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Abstract

Oil and gas reserves are projected based upon a number of fluctuating variables such as operating conditions (including curtailments), product prices, operating coats, and production trends. Most of these factors have a direct relationship to the future net revenues and payout times. However, the corresponding effect of changes in these parameters on the gross reserves is quite often buried beneath the surface of associated changes in future revenues. Even though the estimates of gross reserves that could he recovered may not change for a particular well, the economic gross reserves and associated future revenues could change dramatically due to economic and/or operating conditions. An increase, or decrease, in pricing and/or operating costs can alter the volume of oil or gas reserves which are reported. When reserves reports are prepared, it is necessary that the oil and gas producer understands the relationship between gross reserves and economic gross reserves as presented herein. The purpose of this paper is to further investigate and define the effect that changes in economic factors, especially pricing, have on the calculation of economic gross reserves. Three typical Appalachian Basin reservoirs (Clinton, Big lime, and shallow oil productive sand) are used in this paper to depict the effects of changes in economic conditions. variations in operating conditions such as curtailments are also briefly addressed to examine associated changes in future revenues and payout times.

Introduction

Reserves reports are generated by applying product prices and expenses to a schedule of projected production of oil or gas. These economic evaluations provide valuable information concerning future net revenues (FNR), discounted future net revenues (DFNR), remaining oil and gas reserves, and payout times (payout). They illustrate the value held by the interest owner(s) based on the estimates of reserves. Since the term "reserves" is used so many different 'says, it is necessary to define its use in this paper. The term "initial gross reserves" will refer to the 100.00 percent volumes of oil or gas estimated to be produced from a certain well to the practical limitations of the reservoir. The term "economic reserves" will refer to the calculated reserves after the application of pricing and all expenses to the well. Economic reserves 'say be separated into "gross" and "net" reserves. "Gross economic reserves" are the economic reserves before the application of any royalties or overriding interests, and "net economic reserves" are the economic reserves net to the revenue interest associated with the 100.00 percent working interest after the application of any royalties or overriding interests. In effect, the "initial gross reserves" and the "economic gross reserves" will differ to varying degrees depending upon economic conditions applied.

It is essential that the interest owner(s) be aware of the changes in gross reserves resulting from changes in the economic limits which occur due to fluctuating product prices and well expenses. Quite often a misunderstanding of the effect economic limits can have on estimates of gross reserves may Iced to a misinterpretation of the reserves report. The economic limit, as defined in this paper, will be the minimum rats to which en oil or gas well may be economically produced with a positive cash flow considering all operating expenses, royalties, and state and county taxes but before any federal income tax.

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