Petroleum Reserves Definitions

2003-2004 Petrobjects 1
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Petroleum Reserves
Definitions
2003-2004 Petrobjects
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Definitions

Petroleum is the world's major source of energy and is a key factor in the
continued development of the worlds economies. Therefore, it is essential for the
countries future planning to have a clear assessment of their petroleum reserves.
Such assessment is of considerable importance to governments, international
agencies, economists, bankers, and the international energy industry.

Petroleum

Crude oil is a mixture of hydrocarbons that exists in a liquid phase in
natural underground reservoirs and remains liquid at atmospheric pressure
after passing through surface separating facilities. Production volumes
reported as crude oil include:
liquids technically defined as crude oil;
small amounts of hydrocarbons that exist in the gaseous phase in
natural underground reservoirs, but which are liquid at atmospheric
pressure after being recovered from oil well (casing head) gas in
lease separators;
small amounts of non-hydrocarbons produced with the oil.

Natural gas is a mixture of hydrocarbon compounds and small quantities of
various non-hydrocarbons existing in the gaseous phase or in solution with oil
in natural underground reservoirs at reservoir conditions.

Natural gas liquids (NGLs) are those reservoir gases liquefied at the
surface in lease separators, field facilities or gas processing plants. NGLs
consist of field condensates and natural gas plant products such as ethane,
pentane, propane, butane and natural gasoline.

Petroleum refers to the naturally occurring liquids and gases which are
predominately comprised of hydrocarbon compounds. It may also contain
non-hydrocarbon compounds; such as nitrogen, carbon dioxide, and
hydrogen sulfide.

Petroleum Resources

Petroleum resources are defined as the oil and gas originally in place
estimated by the existing petroleum technological methods. The gas originally
in place is either non-associated or associated. The non-associated gas is

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defined as the natural gas in reservoirs that do not contain significant
quantities of crude oil or do not contain crude oil at all. The associated gas is
defined as the natural gas that exists in oil reservoirs. It is either free or
dissolved. The free gas, commonly known as the gas cap, overlies and is in
contact with the crude oil in the reservoir. The dissolved gas is the quantity of
gas, expressed in standard cubic feet (SCF), which is dissolved in one stock
tank barrel (STB) of oil. By Natural Gas Liquid (NGL), which is originally in
place, we mean the components that are volatile in free gas, all of which will
be converted to NGL phase by means of the current/planned gas processing.

Petroleum Reserves

Petroleum reserves refer to the quantities of petroleum available for
production plus the quantities which are anticipated to become available
within a practical time frame through additional field development,
technological advances, or exploration. This definition implies that, for oil and
gas, in order to be called reserves,
Oil and gas must be physically and economically producible. For
example, if there are billions of barrels of oil in place, but it is
uneconomical to produce it with existing technology, then oil
reserves sum up to zero.
Since the resource has not been produced and is inaccessible,
reserves can not be measured, they can only be estimated.
Since reserves are remaining, there is a time line associated with
each reserve estimate.

That said, the word reserves is an abstract concept; i.e. it can never be a
fixed volume but it can and does change from time to time and from observer
to observer. For this reason, reserves cannot have value, but can only
represent value in an abstract sense. For example, if all conditions are
identical, a property with greater reserves can be construed to have a greater
value. Said differently, a comparison to an office building is illustrative; an
office building retains the same physical size and character whether the rents
for the building go up or down. Reserves, on the other hand, may increase or
decline with changes in oil price.
Since we are interested only in those reserves which remain to be
produced from this time forward, this leads to the term remaining reserves
from the effective date of study. When the study starts at the discovery date,
we speak of original reserves. This term includes all oil and gas which is
expected to be recovered over the life of the field or well. The term ultimate
recovery may also be applied to mean original reserves. Since also we are

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dealing with estimates, the terms should be known as estimated remaining
reserves (ERR) and estimated ultimate recovery (EUR). Hydrocarbons which
were produced up to the effective date of the study are known as cumulative
recovery (Cum). The relationship between ERR, EUR, and Cum is as follows:

EUR = ERR + Cum (1)

In some cases, Cum may not be known as of the effective date of
production. This is because the production data normally takes a month or
two to get through the system. In this case, it will be necessary to estimate
production from the last measured data to the effective date. Therefore, we
may wind up with an estimated Cum as of the effective date.
Petroleum resources and reserves are related via recovery factor (RF):

EUR = N*RF (2)

Combining equations (1) and (2) yields:

ERR = N*RF Cum (3)

Notice that only Cum is measurable, all of the others are estimates.

Proven Reserves

Proven Reserves are defined as the estimated quantity of all hydrocarbons
statistically defined as crude oil or natural gas, which geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. Reservoirs are considered proven if economic producibility is
supported by either actual production or conclusive formation testing. The
area of an oil reservoir considered proven includes those portions delineated
by drilling and defined by gas-oil or oil-water contacts, if any, and the
immediately adjoining portions not yet drilled, but which can be reasonably
judged as economically productive on the basis of available geological and
engineering data. In the absence of information on fluid contacts, the lowest
known structural occurrence of hydrocarbons controls the lower proven limit
of the reservoir.

Crude oil: estimates include oil that can be produced economically through
application of improved recovery techniques following successful completion
of pilot testing. Estimates do not include:

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oil that may become available from known reservoirs but is reported
separately as "indicated additional reserves";
oil, the recovery of which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics or economic
factors;
oil that may occur in untested prospects; and
oil that may be recovered from oil shales, coal, gilsonite and other
such sources.

Natural gas: estimates are prepared for total recoverable natural gas, non-
associated gas and associated-dissolved gas. Estimates do not include
gaseous equivalence of natural gas liquids expected to be recovered from
reservoir natural gas as it is produced, natural gas being held in underground
storage or non-hydrocarbon gases.

Recovery Factor

Some professionals in the oil business believe that the recovery factor is a
sole function of technology. Others do believe it is a function of geology and
quality of the reservoir. As a matter of fact, it depends on all factors; i.e. it
depends on:
Geology and quality of the reservoir,
Quality and type of recovery,
Quality of the production scheme, and
Present technology.

For example, it is known that for poor reservoirs (fractured tight reservoir),
the RF is about 3%, and for very high porous and permeable reservoir (as a
reef) it is about 80%. Similarly, the recovery method adopted, whether
primary or secondary, and the quality of production scheme will assuredly
have a strong influence on the RF, not to mention the effect of technology
adopted in depleting the reservoir.

Reserve Growth

Reserve growth is defined as the increase in the successive estimates of
reserves. It has been observed in almost all fields or provinces, but most
notably in mature petroleum provinces, like many in the U.S., where it has
contributed substantial additional reserves over the last two decades. It is the
most important problem in assessing the future production. Statistically
reserves growth occurs because the reserves are badly estimated.

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At the present time, it is claimed that there is reserve growth in the
evolution of reserves, but in fact the extent of reserve growth can be
measured only when the fields have been depleted and abandoned. On still
producing fields, cases of reserve growth are publicized whereas little is said
about reserve decrease. The huge increase during the second half of the
1980s by the OPEC countries was political (quotas) and the decrease in 1999
of 20 Gb by Mexico was done after the financial crisis was solved (previously
large reserves were needed to guarantee the loan from the US and IMF and
before Nafta agreement signed). Reserve growth is claimed to come from
higher recovery factor and from increase in oil price.
Although reserve growth on individual pool or field levels may be either
positive or negative, the growth within a country or petroleum province is
generally positive, and provides a means for estimating future potential
reserves. An evaluation of reserve growth, however, is complex, being
affected not only by geological, reservoir, and engineering factors, but also by
local laws and policies that control exploration, reserve reporting, and field
development activities.

Sources of Reserve Figures and Their Problems

The sources from which world oil reserves and production figures are reported
can be grouped into two main sources:
Oil industry periodicals, and
Independent agencies.

There are four oil industry periodicals that report values for world oil reserves
and the annual production, those are:
Oil & Gas Journal (OGJ),
British Petroleum Amoco (BP),
World Oil, and
OPEC Annual Statistical Bulletin (ASB).

The most common independent agencies are the United States Geological
Survey (USGS) and Petroconsultants. Those agencies provide independent
estimates after they have recognized the inconsistent nature of the reserve figures
reported in the trade journals and periodicals.
The data reported by the OGJ comes from a questionnaire distributed to the
different countries and are reported as received. However, when a country fails to
reply to the questionnaire, the number seems to be carried forward to the following

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year without adjustment
(11)
. However, if the country makes an official declaration
reporting new reserves, the numbers seems to be adjusted.
BP simply reproduces the numbers reported by the OGJ, with the following slight
adjustments
(11)
:
Numbers are shown to represent end-of-year (December 31) rather than
beginning of the following year (January 1).
Estimates of the NGL reserves are added to the USA and Canada oil reserve
figures. There is no proof, however, that estimates of all other countries
include their NGL figures as well.
Higher numbers are reported for Azerbaijan and Kazakhstan in recent years
without specifying the source or reasons for the differences.

