in a probabilistic evaluation by the definitions. As
On the other hand, if the current stage of field development is previously stated, certain variables may not be represented in a
such that the “proved” distribution is the same as the overall distribution fashion for reserve reporting purposes. The
distribution, then proved reserves may be better represented by objective of the definitions is not to limit the understanding of
the P-50 of that distribution. the hydrocarbon assets, but rather to ensure that the reported
reserves, in particular proved reserves, are evaluated
In fact, it follows from this discussion that the percentiles consistently.
applicable to each of the reserve categories are dynamic
throughout the life of the reservoir and are not a fixed value. For example, some of the geologic variables to consider may
Obviously, during the early field development stages be:
reportable proved reserves may represent only a small • Water-Hydrocarbon Contact
percentile of the overall reserve and resource opportunity. • Gas-Oil Contact
With increased development and decreased uncertainty, • Bulk Rock Volume
proved reserves may approach a P-50 or expected value. • Net-to-gross ratios
• Porosity
The second approach is similar to what has been discussed, • Water Saturation
except that proved reserves are estimated deterministically.23
• Cutoff values
That value would then be compared to the unrestricted
• Reservoir Facies Distribution
distribution of recoverable hydrocarbons to determine its
corresponding percentile. By determining the proved reserves
The first geologic variable listed in bold letters above is
deterministically, conforming with the regulation guidelines
directly affected by the definition of reserves. While there may
and using expected values of rock properties and engineering
be some uncertainty as to the exact location of the fluid
factors, the evaluator is basically determining the expected
contacts, the reserve definitions are very clear in that for
value of the proved distribution as previously defined.
proved reserves fluid contacts should not be speculated upon.
Therefore, under the current definitions, the generation of the
Evaluation Variables
proved hydrocarbon-in-place distribution should incorporate
the LKO value and not a distribution of the contacts.
In general when estimating reserves, the evaluator deals with
However, it may be reasonable to expect that more
three types of variables: 1) Geologic, 2) Engineering and 3)
hydrocarbons may exist below the LKO depth.
Economic. Each of these variables may have degrees of
uncertainty that may be represented as distributions.
Engineering examples of variables that may be directly
affected by the reserve definitions are: 1) well spacing, 2)
This paper does not deal with the aspects of generating the
recovery factors, and 3) implementation of secondary and
random variable distributions or the correlations between
tertiary projects. While downspacing or the implementation of
them. Nor does this paper address the issues of properly
secondary projects may result in increased recoveries, the
incorporating the reservoir physics to represent the actual
definitions prevent us from speculating on these results unless
producing mechanisms in the probabilistic model. Obviously,
there have been successful tests or pilots. Therefore, it would
the evaluator should be familiar with how the data were
be an inconsistent application of these guidelines if the
collected and what they represent. Also, the reader should be
incorporation of these operating practices in the probabilistic
aware that throughout the discussion of reservoir variables,
analysis increases the estimate of proved reserves. Reserve
scale consistency between the variable distributions and the
distributions that incorporate the results from waterflooding
model to which they apply should be maintained. This means,
projects yet to be tested through pilots may result in
2 overstating proved reserves, as currently defined, particularly
Patricelli, J.A., McMichael, C.L.: “An Integrated
during the aggregation of multiple field reserves. The subject
Deterministic/Probabilistic Approach to Reserve
of reserve aggregations is discussed in the next section.
Estimations,” JPT (Jan. 1995) pp. 49-53.
3
Nangea, A.G., Hunt E. J.:” An Integrated
The reserve definitions are even less flexible when it comes to
Deterministic/Probabilistic Approach to Reserve Estimation:
economic parameters. To categorize reserves as proved, those
An Update,” SPE 38803, presented at the 1997 SPE Annual
reserves have to be economical under current economic
Technical Conference and Exhibition held in San Antonio,
conditions. While it may be appropriate to incorporate
Texas, 5-8 October 1997.
SPE 63202 ADAPTING PROBABILISTIC METHODS TO CONFORM TO REGULATORY GUIDELINES 5

uncertainty and volatility in hydrocarbon prices, operating Figure 4: Secondary Recovery Factors
costs and development costs in probabilistic analysis, these
variables are generally fixed in the reserve definitions.

