SPE Evening Presentation 31 10 17 Final

Reserves & Resources –
Top 10 PRMS errors and misunderstandings
Dr. Ed Jankowski - Managing Director

RPS Energy
Imperial College, 31st October 2017
rpsgroup.com/energy 1
Petroleum Resources Management System
• 2007 SPE/WPC/AAPG/SPEE publish Petroleum

Resources Management System
• 2011 Guidelines for Application of the PRMS
• 2014 SPE OGRC agreed to consider revision to

PRMS
• 2017 Updated to PRMS
SPE-PRMS (2007): general principal
Net
Recoverable
Reserves
• The “unit of currency” is The Project
• “Classification”
– Into Prospective Resources, Contingent Resources or Reserves
– Based solely on an estimate of Chance of Commerciality which
equates to level of maturity
• “Categorisation”
– Into low, best, high, or 1C, 2C, 3C, or 1P, 2P, 3P, respectively
– Based solely on the range of uncertainty: captured by three
discrete estimates
Project approach
PRMS errors/misunderstandings - 6 to 10
Economic Limit Test (ELT) – based on

project cash flow or company’s cash flow?
Applying risk to Contingent or Prospective

Resources or mixing risk with uncertainty
Reserves and lease fuel
Misuse of terms in PRMS
Aggregation of Prospective Resources –

Overstating Total Resources
PRMS errors/misunderstandings - 1 to 5
Gross vs. Net Reserves (Entitlement) – PSC
Incremental projects – scope of work different

in 1P , 2P and 3P cases
Incremental vs. project based approach
Field operating cash flow is negative but

delaying abandonment improves Project value
– are produced volumes still Reserves?
1P volume is uneconomic but 2P and 3P

volumes have positive value what do we book
as Reserves – “Economic vs. Commercial”
• Total Prospective Resources are commonly grossly
overstated as a result of either simply summing all P90,
P50 and P10 values arithmetically or aggregating them
probabilistically assuming all prospects were successful
• This outcome represents only one possible success
outcome resulting from a drill out of the prospect
inventory
• The probability of this outcome is the least likely
outcome of any drilling programme and the product of
each individual chance of discovery (assuming
independent probabilities)
• The real range of successful outcomes should encompass
all possible success outcomes from 1 success to all
successes and every combination/permutation in-
between
• The true P90 to P10 values of this distribution are much
lower than assuming all prospects are successful
• The consolidated chance of success increases with each
prospect added into the consolidation and represents
the chance of 1 or more successes
• RPS internal note is available upon request
P100 P90 P50 P10 P0 Mean CoD

Prospect 1 20 49 89 164 400 100 10%
Prospect 2 20 49 89 164 400 100 10%
Prospect 3 20 49 89 164 400 100 10%
Prospect 4 20 49 89 164 400 100 10%
Arithmetic
80 196 356 656 1600
Total
400 1/10^4 r
Probabilistic
80 283 388 532 1600
Total
Success Total 20 52 98 206 1600 117 34% a

• Arithmetic and Probabilistic Total assumes 100% success
• Success Total assumes at range of outcomes from 1 success to all successes and all
combinations/permutations between the 2
P0 = 1600
a Fulloutcomes
range of
P10 = 656
Arithmetic
P90 – P50 r
P0 = 400
Range
P90 = 196
P100 = 20 P100 = 20
Misuse of terms in PRMS
Some examples of the misuse of terms:

• “Risked” Reserves are ......
• “Recoverable Reserves” are ......
• “Remaining Reserves “are ......
• “1P STOIIP” = .......
• “Total Reserve = Proven + Probable + Possible”
• “2P production forecast excludes economic cut-off”
• “Current Resource base or 3P is xx”
• “A compression project is only included in the 3P reserves estimate”
• “Three additional wells are included in the 3P reserves “
Reserves and lease fuel
• Lease fuel is that portion of produced natural gas, crude oil, or condensate consumed as fuel in
production and lease plant operations.
• Lease fuel should be treated as shrinkage and is not included in sales quantities or resource
estimates.
• However, some regulatory guidelines may allow lease fuel to be included in Reserves estimates
where it replaces alternative sources of fuel and/or power that would be purchased in their
absence.
• Where claimed as Reserves, such fuel quantities should be reported separately from sales, and
their value must be included as an operating expense.
• Flared gas and oil and other losses are always treated as shrinkage and are not included in
either product sales or Reserves.
(PRMS 3.2.2)
• Guidance and rules to be addressed in 2017 update
Mixing risk and uncertainty
1P 2P 3P
P100 P0
P90 P50 P10
Reserves 20 49 89 164 400
• P90 volume has a 90% chance of occurring