World Oil poses similar questionnaire to the countries, yet some reported
numbers are significantly different than those of OGJ and BP, especially for OPEC
countries
(11)
.
The numbers reported in the ASB are based on direct communications to the
Secretariat, as well as various other sources, such as the Middle East Economic
Survey, Petroleum Intelligence Weekly, Arab Oil and Gas, and, of course after
verification and comparisons
(17)
, the OGJ, BP, and World Oil. The ASB shows tables
for member countries at the end of the year for both proven crude oil reserves and
proven natural gas reserves. It also shows the worlds proven crude oil reserves
and the worlds proven natural gas reserves.
BP numbers are the most widely quoted and used by experts and non-experts
alike. The analysts who use these numbers assume that they must have the
support of the renowned oil company. In addition to the confusion when a note
next to the number says proved reserves conveying some sort of technicality to
the term.
OPEC also quotes from BP and their numbers are taken to represent accurate
figures, since OPEC is a professional international organization, and the numbers
are produced in an impressive volume with other energy data.

Why the Need for Reserves Definitions

In order to avoid a situation where reserves lose all meaning as a comparative
measure, it is necessary that the industry adopt a consistent nomenclature or a
definition for reserves in order to provide some broadly accepted constraints on the
conditions that would result in the estimation of reserves. Without a definition as a
guideline or reference, a volume labeled as reserves could be anything but would
have no meaning to anyone.

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Petroleum Reserves
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Until two decades ago, reserves estimation and classification was not a big issue,
because oil and gas reserves were not sold or traded. They were kept as a
companys crown jewels. The reservoirs were much more conventional and less
risky. Natural gas was not a valuable commodity and, in fact, there was an
oversupply. Oil reserves were also greater than demand, resulting in a pro-
rationing system. This system kept everyone honest, since everyone was
scrutinizing everyone elses reserves estimates. Companies also survived on cash
flow and debt financing.
In todays environment, however, everything is for sale, from reserves to
processing plants to companies. There is a great need for raising capital on the
public market. There is a good demand for both oil and natural gas. With
conventional sources becoming depleted, our industry is directing itself towards
higher risk ventures, such as shallow gas, heavy oil, and the more complex
reservoirs. It comes as no surprise, then, that tighter controls need to be put in
place if the industry wants to attract public financing.
To express the variance in reserves estimates, the industry has developed
reserves classification systems, referred to as Reserves Definitions. Proved,
probable and possible reserves imply low, intermediate, and high degrees of
uncertainty, respectively. There are, however, as many reserves definitions in place
today as there are stakeholders in the industry, each one fulfilling a specific
purpose. Furthermore, the wording of the definitions is sufficiently vague, allowing
evaluators a great deal of latitude when classifying reserves. This freedom, coupled
with companies pressure to look good in the financial market, has resulted in a
bending of the rules. Because of this seeming lack of control, many associations
today are attempting to standardize reserves definitions and set up enforcement
organizations.

Why the Need for Harmonization

Accepting the fact that there are as many reserves definitions in place today as
there are stakeholders in the industry, there must be a means of harmonizing those
definitions. This is necessary for the following reasons:
Enhance communication
Make terms comparable and compatible
Provide a methodology for evaluating resources on a common basis
Improved support for financial reporting

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Petroleum Reserves
Definitions
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Historical Development of Reserves Definitions

The American Petroleum Institute (API) was the first agency that set definition of
reserves in the mid - 1930's. From 1936 to 1964, the American Petroleum Institute
(API) set the standards for definitions of Proved Reserves. This effort was joined by
the American Gas Association (AGA) in 1946 with the joint API-AGA annual
publication of Proved Reserves of Crude Oil, Natural Gas Liquids and Natural Gas.
In 1964, the Society of Petroleum Engineers (SPE) issued reserve definitions, which
agreed closely with revised API definitions.
The events of the 1970s and the resulting changes in the oil industry led to the
issuance of definitions by the Security and Exchange Commissions (SEC) in 1979,
by SPE in 1981 and by the World Petroleum Congress (WPC) in 1983. SPE revised
its definitions in 1987 and, in cooperation with WPC, again in 1997. Until 1983 all
reserves definitions, at least those issued by recognized authorities such as API and
SPE, were for Proved Reserves only. The WPC definitions of 1983 included
categories ranging from Proved to speculative reserves. The 1987 SPE definitions
were the first to formally define Proved, Probable and Possible. This does not mean
that the terms were not in use or that Probable and Possible reserves had not been
calculated and reported. Producing companies, consulting firms, banks and
government agencies developed their own criteria for UnProved reserves and used
them.
Despite the efforts of SPE/WPC and SEC to standardize reserves, multiple
reserve definitions remain in use. Many companies and agencies retain their own
definitions which, while close to the SPE standard, have certain idiosyncrasies
resulting from law and regulatory requirements, corporate policy decisions and/or
ingrained habit. This is particularly true regarding the boundary between Proved
and Unproved and, to a lesser extent, the sub-categories within Proved. In this
report, the following reserves definitions are examined:

1. ARPS 1962 reserves classification
2. The SPE/API 1965 reserves definitions
3. The McKelvey Box resource classification system
4. The SEC definition of 1979
5. The 1981 SPE definitions
6. The 1988 SPE definition
7. The SPE/WPC definitions
8. The SPE/WPC/AAPG definitions
9. The UNFC classification system
10. The SPEE expansions of the SPE 1987 and 1997 definitions
11. The California State Board of Equalization (SBOE) definition contained in
rule 468 of the California R&T Code.

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12. Canadian reserves definitions
13. Chinese classification system
14. The CCOP classification system

The SPE and SPE/WPC definitions are intended to provide industry and observers
of the industry, consultants and the financial (lending) community with a standard
to which all evaluators should conform. The 1981 and 1987 SPE definitions
succeeded in providing that standard for domestic use, and the 1997 SPE/WPC
collaboration attempted to provide an international standard. In any case, SPE is
considered to be the industry standard.
The SEC definitions are the response of government to the perceived need for a
benchmark by which producing companies could be compared to each other. The
primary beneficiary of this effort is the equity financial community and consulting
firms. The Rule 468 definition is the recognition by SBOE of the need for a
regulatory standard that should be followed by assessors in appraising oil
properties. The SPEE expansion of the SPE definitions is included because of the
extensive explanation of the SPE definitions rendered by SPEE and the historical
context for these definitions provided by SPEE.

The Escalated/Un-escalated Issue

The definitions of reserves include the phrase under existing economic
conditions [where] and for Proved reserves says, current economic conditions
[where] current economic conditions include prices and costs prevailing at the
time of the estimate. SPE provides no further elaboration of the intent of the terms
existing, or current, or economic conditions as used in the definitions and
gives no guidance as to the selection of initial prices and/or estimation of operating
costs
(14)
.
The SPE language has often led to debates among evaluators regarding the
treatment of future prices and costs. Why are two different terms used? Are
reserves to be established only by using the price and cost in effect on the date of
evaluation or can reserves be established by projecting prices and costs which
change over time from the initial values? The former is generally referred to as the
un-escalated case while the latter is referred as the escalated case. Further, there
tends to be an assumption that escalated always means increasing rather than
simply a change from the initial value.

The debate is usually framed as follows:

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One side of the debate says that existing economic conditions are the totality of
the conditions that may affect the value of a property and/or influence the future
operation of a project. The evaluator may start with the price(s) and cost(s)
occurring on the date of evaluation, but if the prevailing economic conditions are
such that the price and/or costs can reasonably be expected to change in some
particular manner, then the evaluator should incorporate those anticipated changes
into the estimation of future cash flow.
The other side of the debate takes the position that using current economic
conditions, which include prices and costs prevailing at the time of the estimate,
allows no change in those prices or costs over the life of the evaluation. This latter
construction ignores the inclusive interpretation of the term include and makes
the term an absolute.
This issue has far more to do with cash flow and the valuation of income than
with reserves. Reserves are influenced in only two ways. First, changing prices and
costs over the life of the projection may result in a different economic limit of
production for the property/project than would be obtained using a flat price/cost
projection; reserves are added at the end of the life when the economic limit is
reduced and the life is extended. On the other hand, when economic limit is
increased and producing life is shortened, reserves are reduced. Second, capital
investment in workovers or remedial work or new drilling that would not be
economically justified at current prices might be justified if prices were escalated
(increased). In this latter case, new reserves might be added through increased
production.
In Monograph I (1988 edition), SPEE takes the position that existing economic
conditions and current economic condition mean the same thing, which is that
the prices and costs in effect at the time of the evaluation are carried forward with
no changes. SPEE goes farther and states (page 45):

If the reserves are increased by escalating product prices and costs, then
the change in the reserves should be shown separately in the engineers
report as Unproved Reserves.

SPEE advises that the evaluator can avoid this by using the same economic limit
(the unescalated one) for both cases thereby assuring that no reserves are added
at the end of life. This, of course, ignores the fact that many operators will continue
to produce beyond this artificial limit.
The position taken in Monograph I (both 1988 and 1998) is the only serious flaw
in an otherwise excellent document. The position is untenable as a practical matter
and has some very serious logical loopholes. In practice, it is often ignored. It is
quite common for evaluators to cite the SPE definition in their reports and then
escalate (de-escalate) prices and/or costs and include all the reserves as Proved.

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Within SPEE, the subject is often warmly debated, and the issue of escalation or
non-escalation is far from a unanimous agreement.