A typical example of a proved reserves economical evaluation

that may not be appropriate under the current reserve
definitions is the consideration of a learning curve. We are all
familiar with the concept that, in general, as we do tasks 0.00 0.04 0.08 0.12 0.15
repeatedly we get better at it. For example, a drilling learning Recovery Factor
curve, which shows a reduction in drilling costs over time. A
probabilistic analysis can be made from past company The primary plus secondary recovery factors can, thus, be
performance to define a function of drilling cost savings, in obtained for each probabilistic iteration as the summation of
percentages, with increased development. the two distributions. Figure 5 shows the aggregated recovery
factors for all the fields.
While this type of analysis is important for internal company
reporting and analysis, it is not appropriate for reserve Figure 5: Primary Plus Secondary Recovery Factors
reporting unless the cost savings trend has been clearly Probability
established in the subject field. Otherwise, the appropriate .026

development costs to use for proved reserve reporting are the

actual costs regardless of expectations of future savings. .019

.013
While dealing with projects outside of North America, the
evaluator generally has to make assumptions regarding the .006
timing for infrastructure, such as pipelines and market
conditions, particularly for gas. While these considerations are .000
important for company planning purposes and can be 0.18 0.21 0.23 0.26 0.28
Recovery Factor
incorporated in risk economic models, they may prevent the
classification of proved reserves. In general, there must be
established infrastructure and product markets to classify Multiplying the original oil in place volumes by the primary
reserves as proved for SEC purposes. plus secondary recovery factors could then calculate reserve
estimates. The aggregated percentile recovery factors for all
To illustrate this problem, consider for example five oil fields five fields are shown in Table 1.
on primary depletion with recovery factors ranging between
12 and 18 percent for each field. As shown in Figure 3, these Table 1: Portfolio Primary plus Secondary Recovery Factors
recovery factors can be expressed as triangular distributions
with a P-90 of 12 percent and a P-10 equal to 18 percent with Recovery Factor (%)
a mean value of 15 percent. P-90 20.5
P-80 21.3
Figure 3: Primary Recovery Factors P-70 21.8
P-60 22.3
P-50 22.7
P-40 23.2
P-30 23.7
P-20 24.2
P-10 24.9
0.10 0.12 0.15 0.18 0.20
Recovery Factor Notice that the P-90 from the aggregated recovery factor
distribution is higher than the P-10 of the primary alone.
These fields are considered good candidates for secondary Obviously, disclosing proved aggregated reserves with an
recovery but no pilot has been implemented yet. The equivalent recovery factor of 20.5 percent would not be
additional recovery factors due to secondary projects are appropriate in this case.
estimated between 0 to 12 percent. These secondary recovery
factors can also be represented by triangular distributions with Although the aggregated recovery factor distribution shown in
a minimum of 0 and a P-10 of 12 percent as shown in Figure Figure 5 and Table 1 may be the correct outcome if all five
4. fields are waterflooded, these expectations can not be used to
book proved reserves at the current field development stages
and under the current reserve definitions. So what is the
6 H. G. ACUÑA, D. R. HARRELL SPE 63202

solution to this problem? Obviously, proved reserves should
be based only on reserve distributions that have been derived
exclusively from primary recovery factors until the
appropriate waterflooding pilots have been implemented and
response has been verified.
One may argue that calculating proved reserves based on
primary recovery factors in this example underestimates the
overall potential of the fields. Someone else may point out that
this conservatism is the reason for the reserve growth observed
with added development. While these arguments may be
correct, one should keep in mind that the reserve categories
have meaning only within the context of their definitions.
Therefore in this example, proved reserves have meaning only
for those volumes calculated without consideration of
secondary recovery. Under the current definitions, secondary
reserves without a successful pilot should be excluded from
the proved category regardless of the waterflooding
perspectivities of the field.
for the purpose of reserve reporting. No lending institution,
market analyst or shareholder would be able to conduct
meaningful comparative reserves and income evaluations
between E&P companies without the standards.
Dry Hole Risk Factor and Aggregation of
Distributions
One aspect that is often overlooked during the aggregation of
distributions is the fact that distributions may have different
risk levels. Consistent with the accepted practice that the
summation of proved, probable and possible deterministic
reserves is not appropriate without risk adjusting each reserve
category first, reserve distributions should not be aggregated
unless they have been adjusted for their “dry hole” factor.
Consider for example the three fault blocks in Figure 6.
Figure 6: Aggregation of Distributions

