In this unit, we are going to discuss the definition of oil reserves and resources, and see what the difference is between the various definitions. This is something which is very important to understand exactly what we are talking about when we speak of reserves and resources. First of all, we start with a formal definition of reserves. This comes from the Society of Petroleum Engineers in the United States, and it is as follows as you can read on your screen. Reserves are those quantities of petroleum which are anticipated to be commercially recovered from known accumulations from a given date forward. Now, there are three elements in this definition. The first is that the quantities of petroleum need to be commercially recovered. This means that we need to make a profit or at least not make losses when we produce petroleum from this accumulation. Next, second point is they must come from known accumulations. We must have found the accumulation. We must have found the oil field and have therefore evidence that the oil field exists. Third point is from a given date forward. It means that we may not be finished with developing the oil field, drilling all the wells that are necessary in order to produce, but we must have some idea of when we are going to start production. This is why oil companies when they discover a new field and they announce their reserves, they also say we are estimating, we expect to be producing from this field at a certain date. The date may not be respected, but you must have some idea of the date at which you will be able to start production. So on the basis of this definition, you understand that all results estimate involve some degree of uncertainty because we don't know how much oil there is in the ground. There is no way that we can go and measure exactly the extent of reserves. So depending on the relative degree of uncertainty, we distinguish several categories of reserves. We distinguish in particular in between proved and non proved reserves, and within the non proved reserves group, we distinguish in between probable and possible reserves. These are common expressions. When we speak of proved reserves sometimes also called P90, we mean exactly the definition that you can read on the screen. Quantities of petroleum which by analysis of geological and engineering data can be estimated with reasonable certainty, at least 90 percent probability to be commercially recoverable. So we have no absolute 100 percent certainty, but we are reasonably certain 90 percent probability that we will be able to produce those quantities of oil out of a given field, and we will be able to do so commercially from the known reservoir, from the reservoir that we are discussing and under current economic conditions, operating methods, and government regulations. The last three points are important because economic conditions, operating methods, or government regulations can change. So government regulation can change and something that we expected to be able to produce suddenly becomes impossible because it's against the rules imposed on the operator or economic conditions can change, the price can go up or down. If the price goes up, it is possible that reserves that were not considered proved because they were not commercially viable, become commercially viable and therefore they become proved reserves. Vice-versa, when the price goes down, it is possible that the opposite occurs. In other words, that the reserves that we considered commercially viable, all of a sudden are no longer commercially viable and therefore we have to restrict our definition of proved reserves. When we speak of proved reserves, we further must distinguish in between developed or undeveloped because in order to produce out of a field, we need to develop it. Which means drilling all the production wells, installing all the pipelines to gather the oil, installing all the equipment that is necessary in order to produce oil out of the well. This investment, which is a large investment normally in the development of a field can be done already or not. So if it has done already, we speak of a developed field, developed proven results. If it has not been done already, we speak of proved reserves, but non-developed, not yet developed. Then we speak of unproved reserves. Unproved reserves are reserves that are based on geological or engineering data similar to those used in estimating proved reserves, but for one reason or another, we are not certain that we don't have the same degree of certainty that we'll be able to produce out of these reserves. So we cannot classify them as proved. They remain unproved. This large category of unproved reserves can be further divided into two. We will speak of probable reserves or possible reserves and the differences is in the degree of probability. When we speak of probable reserves, we speak also of P50. These are reserves that have at least 50 percent probability of being produced in commercial conditions and from known reservoir and from a given date forward as we already discussed. We need to have at least 50 percent probability that we will be able to do so, and make a profit. When it comes to the next category, possible reserves, this is also called sometimes P10. P10 means that we have less than 50 percent probability of being able to produce, but we have at least 10 percent. If we have less than 10 percent, we cannot even call them possible reserves. At least 10 percent probability of being able to recover those quantities on the commercial conditions, existing conditions, technical economic regulatory conditions out of the known field that we are discussing. Then we have the concept of reserves growth. In fact, reserves do not grow. Reserves are always the same, but are estimates the amount of oil which is physically in the ground remains the same but our estimate may change. Our estimate may change because with time out of producing from a given field, we come to know it better. We come to know the physical characteristics, the hydraulic characteristics in much better as we produce out of them. So our estimate of original estimate of reserves will be revised. Normally it is revised upwards. So we have increases in the estimate and we say that we have reserves growth. In fact, physical oil in place has not changed. What has changed is our understanding of the amount of oil which is available, and our ability to produce out of existing accumulation. So normally, reserves are revised upwards but sometimes they are revised downwards. Sometimes we have negative surprises, and so reserves growth is normally positive, but in some cases can even be negative.