Three major areas of failure of the SPEE proposition are as follows:

1. In periods of changing prices and costs an evaluation done of Property A in
October might have one reserve estimate, while an evaluation done in
November could have a second (higher or lower) reserve estimate. Both
would be considered correct, but which one is really correct? If the same
evaluator had estimated the reserves in October by projecting the October
price to change to the November price, the change in reserves would be
Unproved while the same volume in the November evaluation is considered
Proved. In all other respects, a change in reserves category is a function of
risk derived from the likelihood of recovery (See SPE Definitions for examples
that illustrate Proved, Probably and Possible). In the SPEE Interpretation,
however, a major change in reserves categorization occurs due solely to the
treatment of prices and costs.
2. The SPEE proposition assumes that escalated prices are increasing prices and
does not consider the impact of pricing cycles and/or decreasing prices or
costs. Further, it fails to consider the effect of differing escalations of prices
as compared to costs. If decreasing prices are projected with flat or
increasing costs, the economic limit would be increased and the reserves may
be decreased. The amount of reserves lost, as it were, cannot be classified
as Unproved since they do not exist as reserves. In that case, they are simply
deducted from Proved reserves. Reserves that were measurable, by
definition, when prices were increasing, become no longer measurable when
prices go down.
3. Finally, SPEE is not consistent on this issue. While being specific about prices
for oil, Monograph I also says: Determining current gas price would be more
difficultcommon sense and good judgment are called for This is true of
the entire evaluation process and applies equally to production projections
and price projections.

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ARPS Reserves
Classification
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In 1962, J.J. Arps published one of the more complete classification systems for
petroleum reserves as depicted by Fig. 1.

Reserves
Primary
Secondary Proved
Probable
Possible
Proved
Probable
Possible
Developed
Undeveloped
Developed
Undeveloped
Producing
Nonproducing
Producing
Nonproducing

Figure 1: Arps Petroleum Reserves Classification System

As shown in Fig. 1, Arps classified reserves based on the source of reservoir
energy into primary and secondary reserves. Following is an explanation of his
classification.

Primary Reserves

Primary reserves are those reserves recoverable commercially at the current
prices and costs by conventional methods and equipment as a result of natural
energy inherent in the reservoir.

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ARPS Reserves
Classification
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Secondary Reserves

Primary/Proved reserves are those reserves proved either by actual production
at commercial rates, or by successful well tests, core analysis, or quantitative log
interpretation, provided that no substantial drainage has occurred since these wells
were drilled or tested.

Primary/Probable

Primary/Probable reserves are those reserves behind the casing of existing wells
or within the known geological limits of a productive reservoir. Those reserves are
inferred from limited evidences that are insufficient to qualify them under proved.

Primary/Possible

Primary/Possible reserves are those reserves inferred from geological or
engineering considerations insufficient to qualify them under probable.

Secondary/Proved

Secondary/Proved reserves are those reserves proved either by a successful
pilot operation, or by satisfactory performance of full-scale secondary operation in
the same reservoir or in a similar nearby reservoir producing from the same
formation.

Secondary/Probable

Secondary/Probable reserves are those reserves inferred from past production
performance, core analysis, log interpretation, or reservoir data, provided the
reservoir itself has not been subject to secondary operations.

Secondary/Possible

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ARPS Reserves
Classification
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Secondary/Possible reserves are those reserves which appear to be suited for
secondary operations but where available data is insufficient to qualify them under
probable.

Primary/Proved/Developed

Developed reserves are those reserves which are recoverable through existing
wells and with existing facilities.

Primary/Proved/Undeveloped

Undeveloped reserves are those reserves under undeveloped spacing units which
are so close and so related to developed spacing units that they may be assumed
with confidence to become commercially productive when drilled.

Primary/Proved/Developed/Producing

Producing reserves are those reserves to be produced by existing wells from
completion intervals open to production.

Primary/Proved/Developed/Non-producing

Non-producing reserves are those reserves to be produced from existing wells
but which are now behind the casing or at minor depths below the bottom of the
hole.

Secondary /Proved/Developed

Developed reserves are those reserves recoverable through existing wells from a
reservoir where successful secondary operations are in progress.

Secondary /Proved/Undeveloped

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ARPS Reserves
Classification
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Undeveloped reserves are those reserves which may be assumed with
confidence to be produced upon the installation of a secondary recovery project
and/or by the drilling of additional wells.

Secondary /Proved/Developed/Producing

Producing reserves are those reserves to be produced by existing wells from that
portion of reservoir subject to full-scale secondary operations.

Secondary /Proved/Developed/Non-producing

Non-producing reserves are those reserves to be produced by existing wells
upon enlargement of the existing secondary operations.

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SPE/API
Reserves Definitions
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In 1964, the SPE set its first definitions which were succinct and fit on one
typewritten page, wherein Proved Reserves are defined as: The quantities of crude
oil, natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in the future from known
oil and gas reservoirs under existing economic and operating conditions.
It is readily apparent that the SPE and API definitions are the same. SPE goes on
to add some explanation: When evaluating an individual property in an existing oil
or gas field, the proved reserves within the framework of the above definition are
those quantities indicated to be recoverable commercially from the subject property
at current prices and costs, under existing regulatory practices, and with
conventional methods and equipment.
Proved reserves were further categorized as Proved Developed Producing (PDP),
Proved Developed Non-Producing (PDNP) and Proved Undeveloped (PUD) with the
latter two categories deriving from the scale of expected investment necessary to
obtain the production. There are five operative criteria for Proved reserves:
1. Known oil and gas reservoirs
2. Reasonable certainty to be recoverable
3. Existing economic and operating conditions
4. Existing regulatory practices
5. Conventional methods and equipment

No criteria are provided for defining known oil and gas reservoirs or for
reasonable certainty to be recoverable. The terms were assumed to be
understood by users, which, at the time, were generally limited to industry
evaluators and a few banks. The same is true of conventional methods and
equipment which usually meant something that had been tried and tested for
years and could be shown to work when appropriately applied in other words, it
had gained general acceptance. At the time existing regulatory practices meant
(a) proration of production and (b) regulations regarding the operation of injection
projects. The existing economic and operating conditions and current prices and
costs, however, require some discussion. Do they mean the same thing? If they
do, what do they mean? If not; what is the difference?
Existing economic and operating conditions is a broader statement than
current prices and costs. The former could relate to the general economy for oil
and gas production and operations including whether inflation or deflation is
occurring, whether over supply or excess demand is prevalent, or whether labor is
in tight supply and could even extend to the income tax structure and the
investment climate. Existing operating conditions is more readily translated to
mean the production mechanism(s) in use whether it be flowing wells, artificial lift,
waterflood, or some other method. A change in expected production due to the
introduction of new operating methods could result in the production being classed

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SPE/API
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as Undeveloped. On the other hand, current prices and costs seems relatively
limited. At the time (1965) this clearly meant (a) using the actual prices being paid
for oil and gas and the actual operating costs being incurred and (b) carrying them
forward in the evaluation. This was accepted at the time because oil prices were
essentially fixed (that was the purpose of proration) and there was, as yet, no
significant inflation. In fact, real oil prices were in decline. Proration would last until
1972, and inflation only became an issue in the early 1970s. There was no
expectation of any other economic conditions.

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The 1972 McKelvey Resource
Classification System
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In 1972, McKelvey set a resource classification system as indicated by Figure 2.

Figure 2: McKelvey Box Resource Classification System (Original Form)

Figure 3 is an incorrect use of McKelvey system.

Figure 3: McKelvey Box Resource Classification System (Incorrect Usage)

Figure 4 is McKelvey system with the SPE/WPC/AAPG terminology implemented.

Figure 4: McKelvey Box SPE/WPC/AAPG Terminology

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SEC
Reserves Classification
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In 1975, as part of the reaction to the energy crisis, the SEC was interested
only in the proved oil and gas reserves. They came up with the following definition:

Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas, and natural gas liquids which geological and engineering data
reveal with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions; i.e.
prices and costs as of the date the estimate is made. Prices include
consideration of changes in existing prices provided only by contractual
arrangements, but not on escalations based upon future conditions.

This is virtually identical to the existing SPE (1965) definition except for the
addition of the phrase, i.e., prices and costs as of the date the estimate is made.
and the final sentence.

Reservoirs are considered proved if economic producibility is supported by either
actual production or conclusive formation test. The area of a reservoir considered
proved includes:
That portion delineated by drilling and defined by gas-oil and/or oil-water
contacts, if any.
The immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information of fluid
contacts, the lowest known structural occurrence of hydrocarbons controls the
lower proved limit of the reservoir.

Reserves which can be produced economically through the application of
improved recovery techniques (such as fluid injection) are included in the proved
classification only when successful testing by a pilot project, or the operation of an
installed program in the reservoir, provides support for the engineering analysis on
which the project or program was based. Estimates of the proved reserves do not
include the following:
Oil that may become available from known reservoirs but is classified
separately as indicated additional reserves.
Crude oil, natural gas, and natural gas liquids, the recovery of which is
subject to reasonable doubt because of uncertainty as to geology,
reservoir characteristics, or economic factors.
Crude oil, natural gas, and natural gas liquids, that may occur in undrilled
prospects.
Crude oil, natural gas, and natural gas liquids, that may be recovered from
oil shales, coal and other such sources.