Of course, the reservoir engineer should make those

calculations to allocate company resources and funds. This
brings us back to our original statement that during the early
stages of field development proved reserves may be
represented by percentile values of the overall reserve
distribution higher than the P-90.
L
If we return to the original postulation of this paper to first
determine individual distributions that comply with the reserve
definitions and then select the P-50 from those distributions to
estimate the proved reserves, then the summation of those P-
I LKG

50 values should be very similar to the P-50 of their aggregate.

Additionally, reserve distributions derived using the
definitions for proved should be risk-equivalent and, thus,
compatible for aggregation without the problems discussed in
the next section.

After determining the proved reserves, one can determine the

appropriate percentile of proved reserves within the overall
company asset reserve distribution, and maybe even disclose
or discuss this percentile and its relationship to company
upside. Probable and possible reserves may be estimated from
P-50 and P-10 of the overall aggregated distribution of
reserves (excludes exploratory assets).
In conclusion, the application of probabilistic analysis and the
variable distributions used thereof should not conflict with the
guidelines established by the definitions. These definitions
were established to standardize, as much as possible, reserve
reporting. This is not to say that the current reserve definitions
should not evolve. On the contrary, these definitions should
and will continue to evolve to address these issues and other
issues. Capen1 wrote “As long as estimators provide the entire
distribution, others can define reserves however they choose
as long as they pick some point in the distribution.” While
this may be applicable for internal company reserve and
budgeting purposes, this statement is obviously unacceptable
A
B
Only fault block “A” has been drilled at this stage of field
development and the well proved gas to a lowest known depth
(LKG). Seismic data analysis indicates the possibility of
additional gas down to the deepest shaded area. It may be
desirable then to aggregate the estimated recoverable gas
volumes from all three fault blocks. Obviously, fault blocks
“B” and “I” have a higher risk than fault block “A”.
Distributions for bulk rock volumes, net-to-gross ratios,
porosity, gas saturation, and recovery factors are used to
generate recoverable gas volumes for each fault block. Each
property distribution is based on fault block averages expected
in this area and for the specific reservoir age.
 SPE 63202 ADAPTING PROBABILISTIC METHODS TO CONFORM TO REGULATORY GUIDELINES 7

The individual reservoir variable distributions are applied to Figure 8: Comparison of Aggregated Distributions
the volumetric gas equation to estimate the original gas in
Cumulative Probability
place. The original gas-in-place is then multiplied by a
recovery factor, sampled from the recovery factor distribution, 1.000
Unrisked
to obtain the recoverable gas for each fault block. These
values are shown in Table 2. Risked
.750

These recoverable gas volumes reflect only the uncertainty in .500

the reservoir properties and performance and, therefore, are
representative of the success cases only. Although the
.250
information obtained this way may provide an important
perspective to the overall upside of the prospect, there is no
reason why the probability of “dry hole” shouldn’t be .000
incorporated into the probabilistic analysis and the aggregated 0 17,500 35,000 52,500 70,000
distribution of recoverable gas volumes. Recoverable Gas (MMscf)

Table 2: Recoverable Gas Volumes (MMscf) Table 3 compares the unrisked and risked aggregated gas
recoverable volumes from these three fault blocks.
Fault Block A Fault Block B Fault Block I
P-90 9,658 13,124 4,904 Table 3: Comparison of Recoverable Gas Volumes (MMscf)
P-80 11,517 15,655 5,852
P-70 12,818 17,539 6,508 Unrisked Risked
P-60 13,943 19,083 7,084 P-90 33,731 16,864
P-50 14,971 20,493 7,629 P-80 36,909 22,963
P-40 16,002 21,909 8,188 P-70 39,301 28,141
P-30 17,102 23,588 8,744 P-60 41,184 32,498
P-20 18,352 25,265 9,480 P-50 42,923 35,658
P-10 20,146 27,500 10,475 P-40 44,954 38,553
P-30 46,932 41,279
P-20 49,299 44,357
The aggregation of these three distributions results in the P-10 52,286 48,534
distribution of unrisked recoverable gas shown in Figure 7,
which assumes that all three fault blocks are successful. While the prior discussion of risk and aggregation of
distributions may be obvious to some, it is still common
Figure 7: Unrisked Aggregation of Fault Blocks A, B and I practice to see reserve distributions aggregated without
consideration for risk. The fact that data are presented in
Cumulative Probability distribution form can make it counterintuitive that additional
1.000 risking may be necessary prior to aggregation.

