Summary

Our current set of SPE reserves definitions, and their SEC counterparts, give a very misleading evaluation in a volatile pricing environment when dealing with mature, long life properties. Previous attempts to tighten the definitions through the use of "snapshot" price assumptions have had the opposite effect and have corrupted the technical uncertainty aspects of the definitions.

Probabilistic handling of pricing data allows evaluations to be performed that quantify economic uncertainty, thus removing the need for snapshot price assumptions or for a price forecast at all. The interaction between technical and economic uncertainties in reserves evaluation is discussed in the light of these results.

Concept

When characterizing a person or a company or anything else where credibility seeks to be established, we firstly review their track record and ask, "what have they done or accomplished?" This process intuitively assumes that the future will be similar to the past. This process also assumes that present conditions or environment are similar to the past, that is, the status quo has not changed. We thus judge the subject on track record.

One would think that the process of evaluating reserves (forecasting in essence) would be approached in a similar way. From a technical viewpoint, it is. When there is sufficient production history, we forecast the future production path using decline curves. We recognize that all production has an economic limit so we use cash flow analysis to calculate this limit based on operating cost and product pricing assumptions.

This is where the departure occurs. The future pricing assumptions have a huge effect on the economic limit calculation and hence the calculation of reserves. One would think that the pricing assumptions would be based on past pricing experience. In a few cases they are, but in most they are not.

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