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SEC
Reserves Classification
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The SEC has divided the proved oil and gas reserves into two categories:

1. Developed: Proved Developed Oil and Gas Reserves are reserves that are
expected to be recovered from existing wells with existing equipment and
operating methods. Reserves that can be recovered using improved recovery
techniques are included only after testing by a pilot project or after the
operation of an installed program has confirmed through production response
that increased recovery will be achieved.

2. Undeveloped: Proved Undeveloped Oil and Gas Reserves are the oil and gas
reserves that are expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively major expenditure is
required for recompletion. Reserves on undrilled acreage shall be limited to
those drilling units offsetting productive units that are reasonably certain of
production when drilled. Proved reserves for other undrilled units can be
claimed only where it can be demonstrated with certainty that there is
continuity of production from the existing productive formation. Under no
circumstances should estimates for proved undeveloped reserves be
attributable to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have
been proved effective by actual tests in the area and in the same reservoir.

The SEC regulations are probably, at least partially, responsible for the
interpretation of the SPE definition regarding price/cost escalation. Note that, for
SEC purposes, only Proved reserves are reported. Since the SEC language is
identical to the 1965 SPE language, with the exception of the additional language to
define existing economic conditions, evaluators began to apply the same non-
escalation criteria to the SPE definition. A classic case is of the tail wagging the dog.
It is of interest, then, that in 1981 SPE issued definitions which still used
existing economic conditions to define Proved reserves, with no further
elaboration or description. One is left to wonder if SPE intended existing or
current economic conditions to mean the same thing as the SEC definition and, if
so, why they did not also include the same or a similar, descriptive phrase. In fact,
none of the SPE definitions subsequent to the SEC definitions, even the far more
wordy 1987 and 1998 versions, go that far but only refer to inclusion of prices and
costs prevailing at the time of the estimate, a substantially less demanding
criteria.

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The 1981 SPE
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The 1981 SPE definitions were a joint effort of SPE, AAPG and API in response to
two events. First, the substantial combined impact on the industry and evaluation
practices caused by the end of proration, the OPEC embargo, extreme price
increases in 1973 and 1979, the decline in domestic production, and the
introduction of enhanced recovery to old fields. Second, the adoption by the SEC
and FASB of methods of reporting Proved reserves as part of the required reporting
of public companies and the near-miss of Reserve Recognition Accounting. (See the
SEC Definition).

In 1981, SPE/API/AAPG said:

Proved reserves of crude oil, natural gas, or natural gas liquids are
estimated quantities that geological and engineering data demonstrate with
reasonable certainty to be recoverable in the future from known reservoirs
under existing economic conditions.

This definition is not only shorter than the 1965 language but leaves out any
reference to existing regulatory practices and known oil and gas reservoirs. And,
while it refers to existing economic conditions, there is no mention of current
prices and costs. The complete text of the 1981 definitions is much more
concerned with defining and explaining the petrophysical and operational criteria for
Proved reserves and sub-categories of Proved reserves such as Proved
Undeveloped. At the time, existing economic conditions were that oil prices were at
a peak and (in hindsight) had started to decline, but there was still substantial
speculation that crude oil price would reach $100/Bbl.

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The 1988 SPE
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On October 1, 1988 SPE approved and issued a revised set of definitions of
reserves which improved on the 1981 definitions by adding definitions for Unproved
(Probable and Possible) reserves and expanding the explanation and discussion of
the nature of reserves in general and Proved reserves in particular. This definition
said:

Reserves are estimated volumes of crude oil, condensate, natural gas,
natural gas liquids, and associated substances anticipated to be
commercially recoverable from known accumulations from a given date
forward, under existing economic conditions, by established operating
practices, and under current government regulations. Reserves estimates
are based on interpretation of geologic and/or engineering data available at
the time of the estimate.

Proved reserves can be estimated with reasonable certainty to be
recoverable under current economic conditions. Current economic conditions
include prices and costs prevailing at the time of the estimate. Proved
reserves may be developed or undeveloped.

In the 1988 version, several phrases and terms from 1965 reappear such as
established operating practices (conventional methods and equipment) and
known accumulations (known oil and gas fields). Also reappearing is the use of
existing economic conditions as criteria for reserves generally, but current
economic conditions for Proved reserves. In 1988, SPE makes the effort to state
that, Current economic conditions include prices and costs prevailing at the time of
the estimate. This language is important in relation to the SPEE interpretation and
the Rule 468 usage.
In regard to the distinction between Proved and Unproved, SPE says:

reserves are considered proved if commercial producibility of the
reservoir is supported by actual production or formation tests. The term
proved refers to the estimated volume of reserves and not just of the
productivity of the well or reservoir. In certain instances, proved reserves
may be assigned on the basis of electrical and other type logs and/or core
analysis that indicate subject reservoir is hydrocarbon bearing and is
analogous to reservoirs in the same area that are producing, or have
demonstrated the ability to produce on a formation test.

Further,

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The 1988 SPE
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The area of a reservoir considered proved includes (1) the area delineated
by drilling and defined by fluid contacts, if any, and (2) the undrilled areas
that can be reasonably judged as commercially productive on the basis of
available geologic and engineering data. In the absence of data on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the proved limit unless otherwise indicated by definitive engineering or
performance data. and,

Proved undeveloped reserves are assigned to undrilled locations that
satisfy the following conditions: (1) the locations are direct offsets to wells
that have indicated commercial production in the objective formation, (2) it
is reasonably certain that the locations are within the known proved
productive limits of the objective formation, (3) the locations conform to
existing well spacing regulations, if any, and (4) it is reasonably certain that
the locations will be developed. Reserves for other undrilled locations are
classified as proved undeveloped only in those cases where interpretations
of data from wells indicate that the objective formation is laterally
continuous and contains commercially recoverable hydrocarbons at locations
beyond direct offsets. Finally,

Reserves that can be produced through the application of established
improved recovery methods are included in the proved classification when
(1) successful testing by a pilot project or favorable production or pressure
response of an installed program in that reservoir, or one in the immediate
area with similar rock and fluid properties, provides support for the
engineering analysis on which the project or program is based, and (2) it is
reasonably certain the project will proceed.

In contrast, Unproved Reserves are defined as follows:

Unproved reserves are based on geologic and/or engineering data similar to
that used in estimates of proved reserves; but technical, contractual,
economic, or regulatory uncertainties preclude such reserves being classified
as proved. They may be estimated assuming future economic conditions
different from those prevailing at the time of the estimate.

Probable reserves are less certain than proved reserves and can be
estimated with a degree of certainty sufficient to indicate they are more
likely to be recovered than not.

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The 1988 SPE
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Possible reserves are less than probable reserves and can be estimated
with a low degree of certainty, insufficient to indicate whether they are more
likely to be recovered than not.

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The SPE/WPC
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In March 1997, the Board of Directors, Society of Petroleum Engineers (SPE)
Inc., and the Executive Board, World Petroleum Congresses (WPC) approved a set
of definitions for the Proved Reserves.
Reserves derived under these definitions rely on the integrity, skill, and
judgment of the evaluator and are affected by the geological complexity, stage of
development, degree of depletion of the reservoirs, and amount of available data.
Use of these definitions should sharpen the distinction between the various
classifications and provide more consistent reserves reporting.

Definitions

Reserves are those quantities of petroleum which are anticipated to be
commercially recovered from known accumulations from a given date forward. All
reserve estimates involve some degree of uncertainty. The uncertainty depends
chiefly on the amount of reliable geologic and engineering data available at the
time of the estimate and the interpretation of these data. The relative degree of
uncertainty may be conveyed by placing reserves into one of two principal
classifications, either proved or unproved. Unproved reserves are less certain to be
recovered than proved reserves and may be further sub-classified as probable and
possible reserves to denote progressively increasing uncertainty in their
recoverability.
The intent of the Society of Petroleum Engineers (SPE) and World Petroleum
Congress (WPC) in approving additional classifications beyond proved reserves is to
facilitate consistency among professionals using such terms. In presenting these
definitions, neither organization is recommending public disclosure of reserves
classified as unproved. Public disclosure of the quantities classified as unproved
reserves is left to the discretion of the countries or companies involved.
Estimation of reserves is done under conditions of uncertainty. The method of
estimation is called deterministic if a single best estimate of reserves is made based
on known geological, engineering, and economic data. The method of estimation is
called probabilistic when the known geological, engineering, and economic data are
used to generate a range of estimates and their associated probabilities. Identifying
reserves as proved, probable, and possible has been the most frequent
classification method and gives an indication of the probability of recovery. Because
of potential differences in uncertainty, caution should be exercised when
aggregating reserves of different classifications.
Reserves estimates will generally be revised as additional geologic or
engineering data becomes available or as economic conditions change. Reserves do
not include quantities of petroleum being held in inventory, and may be reduced for
usage or processing losses if required for financial reporting.

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The SPE/WPC
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Reserves may be attributed to either natural energy or improved recovery
methods. Improved recovery methods include all methods for supplementing
natural energy or altering natural forces in the reservoir to increase ultimate
recovery. Examples of such methods are pressure maintenance, cycling, water-
flooding, thermal methods, chemical flooding, and the use of miscible and
immiscible displacement fluids. Other improved recovery methods may be
developed in the future as petroleum technology continues to evolve.