.750 The amount of recoverable gas that can be booked as proved,

probable and possible for this example will be discussed later
.500 in this paper.

.250 Aggregation of Reserve Portfolio

Mean = 43,091

.000
20,000 31,250 42,500 53,750
Recoverable Gas (MMscf)
To calculate the risked and, therefore, more representative
recoverable gas distribution at this stage of development, one
should apply the individual chances of success (COS) for each
fault block during the simulation. Figure 8 compares the
unrisked distribution with the risked distribution obtained by
assuming a COS of 100 percent in fault block A, 75 percent in
fault block B and 50 percent in Fault block I.
The aggregation of company reserves has traditionally been
65,000
fairly straightforward. The summation of all individual proved
reserves within its portfolio provide the total company proved
reserves. Similar arithmetic is performed for probable and
possible reserves. This process has been slightly complicated
by the introduction of probabilistic evaluation of reserves and
the current reserve definitions.
It has been well established that the summation of individual
percentiles from various distributions is not equal to the same
percentile of the aggregate. Thus it follows that adding up the
P-90, as defined for proved reserves, from the various reserve
8 H. G. ACUÑA, D. R. HARRELL SPE 63202

portfolio components will not be equivalent to the P-90 of the
aggregated total. In fact, the summation of the P-90 will be, in
general depending on the number of uncorrelatable
opportunities in the portfolio, much lower than the P-90 of the
aggregate. On the other hand, the summation of the P-10 will
tend to exaggerate the upside and be much higher than the P-
10 from the aggregated distribution. The reason for this is very
simple -- the larger the amount of opportunities available to a
company, the more it can diversify risk. In other words,
independent opportunities will tend to compensate each other;
some may be low and some may be high, thus reducing the
uncertainty of the total portfolio outcome. The addition of
individual P-50 values should approach the P-50 of the
aggregated distribution, as long as the median and the mean
are not too dissimilar.
The obvious dilemma becomes how to report individual and
total company portfolio reserves. To make matters worse, each
distribution in the reserve portfolio needs to be properly risked
and may or may not comply with all the definitions. The
current definitions provide no wording for the proper method
for aggregating reserves; neither do the definitions provide
guidance for the appropriate level of aggregation to apply the
percentiles associated with each reserve category.
Consider, for illustration purposes, a company with only
probable reserves from ten fields defined at the field level at
the P-50s. Recoverable hydrocarbon volumes above P-55 are
zero. That is, the prospects may have a COS of 55 percent.
The following table shows the recoverable oil volumes for one
field and the aggregates of two, three, five and all ten fields.
explain or disclose this risk to their investors? All these are
real and difficult questions without simple solutions. As we
have mentioned earlier, the definitions provide no guidance
for the process of aggregating portfolios.
For reserve aggregation, we emphasize one more time that the
evaluator should consider the audience for the report. Clearly,
this type of analysis is of great value for the company’s
internal resource allocation and portfolio risk analysis. It helps
the company understand the diversification of their portfolio.
It provides an insight to the impact that divesting fields and
properties may have on their overall risk profile. It helps the
company measure the level of commitment necessary to reach
a certain level of success.
However, for reserve reporting purposes and under the current
definitions it may be difficult if not impossible to justify
proved reserves in this example. Under SEC guidelines, we
should not disclose any proved reserves. The P-90 volumes of
the aggregated totals can not be allocated with reasonable
certainty to any specific field or prospect.
In fact, to realize the P-90 volumes (or any other percentile
volume of the aggregated totals), the company would have to
be committed to the development of all ten fields regardless of
early disappointments or successes. The SEC/WPC provides
no guidance to handle this type of problem probabilistically.
However, the only justification to book proved reserves under
the SPE/WPC guidelines would be the fact that the aggregated
P-90 value has a positive value. This, however, would conflict
with the grain of the remaining guidelines.