• P50 volume has a 50% chance of occurring r
• P10 volume has 10% chance of occurring
• Total probability = 150% r
Expressing volumetric uncertainty
1P 2P 3P
P100 P0
P90 P50 P10
Reserves 20 49 89 164 400
Probability
Density Function
(PDF)
• There is a 90% chance that the volume ≥49 and lies between 49 and 400
• There is a 80% chance that the volume lies between 49 and 164 (P90 to P10 range)
Applying risk to Contingent or Prospective
Resources
Unrisked
P90 = 49 Resources P100 P90 P50 P10 P0 Mean CoD
Unrisked 20 49 89 164 400 100
Risked r 2.0 4.9 8.9 16.4 40.0 a

10 10%
Risked a 0 0 0 20 400 10
P50 = 89
P10 P9 P5 P1 P0
a 20 49 89 164 400
Risked
P10 = 164
Economic Limit Test (ELT)
Reserves Contingent
Resources
Economic Limit Economic Limit
• ELT date is based on undiscounted operating net cash flow

• Excludes abandonment, decommissioning and reclamation (ADR) costs
• Is that the project net cash flow of company's net cash flow?
Economic Limit Test (ELT) in a PSC setting
• “Contractors” operating cash flow very different to project operating cash flow
• Contractor pays 100% of costs but only receives a share of revenue based on cost oil
and profit oil – not related to Working Interest
• Contractor ELT date may be much earlier than Project ELT date
• ADR costs included in operating costs and therefore recoverable as Cost Oil
volumes have positive value
• Categorising volumes as Reserves requires an assessment of the economic viability of the
estimated volume range
• In some cases part of the volume range (the lower end) is shown to be uneconomic under
current economic assumptions
• In the case where the discounted value of the P90 case is negative but the undiscounted net
cash flow is still positive then Reserves can be assigned to the P90, P50 and P10 volumes
• In some cases however even the undiscounted cash flow at the P90 level is negative. It is
currently acceptable in PRMS in these cases to classify the P90 volume as 1C Contingent
Resources and the P50 and P10 volumes as 2P and 3P reserves respectively
• Once the investment that caused the P90 case to be uneconomic is sunk then the point
forward value would become positive and the remaining 1C volume moved back to 1P
• RPS normal practice would be to not use a split category approach
• The P90 – P10 volumetric range is derived from a continuous distribution and the entire range
should be classified accordingly
• If the operator is committed to the project even though part of the distribution is uneconomic
then the whole range should be classified as Reserves. This situation should reported as a
footnote to the reported Reserves table
• If the operator has effectively placed the project on hold as a result of this situation then the
entire distribution should be categorised as Contingent Resources until such time the operator
is ready to commit to the project
Economic vs. Commercial
Economic: Commercial:
In relation to petroleum Reserves and The entity (company) claiming commerciality has
Resources, economic refers to the situation demonstrated firm intention to proceed with development
where the income from an operation and such intention is based on all of the following criteria:
exceeds the expenses involved in, or
attributable to, that operation. • Evidence to support a reasonable timetable
• A reasonable assessment of the future economics meeting

defined investment and operating criteria
• A reasonable expectation of a market
• Evidence that the necessary production and transportation

facilities are, or can be made, available
• Evidence that legal, contractual, environmental and other

social and economic concerns will allow for the actual
implementation of the recovery project
Undiscounted net cash flow ≥ 0.0 Net cash flow discounted at [x%] ≥ 0.0
volumes have positive value
P90 P50 P10
MMbbls MMbbls MMbbls
Volumes 49 89 164
P90 P50 P10 P90 P50 P10

MMbbls MMbbls MMbbls MMbbls MMbbls MMbbls
NPV0 +ve +ve +ve NPV0 -ve +ve +ve
NPV10 -ve +ve +ve NPV10 -ve +ve +ve
1P 2P 3P 1P 2P 3P
MMbbls MMbbls MMbbls MMbbls MMbbls MMbbls
Reserves a 49 89 164 Reserves r 0 89 164
1C 2C 3C
Contingent
49 0 0
Resources
delaying abandonment improves the NPV
– are produced volumes still Reserves?
Reserves Contingent
Resources
Economic Limit
delaying abandonment is more economic –
are produced volumes still Reserves?
1 year delay to
decommissioning is more
economic
Reserves or Resources ??
Incremental vs. project based approach
• PRMS advocates that the following approaches can be adopted:

“Evaluators may assess recoverable quantities and categorize results by uncertainty using
the deterministic incremental (risk-based) approach, the deterministic scenario (cumulative)
approach, or probabilistic methods”
• A project based approach using either a deterministic or probabilistic
approach to the evaluation of Reserves and Resources is usually the norm
• Within the US however the incremental approach is generally adopted
• This approach results in use of such terms as the 1P or 2P or 3P area.
• Such terms and concept is not compatible with the project based approach
to evaluation that underpins PRMS
• These approaches therefore can produce very different outcomes
The Incremental Method
• The deterministic incremental method is widely used in mature onshore

environments, especially where multiple wells are drilled and where well-
spacing regulations apply.
• Typically,
➢ Proved Developed Reserves are assigned within the drilled spacing-unit
➢ Proved Undeveloped Reserves are assigned to adjacent spacing-units where
there is high confidence in continuity of productive reservoir.
➢ Probable and Possible Reserves are assigned in more remote areas indicating
progressively less confidence.
• The respective quantities (e.g., Probable Reserves) are estimated discretely
as opposed to defining a Proved plus Probable Reserves scenario or a best
estimate for the project based on probabilistic methods.
• Particular care is required to: -
➢ Define the project correctly (e.g., distinguishing between which wells are
planned and which are contingent)
➢ Ensure that all uncertainties are appropriately addressed.
Incremental projects – scope of work
different in 1P , 2P and 3P cases
• The key to the classification of hydrocarbon volumes as Reserves or Contingent Resources is
identification and definition of the “project” that will be employed to extract those volumes
• On this basis the P90, P50 P10 volumes reported as 1P, 2P and 3P reserves should all be based
on the same project (number of wells, same facilities etc.)
• In many cases an incremental project can be identified that will be executed sometime in the
future
• The volumes associated with this incremental project should be classified separately based on
the defined incremental project
• If this incremental project satisfies all the criteria in PRMS for Reserves which includes evidence
of commitment to the project by the operator then the volumes can be booked as Reserves
along with the Reserves in the main project
• If any of the criteria are not satisfied then the volumes in the incremental project must lie in
Contingent Resources until such time as the factor making them contingent at this point in time
have been overcome
• In some cases volumes in a contingent incremental project are added into the 3P reserves case
and treated as part of the upside potential of the main project
• In RPS’s opinion this approach is not PRMS compliant as well as being statistically incorrect.
Other auditors however sometimes use this approach
Incremental projects – scope of work
different in 1P , 2P and 3P cases
P90 P50 P10
Volumes Project A 100 150 300 Reserves a
Volumes Incremental Project B 30 50 100 Contingent Resources a
1P 2P 3P
Total Reserves 100 150 350 r
Production-Sharing Contract Reserves
...Under the PSC terms, the producers have an entitlement to a portion of the
production. This entitlement, often referred to as “net entitlement” or “net
economic interest,” is estimated using a formula based on the contract terms
incorporating project costs (cost oil) and project profits (profit oil). Although
ownership of the production invariably remains with the government authority up
to the export point of the project, the producers may take title to their share of the
net entitlement at that point and may claim that share as their Reserves.
Net Reserves are therefore a function of the Cost Oil, Profit Oil and in some
cases Tax Oil
(PRMS 3.3.2)
Contractor’s Entitlement Revenue – PSC
Gross Revenue
Royalty
Net Revenue
Unused Cost Oil

Profit Oil Cost Oil
State Share of Profit Contractor’s Share State Share of Cost Contractor’s Share
Oil of Profit Oil Oil of Cost Oil
Contractor and Company’s Net cash Flow – PSC
Net Revenue
State’s share of Profit Contractor’s share of

Contractor’s Cost Oil
Oil Profit Oil
Contractors’s Share of Revenue

(Contractor’s Share of Cost Oil + Profit Oil)
Less IOC’s share of Profit NOC’s share of Profit

IOC’s share of Cost Oil
Oil Oil
OPEX
CAPEX
Abandonment
NOC’s Share of Cost
Less Tax?
Oil
Tax
Equals
Contractor’s Net Cash Flow
UK Assumptions:
• WI = 50%
Tax & Royalty