Proved Reserves

Proved reserves are those quantities of petroleum which, by analysis of
geological and engineering data, can be estimated with reasonable certainty to be
commercially recoverable, from a given date forward, from known reservoirs and
under current economic conditions, operating methods, and government
regulations. Proved reserves can be categorized as developed or undeveloped.
If deterministic methods are used, the term reasonable certainty is intended to
express 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.
Establishment of current economic conditions should include relevant historical
petroleum prices and associated costs and may involve an averaging period that is
consistent with the purpose of the reserve estimate, appropriate contract
obligations, corporate procedures, and government regulations involved in
reporting these reserves.
In general, reserves are considered proved if the commercial producibility of the
reservoir is supported by actual production or formation tests. In this context, the
term proved refers to the actual quantities of petroleum reserves and not just the
productivity of the well or reservoir. In certain cases, proved reserves may be
assigned on the basis of well logs and/or core analysis that indicate the subject
reservoir is hydrocarbon bearing and is analogous to reservoirs in the same area
that are producing or have demonstrated the ability to produce on formation tests.
The area of the reservoir considered as proved includes (1) the area delineated
by drilling and defined by fluid contacts, if any, and (2) the undrilled portions of the
reservoir that can reasonably be judged as commercially productive on the basis of
available geological and engineering data. In the absence of data on fluid contacts,
the lowest known occurrence of hydrocarbons controls the proved limit unless
otherwise indicated by definitive geological, engineering or performance data.
Reserves may be classified as proved if facilities to process and transport those
reserves to market are operational at the time of the estimate or there is a
reasonable expectation that such facilities will be installed. Reserves in undeveloped

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The SPE/WPC
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locations may be classified as proved undeveloped provided (1) the locations are
direct offsets to wells that have indicated commercial production in the objective
formation, (2) it is reasonably certain such locations are within the known proved
productive limits of the objective formation, (3) the locations conform to existing
well spacing regulations where applicable, and (4) it is reasonably certain the
locations will be developed. Reserves from other locations are categorized as
proved undeveloped only where interpretations of geological and engineering data
from wells indicate with reasonable certainty that the objective formation is
laterally continuous and contains commercially recoverable petroleum at locations
beyond direct offsets.
Reserves which are to be produced through the application of established
improved recovery methods are included in the proved classification when (1)
successful testing by a pilot project or favorable response of an installed program in
the same or an analogous reservoir with similar rock and fluid properties provides
support for the analysis on which the project was based, and, (2) it is reasonably
certain that the project will proceed. Reserves to be recovered by improved
recovery methods that have yet to be established through commercially successful
applications are included in the proved classification only (1) after a favorable
production response from the subject reservoir from either (a) a representative
pilot or (b) an installed program where the response provides support for the
analysis on which the project is based and (2) it is reasonably certain the project
will proceed.

Unproved Reserves

Unproved reserves are based on geologic and/or engineering data similar to that
used in estimates of proved reserves; but technical, contractual, economic, or
regulatory uncertainties preclude such reserves being classified as proved.
Unproved reserves may be further classified as probable reserves and possible
reserves.
Unproved reserves may be estimated assuming future economic conditions
different from those prevailing at the time of the estimate. The effect of possible
future improvements in economic conditions and technological developments can
be expressed by allocating appropriate quantities of reserves to the probable and
possible classifications.

Probable Reserves

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The SPE/WPC
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Probable reserves are those unproved reserves which analysis of geological and
engineering data suggests 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.
In general, probable reserves may include (1) reserves anticipated to be proved
by normal step-out drilling where sub-surface control is inadequate to classify these
reserves as proved, (2) reserves in formations that appear to be productive based
on well log characteristics but lack core data or definitive tests and which are not
analogous to producing or proved reservoirs in the area, (3) incremental reserves
attributable to infill drilling that could have been classified as proved if closer
statutory spacing had been approved at the time of the estimate, (4) reserves
attributable to improved recovery methods that have been established by repeated
commercially successful applications when (a) a project or pilot is planned but not
in operation and (b) rock, fluid, and reservoir characteristics appear favorable for
commercial application, (5) reserves in an area of the formation that appears to be
separated from the proved area by faulting and the geologic interpretation indicates
the subject area is structurally higher than the proved area, (6) reserves
attributable to a future work-over, treatment, re-treatment, change of equipment,
or other mechanical procedures, where such procedure has not been proved
successful in wells which exhibit similar behavior in analogous reservoirs, and (7)
incremental reserves in proved reservoirs where an alternative interpretation of
performance or volumetric data indicates more reserves than can be classified as
proved.

Possible Reserves

Possible reserves are those unproved reserves which analysis of geological and
engineering data suggests 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.
In general, possible reserves may include (1) reserves which, based on
geological interpretations, could possibly exist beyond areas classified as probable,
(2) reserves in formations that appear to be petroleum bearing based on log and
core analysis but may not be productive at commercial rates, (3) incremental
reserves attributed to infill drilling that are subject to technical uncertainty, (4)
reserves attributed to improved recovery methods when (a) a project or pilot is
planned but not in operation and (b) rock, fluid, and reservoir characteristics are
such that a reasonable doubt exists that the project will be commercial, and (5)

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The SPE/WPC
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reserves in an area of the formation that appears to be separated from the proved
area by faulting and geological interpretation indicates the subject area is
structurally lower than the proved area.

Reserve Status Categories

Reserve status categories define the development and producing status of wells
and reservoirs.

Developed: Developed reserves are expected to be recovered from existing
wells including reserves behind pipe. Improved recovery reserves are considered
developed only after the necessary equipment has been installed, or when the costs
to do so are relatively minor. Developed reserves may be sub-categorized as
producing or non-producing.

Producing: Reserves subcategorized as producing are expected to be
recovered from completion intervals which are open and producing at the
time of the estimate. Improved recovery reserves are considered producing
only after the improved recovery project is in operation.

Non-producing: Reserves subcategorized as non-producing include shut-in
and behind-pipe reserves. Shut-in reserves are expected to be recovered
from (1) completion intervals which are open at the time of the estimate but
which have not started producing, (2) wells which were shut-in for market
conditions or pipeline connections, or (3) wells not capable of production for
mechanical reasons. Behind-pipe reserves are expected to be recovered from
zones in existing wells, which will require additional completion work or future
recompletion prior to the start of production.

Undeveloped Reserves: Undeveloped reserves are expected to be recovered:
(1) from new wells on undrilled acreage, (2) from deepening existing wells to a
different reservoir, or (3) where a relatively large expenditure is required to (a)
recomplete an existing well or (b) install production or transportation facilities for
primary or improved recovery projects.

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SPE-WPC-AAPG
Definitions
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In February 2000, the Board of Directors, Society of Petroleum Engineers (SPE)
Inc., the Executive Board, World Petroleum Congresses (WPC), and the Executive
Committee, American Association of Petroleum Geologists (AAPG), approved a set
of definitions for the Proved Reserves.
Estimates derived under these definitions rely on the integrity, skill, and
judgment of the evaluator and are affected by the geological complexity, stage of
exploration or development, degree of depletion of the reservoirs, and amount of
available data. Use of the definitions should sharpen the distinction between various
classifications and provide more consistent resources reporting.

Definitions

The resource classification system is summarized in Figure 1 and the relevant
definitions are given below. Elsewhere, resources have been defined as including all
quantities of petroleum which are estimated to be initially-in-place; however, some
users consider only the estimated recoverable portion to constitute a resource. In
these definitions, the quantities estimated to be initially-in-place are defined as
Total Petroleum-initially-in-place, Discovered Petroleum-initially-in-place, and
Undiscovered Petroleum-initially-in-place, and the recoverable portions are defined
separately as Reserves, Contingent Resources and Prospective Resources. In any
event, it should be understood that reserves constitute a subset of resources, being
those quantities that are discovered (i.e. in known accumulations), recoverable,
commercial and remaining.

Total Petroleum Initially In Place

Total Petroleum-initially-in-place is that quantity of petroleum which is estimated
to exist originally in naturally occurring accumulations. Total Petroleum-initially-in-
place is, therefore, that quantity of petroleum which is estimated, on a given date,
to be contained in known accumulations, plus those quantities already produced
therefrom, plus those estimated quantities in accumulations yet to be discovered.
Total Petroleum-initially-in-place may be subdivided into Discovered Petroleum-
initially-in-place and Undiscovered Petroleum-initially-in-place, with Discovered
Petroleum-initially-in-place being limited to known accumulations.
It is recognized that all Petroleum-initially-in-place quantities may constitute
potentially recoverable resources since the estimation of the proportion which may
be recoverable can be subject to significant uncertainty and will change with
variations in commercial circumstances, technological developments and data
availability. A portion of those quantities classified as Unrecoverable may become

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SPE-WPC-AAPG
Definitions
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recoverable resources in the future as commercial circumstances change,
technological developments occur, or additional data are acquired.

Discovered Petroleum Initially In Place

Discovered Petroleum-initially-in-place is that quantity of petroleum which is
estimated, on a given date, to be contained in known accumulations, plus those
quantities already produced therefrom. Discovered Petroleum-initially-in-place may
be subdivided into Commercial and Sub-commercial categories, with the estimated
potentially recoverable portion being classified as Reserves and Contingent
Resources respectively, as defined below.