Table 4: Field Reserve Aggregation Example (MMBbl) Disclosing the aggregated volumes in this case as proved may
leave investors unprotected against portfolio changes,
1 Field 2 Fields 3 Fields 5 Fields 10 Fields divestitures, delayed or incomplete portfolio development. On
P-90 0.0 0.0 9.6 16.6 50.5 the other hand, not presenting this information at all does not
P-80 0.0 0.0 13.5 27.1 61.3 adequately reflect the upside of a company’s portfolio.
P-70 0.0 12.4 15.9 31.3 69.5
P-60 0.0 14.3 19.2 36.2 76.4 Until the reserve definitions are modified to accommodate this
P-50 10.9 15.9 26.1 42.0 82.7 type of problem and the investing public has been familiarized
P-40 13.2 17.8 29.4 45.8 88.8 on this subject, we would recommend against disclosing
P-30 14.7 21.4 32.3 50.4 94.9 aggregated proved reserves that can not be readily identified at
P-20 16.2 28.2 35.9 56.7 102.8 the individual field level. However, we would recommend
P-10 18.0 31.9 43.6 64.2 114.3 discussing these volumes and the overall risk profile of the
company that results from its existing portfolio in company
This simple example highlights the problem that one filings and reports. This allows investors to make their own
encounters when aggregating multiple fields. Although at the decisions based on their comfort level about the overall
individual field level none of the fields have proved reserves, company’s upside without the assumption of reasonable
the aggregated total shows significant reserves at the P-90 certainty associated with the proved reserve category.
level for three or more fields.
Example Problem
Should this company then be in a position of disclosing the
aggregated reserves as proved? If so, how should this In this example, we will walk through the analysis of reserves
information be disclosed to the investors and shareholders? as a gas exploratory prospect is first drilled. Figure 9 shows
What if the company decides to divest individual fields or all the Gross Hydrocarbon Isochor for this example.
of them? Prospective buyers may not pay anything for proved
reserves for the individual fields. How can the company then
 SPE 63202 ADAPTING PROBABILISTIC METHODS TO CONFORM TO REGULATORY GUIDELINES 9

Figure 9: Gross Hydrocarbon Isochor distribution carries a much higher risk than a P-90 from a gas
reserves distribution. The salt dome prospect is not yet
considered a known reservoir and Table 5 shows the result for
a successful case without dryhole consideration. A similar
table, after applying the risk factors to each fault block
through correlated binomial distribution of the COS, could be
generated to get the risked recoverable gas distribution.
However, this still would not be enough to elevate any of the
gas volumes to a reserve category.

The company then successfully drilled fault block A to test the

The exploration prospect consists of 9 fault blocks labeled A
through I. The first step involves the determination of the
distributions for the gross hydrocarbon bulk rock volume, net-
to-gross ratios, porosities, water saturations, formation volume
factors and recovery factors. These distributions and their
appropriate correlations are used in the volumetric equation to
derive original and recoverable gas distributions for each fault
block. This is shown schematically in Figure 10. This figure
also shows the type of distribution used for each variable.
Figure 10: Gas Volumetric Equation
BRV
BR V A
exploration concept. The well A-1 found gas down to the base
of the sand thus establishing the LKG for that fault block.
Seismic analysis indicates the possibility of more gas downdip
of the LKG, but the seismic analysis is not conclusive. This is
shown schematically in Figure 6. Knowing that we have 9
prospective fault blocks with one already tested, the issue
becomes now how much proved, probable and possible
reserves can be booked.
Following our prior discussion, the first step would be to
establish a distribution of recoverable gas that complies with
the definitions for fault block A. We will call this distribution
the proved distribution. In this case, the proved distribution
was restricted by the LKG. There may still be some
uncertainty associated with the petrophysical and structural
elements of fault block A that would make the generation of
the proved distribution necessary. Otherwise, a deterministic
evaluation of that fault block may be enough. The second step
is to generate the distribution for the entire fault block A
recoverable gas. This distribution would include the upside
NTG POR Sw that is indicated by the seismic below the LKG.
NT G A P o ro sity A SW A