• WI = 50%
• Royalty = 10%
PSC
• WI = 50%
• State back in 20%
• Royalty = 10%
• Cost recovery max 70%
• Profit share 80%/20%
•Tax @30% paid by Contractor
Company Net Reserves ≡ Company Share of Pre Tax Revenue
• In the normal case, the contractor is obligated to pay income tax out of his share of the
project profit.
• In such cases, the contractor’s tax obligation impacts the project’s economic performance
but has no impact on the reserve calculations because reserves are calculated on a before tax
basis.
• In many production sharing agreements, however, the government or state owned oil
company agrees to pay tax on behalf of the contractor.
• If, under the terms of the contract the contractor derives a benefit from and an economic
interest in the hydrocarbon volumes used to fund the tax payments, those payments may be
considered as the contractor’s reserves...
• The contractor’s cost recovery and profit share are computed in the standard fashion, but
instead of being the contractor’s entitlement before tax, they may now be viewed as the net
entitlement after tax.
• The revenue entitlement after tax must be grossed up by an amount equal to the tax paid on
the contractor’s behalf.
Contractor pays Tax @30% NOC pays Contractor Tax @30%
PRMS update 2017
The purpose of this new release is:
• Improve the clarity and granularity of

current PRMS guidelines
• Consider further alignment with COGEH
• Provide more of a link to the systems in
Norway and Russia
• Expected end 2017?
Updates expected to be included in PRMS
2017 – as presented by OGRC in 2016
Some specifics:
• Lease Fuel – further clarity on treatment of lease fuel (#8)
• New categories:
• Proved Reserves (can now be uneconomic) (#5)
• Project Economic 2P Reserves – recognition that companies plan and make decision
around the status of the 2P Reserves case. (#5)
• Further clarity on definition of economic vs. commercial (#5)
• Incremental and Scenario (cumulative) methods are allowed but now must give similar
results as a probabilistic method. (#3)
• Split conditions are not allowed (use of different economic assumptions for the 1P from
the 2P or 3P cases). (#2)
• Split classification no longer allowed, i.e. you cannot have 1C with 2P and 3P. (#2)
Summary
• PRMS guidelines are not prescriptive or black and white, there many grey areas
• All project and evaluations are different – the key is defining the project
• This results in differences in approach and interpretation
• These can lead to very different results
• Much is left to judgement of the Reporting Entity or Auditor
• Errors and misunderstandings are also very common
• There is no substitute for experience
Thankyou
For further information contact
Ed Jankowski at
jankowskie@rpsgroup.com

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Reserves & Resources –

Top 10 PRMS errors and misunderstandings

Dr. Ed Jankowski - Managing Director

• 2007 SPE/WPC/AAPG/SPEE publish Petroleum

• 2011 Guidelines for Application of the PRMS

• 2014 SPE OGRC agreed to consider revision to

• 2017 Updated to PRMS

• The “unit of currency” is The Project

Economic Limit Test (ELT) – based on

Applying risk to Contingent or Prospective

Reserves and lease fuel

Misuse of terms in PRMS

Aggregation of Prospective Resources –

Gross vs. Net Reserves (Entitlement) – PSC

Incremental projects – scope of work different

Incremental vs. project based approach

Field operating cash flow is negative but

1P volume is uneconomic but 2P and 3P

P100 P90 P50 P10 P0 Mean CoD

Success Total 20 52 98 206 1600 117 34% a

Some examples of the misuse of terms:

• Guidance and rules to be addressed in 2017 update

• P90 volume has a 90% chance of occurring

• Total probability = 150% r

P90 = 49 Resources P100 P90 P50 P10 P0 Mean CoD

Unrisked 20 49 89 164 400 100

Risked r 2.0 4.9 8.9 16.4 40.0 a

Economic Limit Economic Limit

• ELT date is based on undiscounted operating net cash flow

• A reasonable assessment of the future economics meeting

• A reasonable expectation of a market

• Evidence that the necessary production and transportation

• Evidence that legal, contractual, environmental and other

P90 P50 P10 P90 P50 P10

• PRMS advocates that the following approaches can be adopted:

• These approaches therefore can produce very different outcomes

• The deterministic incremental method is widely used in mature onshore

Production-Sharing Contract Reserves

Unused Cost Oil

State’s share of Profit Contractor’s share of

Contractors’s Share of Revenue

Less IOC’s share of Profit NOC’s share of Profit

Tax & Royalty

The purpose of this new release is:

• Improve the clarity and granularity of

• Expected end 2017?

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