Reserves

Reserves are defined as those quantities of petroleum which are anticipated to
be commercially recovered from known accumulations from a given date forward.
Reference should be made to the full SPE/WPC Petroleum Reserves Definitions for
the complete definitions and guidelines.
Estimated recoverable quantities from known accumulations which do not fulfill
the requirement of commerciality should be classified as Contingent Resources, as
defined below. The definition of commerciality for an accumulation will vary
according to local conditions and circumstances and is left to the discretion of the
country or company concerned. However, reserves must still be categorized
according to the specific criteria of the SPE/WPC definitions and therefore proved
reserves will be limited to those quantities that are commercial under current
economic conditions, while probable and possible reserves may be based on future
economic conditions. In general, quantities should not be classified as reserves
unless there is an expectation that the accumulation will be developed and placed
on production within a reasonable timeframe.
In certain circumstances, reserves may be assigned even though development
may not occur for some time. An example of this would be where fields are
dedicated to a long-term supply contract and will only be developed as and when
they are required to satisfy that contract.

Contingent Reserves

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SPE-WPC-AAPG
Definitions
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Contingent Resources are those quantities of petroleum which are estimated, on
a given date, to be potentially recoverable from known accumulations, but which
are not currently considered to be commercially recoverable.
It is recognized that some ambiguity may exist between the definitions of
contingent resources and unproved reserves. This is a reflection of variations in
current industry practice. It is recommended that if the degree of commitment is
not such that the accumulation is expected to be developed and placed on
production within a reasonable timeframe, the estimated recoverable volumes for
the accumulation be classified as contingent resources.
Contingent Resources may include, for example, accumulations for which there
is currently no viable market, or where commercial recovery is dependent on the
development of new technology, or where evaluation of the accumulation is still at
an early stage.

Undiscovered Petroleum Initially In Place

Undiscovered Petroleum-initially-in-place is that quantity of petroleum which is
estimated, on a given date, to be contained in accumulations yet to be discovered.
The estimated potentially recoverable portion of Undiscovered Petroleum-initially-
in-place is classified as Prospective Resources, as defined below.

Prospective Resources

Prospective Resources are those quantities of petroleum which are estimated, on
a given date, to be potentially recoverable from undiscovered accumulations.

Estimated Ultimate Recovery

Estimated Ultimate Recovery (EUR) is not a resource category as such, but a
term which may be applied to an individual accumulation of any status/maturity
(discovered or undiscovered). Estimated Ultimate Recovery is defined as those
quantities of petroleum which are estimated, on a given date, to be potentially
recoverable from an accumulation, plus those quantities already produced
therefrom.

Aggregation

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SPE-WPC-AAPG
Definitions
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Petroleum quantities classified as Reserves, Contingent Resources or Prospective
Resources should not be aggregated with each other without due consideration of
the significant differences in the criteria associated with their classification. In
particular, there may be a significant risk that accumulations containing Contingent
Resources or Prospective Resources will not achieve commercial production.

Range of Uncertainty

The Range of Uncertainty, as shown in Figure 1, reflects a reasonable range of
estimated potentially recoverable volumes for an individual accumulation. Any
estimation of resource quantities for an accumulation is subject to both technical
and commercial uncertainties, and should, in general, be quoted as a range. In the
case of reserves, and where appropriate, this range of uncertainty can be reflected
in estimates for Proved Reserves (1P), Proved plus Probable Reserves (2P) and
Proved plus Probable plus Possible Reserves (3P) scenarios. For other resource
categories, the terms Low Estimate, Best Estimate and High Estimate are
recommended.
The term "Best Estimate" is used here as a generic expression for the estimate
considered being the closest to the quantity that will actually be recovered from the
accumulation between the date of the estimate and the time of abandonment. If
probabilistic methods are used, this term would generally be a measure of central
tendency of the uncertainty distribution (most likely/mode, median/P50 or mean).
The terms "Low Estimate" and "High Estimate" should provide a reasonable
assessment of the range of uncertainty in the Best Estimate.
For undiscovered accumulations (Prospective Resources) the range will, in
general, be substantially greater than the ranges for discovered accumulations. In
all cases, however, the actual range will be dependent on the amount and quality of
data (both technical and commercial) which is available for that accumulation. As
more data become available for a specific accumulation (e.g. additional wells,
reservoir performance data) the range of uncertainty in EUR for that accumulation
should be reduced.

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SPE-WPC-AAPG
Definitions
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Figure 1 is a graphical representation of the definitions. The horizontal axis
represents the range of uncertainty in the estimated potentially recoverable volume
for an accumulation, whereas the vertical axis represents the level of
status/maturity of the accumulation. Many organizations choose to further sub-
divide each resource category using the vertical axis to classify accumulations on
the basis of the commercial decisions required to move an accumulation towards
production. As indicated in Figure 1, the Low, Best and High Estimates of potentially
recoverable volumes should reflect some comparability with the reserves categories
of Proved, Proved plus Probable and Proved plus Probable plus Possible,
respectively. While there may be a significant risk that sub-commercial or
undiscovered accumulations will not achieve commercial production, it is useful to
consider the range of potentially recoverable volumes independently of such a risk.

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SPE-WPC-AAPG
Definitions
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If probabilistic methods are used, these estimated quantities should be based on
methodologies analogous to those applicable to the definitions of reserves;
therefore, in general, there should be at least a 90% probability that, assuming the
accumulation is developed, the quantities actually recovered will equal or exceed
the Low Estimate. In addition, an equivalent probability value of 10% should, in
general, be used for the High Estimate. Where deterministic methods are used, a
similar analogy to the reserves definitions should be followed.
As one possible example, consider an accumulation that is currently not
commercial due solely to the lack of a market. The estimated recoverable volumes
are classified as Contingent Resources, with Low, Best and High estimates. Where a
market is subsequently developed, and in the absence of any new technical data,
the accumulation moves up into the Reserves category and the Proved Reserves
estimate would be expected to approximate the previous Low Estimate.

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UNFC
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The United Nations Framework Classification (UNFC) for Energy and Mineral
Resources is a universally applicable scheme for classifying/evaluating energy and
mineral reserves/resources. Most importantly, it allows a common and necessary
international understanding of these classifications/evaluations. The Classification is
designed to allow the incorporation of currently existing terms and definitions into
this framework and thus to make them comparable and compatible. This approach
has been simplified through the use of a three-digit code clearly indicating the
essential characteristics of extractable energy and mineral commodities in market
economies, notably:
degree of economic/commercial viability;
field project status and feasibility; and
level of geological knowledge.

The UNFC is a flexible system that is capable of meeting the requirements for
application at national, industrial and institutional level, as well as to be successfully
used for international communication and global assessments. It meets the basic
needs for an international standard required to support rational use of resources,
improve efficiency in management, and enhance the security of both energy
supplies and of the associated financial resources. Furthermore, the new
classification will assist countries with transition economies in reassessing their
energy and mineral resources according to the criteria used in market economies.
The Classification is harmonized with the SPE/WPC/AAPG Petroleum Resource
Classification; with the IAEA/NEA Classification of Uranium Reserves/Resources;
and with the CMMI/CRIRSCO Definitions for Mineral Reserves/Resources. During its
completion, intensive consultations were held with a number of professional and
intergovernmental organizations dealing with reserves evaluation, management and
accounting.

Background

The UNECE Working Party on Coal initiated the first version of the United Nations
Framework Classification for Solid Fuels and Mineral Commodities in 1992, on the
basis of a proposal made by the German Government. The same principles had
already been applied in a classification originally developed by Mr. Dietmar Kelter,
Federal Institute for Geosciences and Natural Resources, Hanover, in 1991. Over a
period of six years, the UN Task Force, chaired by Mr. Kelter, designed and
elaborated it with the substantial contribution and support of more than 50
countries and organizations worldwide. At its annual session in 1997, the ECOSOC
recommended to all UN member countries to apply the Classification to their coal
and mineral sectors (ECOSOC Decision 226/1997). Since then, the Classification