43,560 * * * * (1- )
OGIP =
7 2,6 2 2 8 0,3 4 2 8 8,0 6 1 9 5,7 8 1 1 03 ,5 00 0 .6 5 0 0 .7 4 0 0 .8 3 0 0 .9 2 0 1 .0 1 0

BG A
0 .1 1 0 0 .1 7 0 0 .2 3 0 0 .2 9 0 0 .3 5 0 0 .0 9 0 .2 9 0 .4 9 0 .6 9 0 .8 9
Table 6 compares the recoverable volumes of gas from the
two distributions. The second column shows the recoverable
0 .0 2 8 0 .0 3 0 0 .0 3 1 0 .0 3 3 0 .0 3 4

volumes of gas estimated from the proved distribution for each

Bg of the percentiles in column one. The third column shows the
The results from this exercise then provide the distribution of total distribution of recoverable gas.
gas resources by aggregating the recoverable volumes from all
the fault blocks. Table 6: Comparison of Recoverable Gas for Fault Block A

Table 5: Salt Dome Example Unrisked Recoverable Gas Proved to Entire Fault Block A
LKG (MMscf) After Drilling
MMscf (MMscf)
P-90 118,288 P-90 3,920 9,658
P-80 123,751 P-80 4,628 11,517
P-70 127,762 P-70 5,184 12,818
P-60 131,104 P-60 5,619 13,943
P-50 134,323 P-50 6,007 14,971
P-40 137,655 P-40 6,411 16,002
P-30 141,116 P-30 6,842 17,102
P-20 145,033 P-20 7,286 18,352
P-10 150,801 P-10 7,982 20,146

From the stage of field development it is obvious that there are Several observations can be made from Table 6 while
no bookable reserves for this prospect. Although we have determining the appropriate amount of reserves to be booked
derived a P-90 for a gas resources distribution, the P-90 of this from this fault block. First, notice that the P-10 from the
10 H. G. ACUÑA, D. R. HARRELL SPE 63202

proved distribution is less than the P-90 of the entire fault As we discussed earlier, these distributions are not risk-
block as defined from seismic. This results from the well consistent since fault block A has a penetration while the other
location, which is not the subject of the discussion. But if we two do not. During the aggregation of these three distributions
were to use the P-90 from the second distribution to determine one should apply the COS to determine the total probable and
the proved reserves, we would obviously be stretching the possible reserves from all three blocks.
volumes beyond those proved by the bit. Since this fault block
will most likely be a one well fault block, only performance This process was discussed earlier in the section dealing with
will be able to prove or disprove the geologic and seismic risk and aggregation of distributions. Assuming a COS of 100
assumptions that define the upside. percent for fault block A, 75 percent for fault block B and 50
percent for fault block I, the aggregated recoverable gas
Given the fact that there is no production data to verify the distribution shown in Table 9 is obtained. From this table the
upside from this fault block, one then has to look at the proved three fault block probable reserves are determined from the P-
reserve distribution. Consistent with our prior discussion, 50. Possible reserves for the same blocks are estimated from
proved reserves would be defined as the P-50 recoverable gas the P-10 of the same risk adjusted distribution.
volumes from this distribution. In this case, the 6,007 MMscf
are the expected recoverable gas volumes from the proved Table 9: Risked Recoverable Gas Fault Blocks A, B and I
distribution and are, thus, the proved reserves. The proved
plus probable reserves would be defined as the P-50 of the MMscf
entire fault block A distribution and the 3P reserves (proved P-90 16,864
plus probable plus possible) would then be estimated from the P-80 22,963
P-10 of the same distribution. Table 7 then shows the reserves P-70 28,141
per category for this fault block. P-60 32,498
P-50 35,658
Table 7: Gas Reserves Fault Block A P-40 38,553
P-30 41,279
Fault Block A (MMscf) P-20 44,357
Proved 6,007 P-10 48,534
Probable 8,964
Possible 5,175 Whether or not reserves can be assigned to any of the
remaining 5 blocks will depend on the certainty of the seismic
After determining the appropriate reserve levels for fault block analysis and the fault block COS observed in this gas
A, the question remains whether additional reserves can be province. Despite the mechanics of probabilistic evaluations,
booked for the remainder of the structure. Statistical the experience and good judgement from the evaluator are still
information on fault block success ratio in tested structures necessary and valuable. In this example, no reserves were
may be of some use if available. assigned beyond the two adjacent fault blocks resulting in total
reserves shown in Table 10.
Let’s first examine the two fault blocks adjacent to fault block
A. These blocks are fault blocks B and I in Figure 6. In our Table 10: Total Gas Reserves
opinion, it would not be appropriate to book proved reserves
for these fault blocks at this stage since the structures have not Fault Block A (MMscf)
yet been penetrated by a well. Probable and possible reserves Proved 6,007
can be booked based on seismic analysis and analogy to fault Probable 29,651
block A. Table 8 shows the unrisked recoverable gas for fault Possible 12,876
block A and each of the adjacent fault blocks.
As a final analysis, one can compare the current reserve base
Table 8: Recoverable Gas Volumes (MMscf) with the overall unrisked and risked gas resource distribution
to better understand the additional potential and prioritize
Fault Block A Fault Block B Fault Block I company resources. The unrisked distribution shows the
P-90 9,658 13,124 4,904 values of recoverable gas if all 9 fault blocks are successful.
P-80 11,517 15,655 5,852 The risked distribution was generated with a relatively high
P-70 12,818 17,539 6,508 (75 percent) correlation coefficient between adjacent fault
P-60 13,943 19,083 7,084 blocks’ COS. Table 11 shows the total recoverable gas
P-50 14,971 20,493 7,629 volumes for the entire structure.
P-40 16,002 21,909 8,188
P-30 17,102 23,588 8,744
P-20 18,352 25,265 9,480
P-10 20,146 27,500 10,475
SPE 63202 ADAPTING PROBABILISTIC METHODS TO CONFORM TO REGULATORY GUIDELINES 11