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has been applied in more than 60 countries worldwide, number of them introduced
the UNFC as a national system, and others adapted their national systems to the
UNFC principles.
In October 1998, the UNECE Task Force and CMMI Expert Group reached an
agreement to integrate their respective definitions into a single, universally
applicable set of definitions. The joint UN/CMMI definitions for mineral and reserves
and resources were completed in November 1999 (Document ENERGY/2000/11).
After considering the successful work done by the UN Task Force on UNFC for
Solid Fuels and Mineral Commodities, the UNECE Committee on Sustainable Energy
decided, at its eleventh session in November 2001, to create an Intergovernmental
Ad Hoc Group of Experts on the Harmonization of Energy Reserves/Resources
Terminology (ECE/ENERGY/47, para.13). The main purpose of the Ad Hoc Group of
Experts was to extend the principles of the UNFC for Solid Fuels and Mineral
Commodities to other energy resources (oil, natural gas and uranium) covering the
specific aspects of each energy commodity, and thus to define the different terms
and definitions.
In order to achieve this objective, the Ad Hoc Group of Experts was split into
three sub-groups, covering separately coal and minerals, petroleum, and uranium,
and they attempted to harmonize each commodity classification with the three
major internationally recognized energy resource classifications, namely: the
UN/CMMI for coal; the SPE/WPC/AAPG for petroleum; and the IAEA/NEA for
uranium. Substantive work was done in cooperation with the above-mentioned
organizations. In addition to this, several national classification systems played an
important role in the harmonization process including the recently revised national
classification of the Russian Federation.
At its thirteenth session in November 2003, the UNECE Committee on
Sustainable Energy adopted the Classification and recommended its application to
all countries worldwide whilst recognizing the fact that the majority of energy and
mineral deposits are located outside the UNECE region. In order to facilitate such
an acceptance on a worldwide scale, the Committee asked the UN Economic
Commission for Europe to endorse the Classification and submit a proposal for
ECOSOC consideration, at its annual session in June 2004 (Document
ECE/ENERGY/53/Corr.1, para.16 (v)).
In addition, the Committee requested that the Ad Hoc Group should continue its
work for another two-year period and recommended appropriate initiatives to
cooperate with relevant institutions and to promote the practical implementation of
UNFC. This includes following the development of related standards and ensuring
further harmonization between these and the UNFC. If required, this may involve
issuing guidelines for the application of the UNFC. An example of such standards is
the foreseen International Financial Accounting Standards for the Extractive
Industries, under consideration by the International Accounting Standards Board

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(IASB). Promotion of the UNFC also includes the holding of regional seminars, and
the creation of national teams and international expert groups, to provide advisory
assistance to countries and regions in harmonizing national classifications with the
UNFC principles. The first seminar following this recommendation was organized
jointly by UNECE, the United Nations Economic and Social Commission for Western
Asia (UNESCWA), the Organization of Petroleum Exporting Countries (OPEC) and
the United Nations Statistical Division (UNSD), in Beirut, Lebanon, in June 2004, for
the benefit of OPEC/UNESCWA Middle East Member States.
At its fifty-ninth session in February 2004, the UN Economic Commission for
Europe endorsed the United Nations Classification for Energy and Mineral Resources
and proposed to the ECOSOC that it recommend its application worldwide
(document E/2004/37- E/ECE/1416).

Total Initial Resources

The total resources initially in-place of naturally occurring energy and mineral
resources, are described in terms of:
Produced quantities,
Remaining recoverable quantities, and
Additional quantities remaining in-place.

The main focus of the UNFC is on remaining recoverable quantities.

Figure 1: Total initial in-place resources

For non-renewable resources, the total resources initially in-place is constant. In
inventories, material balance is therefore maintained. If any change appears, this
must be explained by a re-evaluation.

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Produced quantities

Produced quantities are included in the UNFC to facilitate explanation of
changes in remaining recoverable quantities resulting from production that
has already occurred.
Produced quantities are the sum of sales quantities and non-sales
quantities as determined at their respective reference points between a
specified initial time (often the time of first recorded production) up to a
given date and time (normally the time of the evaluation). Non-sales
quantities are considered to have intrinsic economic value.

Remaining recoverable quantities

Remaining recoverable quantities are the sum of sales quantities and non-
sales quantities estimated to be produced at the respective reference points
from a given date and time forward.

Additional quantities remaining in-place

Additional quantities remaining in-place are quantities estimated to be in-
place at the initial time, less the sum of the produced quantities and the
estimated remaining recoverable quantities.
Additional quantities remaining in-place are described in non-economic
terms only. Their recoverability and, as a result, their economic viability, has
not been assessed. Alternatively quantities may be non-economic in the
sense that they may not be recovered in the future, although they may be an
integral part of the recovery operations. Both forms of additional quantities
remaining in place may hold intrinsic economic value, as do the recoverable
non-sales quantities.

Classifications

Total remaining resources are categorized using the three essential criteria
affecting their recoverability:
Economic and commercial viability (E).
Field project status and feasibility (F).
Geological knowledge (G).

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Most of the existing resource classifications recognize these explicitly or
implicitly. By making them explicit, the UNFC becomes a framework that allows for
harmonization of existing classifications. The three criteria are easily visualized in
three dimensions as shown in Figure 2.

Figure 2: Principal elements of the UNFC

Three main categories are used to describe economic and commercial viability,
three to describe field project status and feasibility and four to describe the level of
geological knowledge. Further subdivision of the main categories is useful for
special applications. Resource quantities are then grouped into classes that are
defined by an E a F and a G category represented by the sub-cubes in Figure 3. A
class of quantities may be a single sub-cube, i.e. 111, or a collection of sub-cubes.
Total resources are an example of such a class where all sub-cubes are included in
he class.

Figure 3: Classification

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E
Fig. 1b
E
c
o
n
o
m
i
c

A
x
i
s
T
o
t
a
l

R
e
s
o
u
r
c
e
s
E
Fig. 1b
E
c
o
n
o
m
i
c

A
x
i
s
T
o
t
a
l

R
e
s
o
u
r
c
e
s
The three dimensions of categorization are represented by the edges of a cube.
The digits are quoted in the order EFG firstly because the alphabetical order is easy
to memorize, and secondly because the first digit refers to the economic viability,
which is of decisive interest to producers, investors and host countries.
Numbers are used to designate the different classes. Number 1, in accordance with
the usual perception that the first is the best, refers to the highest degree of
economic viability on the E axis, the most advanced project status on the F axis and
the highest quality assessment on the G axis. The use of categories is different for
fluids and for solids. This is primarily due to the fact that fluids may flow in a
reservoir, irrespective of the level of geological knowledge. In the case of solids,
recovery will normally be restricted to rock bodies that have been reliably assessed.

Codification

Due to variation between terminologies in different systems and languages, it is
recommended to use only three-digit numeric codes for individual categories, so
that they will be universally understood. For this to be possible, the sequence is
always fixed, so that the quantity characterized as E1;F1;G1 may be written in
number form as 111, independent of languages. In practice, only a limited number
of combinations (classes) are valid.
To illustrate, the UNFC for coal, uranium and other solid minerals, shown in Figure
5 may be expanded in Figure 4.

Figure 4: Three-digit codification

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Class 111 is of prime interest to an investor. It refers to quantities that are:
economically and commercially recoverable (number 1 as the first digit); have been
justified by means of a feasibility study or actual production to be technically
recoverable (number 1 as the second digit); and are based on reasonably assured
geology (detailed exploration for solids) (number 1 as the third digit).
Subcategories may be added under the main categories when required.
Categories and sub-categories shall be numbered. A sub-category shall be
separated from the main category number by a decimal point, e.g. E1.1. In such
cases the categories have to be separated by a semicolon to distinguish the
different categories that are included in the codified unit, e.g. 1.1;1;1 for the
subcategory defined by E1.1, F1and G1.
A single geological deposit or accumulation of a recoverable quantity may be
subject to production by several separate and distinct projects that are at different
stages of exploration or development. The estimated remaining recoverable
quantities obtained through each such project may be categorized separately.

Figure 5: UNFC as applied to coal, uranium and other solid minerals

Harmonisation

The incorporation of existing classification systems into the UNFC and their
comparison is simplified by means of codification acting as an interface. Existing
resource inventories that are classified using one or two of the sets of criteria may
initially be retained projecting the resources onto the relevant axis or plane of the
UNFC. As resources are being re-evaluated, the missing categories are easily
identified, allowing the old inventory to be migrated into a full UNFC inventory.
Taking examples from petroleum, this may apply to a pre-existing Russian
inventory [9], categorized primarily with respect to the level of geological
knowledge (the G-axis); an inventory based on the SPE/WPC/AAPG classification,

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categorized primarily with respect to field project status (the F-axis), or an
inventory based on McKelveys classification [10,11] in the G-E plane.

Quantification

Quantities in classes may be represented by one or more discrete estimates or
by a probability distribution that reflects the range of uncertainty in the estimate of
that quantity. When a quantity is represented by a probability distribution, a low, a
best and a high estimate shall be quoted:
The low estimate shall have a 90% probability of being exceeded and shall be
designated P
90
.
The best estimate shall be any of the mean (expected) value, the most
probable (mode) value or the median (P
50
) value. It shall be stated which
statistical measure has been used for the estimate.
The high estimate shall have a 10% probability of being exceeded and shall
be designated P
10
.

When a quantity is represented by several discrete estimates there shall be
quoted, as a minimum, a low, a best and a high estimate, where such estimates
shall reflect the same principles, and approximately the same probabilities, as
would be associated with estimates derived from a probability distribution and
quoted above.
When a quantity is represented by a single discrete estimate, this shall be the best
estimate unless otherwise stated.