Table 11: Total Recoverable Gas Volumes (MMscf)

7. The percentiles applicable to proved, probable and
Unrisked Risked possible reserves are dynamic throughout the life of the
P-90 118,018 33,241 reservoir.
P-80 123,711 44,390
P-70 127,621 56,310 8. Recoverable hydrocarbon volume distributions may not
P-60 131,193 67,592 be risk consistent. These distributions need to be adjusted
P-50 134,681 79,533 for risk (COS) prior to aggregation.
P-40 137,929 90,543
P-30 141,361 102,817 9. One approach to define proved reserves is to select the P-
P-20 145,432 113,558 50 value from a proved distribution. Where a proved
P-10 150,695 127,563 distribution is defined as the distribution of recoverable
hydrocarbons derived by strictly following the definitions
Notice that the unrisked 3P value of reserves of 48,534 MMscf and regulatory requirements.
corresponds to approximately a P-75 of the total risked
recoverable gas distribution. This information is very
indicative of the significant upside, beyond current bookable
reserves, that can be achieved with further development.

Conclusions

In this paper, we have discussed how the reserve definitions

may affect the implementation of probabilistic methods. The
following conclusions can be made from the preceding
discussions:

1. Probabilistic methods should not be used as a tool to

boost reserve reporting. Probabilistic methods are most
useful for the prioritization of the company’s portfolio
and the allocation of capital and manpower resources.

2. The evaluation of hydrocarbon resources and reserves

may have different objectives and parameters for different
audiences. The SEC set those parameters for proved
reserve-reporting purposes through their regulations and
guidelines.

3. One should keep in mind that the reserve categories have

meaning only within the context of their definitions.
Therefore, even when the evaluator expects upside
recoverable hydrocarbon volumes, those volumes can not
be reported if they fall outside the definitions. This
ensures consistent reserve reporting among companies.

4. SEC regulations and SPE/WPC reserve definitions may

prevent certain variables from being expressed in
distribution form during the probabilistic analysis.

5. Satisfying the P-90, P-50 and P-10 from a hydrocarbon

resource distribution is not enough to book reserves.

6. The SPE/WPC reserve definitions do not provide

guidelines to the appropriate level to which the P-90, P-50
and P-10 are applicable. Also, these definitions do not
provide guidelines for the aggregation of prospects.
Therefore, extreme caution should be exercised when
reporting aggregated volumes as reserves.