Data registration

Codification has the advantage of providing a short, unambiguous identification
of the reserve/resource categories that facilitates computer processing of data and
exchange of information. This is particularly important when using information on
probabilities.
For practical use in deterministic applications, the three-dimensional model can
also be presented in a two-dimensional matrix, showing the third (economic)
dimension within the individual boxes.
Table 1 illustrates how information may be recorded in a matrix for coal,
uranium and other solid minerals. The main consecutive stages of geological
knowledge are shown on the horizontal axis. They define reserve/resource
categories according to degree of geological and, where relevant, geotechnical
assurance. Along the vertical axis, the main feasibility assessment stages are

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UNFC
National
system
1 111 112 113
3 311 312 313
1 121 122 123
2 221 222 223
3 321 322 323
3 331 332 333 334
Contingent
Project undefined
Justified
Reasonably assured
geological conditions
Inferred geological
conditions
Prospective geological
conditions
Estimated geological
conditions

UN International
Framework Detailed Exploration General Exploration Prospecting Reconnaissance
Nationall
System
1 (111)
2 (211)
usually
1 (121) + (122)
not
2 (221) + (222)
relevant
3 (331) 3 (332) 3 (333) 3 (334)
Economic Viability 1: economic 3: intrinsically economic (economic to potentially economic)
Categories: 2: potentially economic
Feasibility Study
and/or Mining
Report
Prefeasibility
Study
Geological
Study*)
introduced as a yardstick to rank reserves/resources according to the amount of
detail with which the feasibility assessment has been carried out. These reflect the
degree of assurance of the reserve/resource figures with respect to economic
viability. The actual result of the feasibility assessment, i.e. the economic viability
of the deposit, is depicted using the third dimension. The matrix presentation of the
classification is shown in Table 1. Similarly, Table 2 shows the matrix for petroleum.

Table 1: The UNFC in matrix form applied to coal, uranium and other solid minerals

Table 2: UNFC in matrix form applied to petroleum

Economic Viability 1: E1 (Economic) 2: E2 (Potentially Economic) 3: E3 (Intrinsically Economic) Categories

Determination of commerciality

Quantities in classes may be considered commercially producible if the entity,
company or government claiming commerciality (the reporter) has the intention of
developing and producing them and such intention is based upon:

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A reasonable assessment of the future economics of such production being
satisfactory;
A reasonable expectation that there is a market for all or substantially all the
expected sales quantities of production;
Evidence that the necessary production and transportation facilities are
available or can be made available; and
Evidence that legal, contractual, environmental and other social and economic
concerns will allow the recovery project to be realized.

The commercial value of the quantities would generally be the present value of
future cash flows obtainable as a result of the production of the recoverable
quantities. The calculation shall reflect:
1. The expected quantities of production whose value is measured.
2. The estimated costs associated with the project to develop, recover and
produce the quantities of production at its reference point, including
environmental and abandonment costs charged to the project based on costs
already incurred and the reporters view of the costs expected to apply in
future periods.
3. The estimated revenues from the quantities of production based on the
reporters view of the prices expected to apply to the respective commodities
in future periods. Such prices are to be based on reliable data, the basis of
which and reason why the reporter considers such price assumptions to be
appropriate should be disclosed. Examples of such reliable data are agreed
contract prices, the published forward price curve for the appropriate
commodity, an average of a group of analysts forecast prices and an average
of historic achieved prices if this is considered to be a good estimate of the
applicable future price.
4. The portion of the costs and revenues accruing to the reporter.
5. Future production and revenue related taxes and royalties expected to be paid
by the reporter.
6. The application of discount rates that reflect a specific risk or uncertainty
associated with the estimated future cash flows. Where risk is reflected in the
discount rate, estimates of future revenues and costs should be discounted at
a rate appropriate to that cash stream.

The basis of the reporters view of commercial conditions and the related
assumptions used in calculating the commercial value shall accompany the
statement of his view.

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Qualified Person

The studies referred to in the UNFC must be undertaken by a person(s) with the
appropriate qualifications to assess resources/reserves of the type of commodity in
question. The qualifications and experience required will vary from country to
country. In certain circumstances licensing may be required.

The UNFC applied to petroleum

Categories

Figure 6 represents an expanded three-dimensional layout showing the
codified classes that are applicable in practice for petroleum.

Figure 6: UNFC as applied to petroleum

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The F-axis for Petroleum and More General UNFC Terminology

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The following categories of the three sets of criteria shall be used for petroleum:
Table 3: Categories and subcategories for Petroleum
Categories and sub-
categories

E1 Economic
E1.1 Normal Economic
E1.2 Exceptional Economic
E2 Potentially economic
E2.1 Marginal Economic
E2.2 Sub-Marginal Economic
E3 Intrinsically Economic
E3.1 Non-sales
E3.2 Undetermined
E3.3 Unrecoverable
F1 Justified Development and/or Production
Project
F1.1 Project in Production
F1.2 Committed Development Project
F1.3 Uncommitted Development Project
F2 Contingent development project
F2.1 Under Justification
F2.2 Unclarified or On hold
F2.3 Not Viable
F3 Project Undefined
G1 Reasonably Assured Geological Conditions
G2 Estimated Geological Conditions
G3 Inferred Geological Conditions
G4 Potential Geological Conditions

Classes of remaining petroleum quantities

Classes of remaining recoverable quantities of petroleum may be defined by
using combinations of E, F and G categories. Four such classes are:

1. Reserves: code 111,112,113
2. Contingent Resources: code 121,122,123,221,222,223,321,322,323,331,332,333.
3. Prospective Resources: code 334. Committed Reserves are subset of reserves restricted
to F1.1 and F1.2.

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Unrecoverable quantities: are estimated to remain in-place after the completion
of all relevant development and production projects. It is therefore not practical to
categorize them by field project status and technical feasibility. Classes of
unrecoverable quantities are defined with respect to geological assessment G. Their
economic viability is categorized as E3.2. They may be visualised to be contained in
the front row of the unnumbered colourless boxes in Figure 6.
As an example, a class of unrecoverable quantities in an accumulation where the
geology is Reasonably Assured will be defined by categories E3.2, all of F1 and F2
and F3, G1, or in numerical codes: 3.2;1;1 and 3.2;2;1 and 3.2;3;1.

Proved, Probable and possible petroleum reserves

Proved petroleum reserves are specifically defined below. The terms probable
and possible petroleum reserves are broad terms that are widely used in the
petroleum industry. The meaning assigned to them varies. The SPE/WPC
definitions, seen in the context of the SPE/WPC/AAPG resource classification, relate
proved + probable (2P) reserves directly to the best estimate of committed
reserves as defined above. Likewise, proved + probable + possible (3P) reserves
relate directly to the high estimate of committed reserves.
In order to make full use of the precision offered by the UNFC, it is
recommended not to use the broader, and somewhat ambiguous, terms probable
and possible reserves. Instead, the terms low, best and high estimates may be
used stating precisely the classes of interest.
In the context of geological knowledge, which includes considerations of
reservoir production characteristics, it is intended that category G1 would generally
correspond to the level of technical confidence required for proved reserves.
Similarly, categories G2 and G3 correspond to the levels of confidence associated
with probable and possible reserves respectively. A particular assessment must
however also include appropriate consideration of the level of confidence resulting
from uncertainties with respect to economic and commercial viability and with
respect to field project status and feasibility.

Proved petroleum reserves

Proved reserves are a specifically defined subset of Committed Reserves. Proved
reserves are those quantities of petroleum which, by analysis of geological and
engineering data, can be estimated with reasonable certainty to be commercially
recoverable, from a given date forward, from known accumulations and under

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current economic conditions, operating methods, and government regulations.
Proved reserves can be categorized as developed or undeveloped.
probabilistic methods are used, there should be at least a 90% probability that the
Proved developed reserves are a particularly important subset of proved
reserves. They allow the recognition of reserves for which the investments have
been made and are accounted for. They are defined as follows:
Proved developed reserves are quantities of proved reserves that are estimated to
be recovered from existing wells and which will be processed and transported to
market using facilities and infrastructure that exist at the date of the estimate.

Categories

2004 Coal, uranium and other solid
minerals
2004 Petroleum
Cat.
Label Definition Label Definition
E1 Econom
ic
Quantities, reported in
tonnes/volume with
grade/quality, demonstrated by
means of a pre-feasibility study,
feasibility study or mining report,
in order of increasing accuracy,
that justify extraction under the
technological, economic,
environmental and other
relevant commercial conditions,
realistically assumed at the time
of the determination.

Economi
c

Production is justified under
the technological, economic,
environmental and other
relevant commercial
conditions, realistically
assumed or specified at the
time of the estimation

E1.1 Normal
Economi
c
Extraction is justified under
competitive market conditions.
Thus, the average value of the
commodity mined per year must
be such as to satisfy the required
return on investment.

Normal
Economic
Production is justified under
normal economic conditions.
Assumptions regarding future
economic conditions may be
constrained by regulation.
E1.2 Exceptio
nal
Economi
c
Exceptional (conditional)
economic quantities are at
present not economic to extract
under normal economic
conditions. Their extraction is
made possible through
government subsidies and/or
other considerations.

Exception
al
Economic
Exceptional economic
quantities are at present not
economic to produce under
normal economic conditions.
Their production is made
possible through government
subsidies and/or other
considerations.

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minerals
2004 Petroleum
E2 Potenti
ally
Econom
ic

tonnes/volume with
grade/quality, demonstrated by
means of a pre-feasibility study,
feasibility study or mining Report,
in order of increasing accuracy,
not justifying extraction under
the technological, economic,
environmental and other relevant
commercial conditions,
realistically assumed at the time
of the determination, but possibly
so in the future.

Potentia
lly
Economi
c
Production is not justified
under the technological,
economic, environmental and
other relevant commercial
conditions, realistically
assumed at the time of the
estimation, but which may
become justified in the
future.

E2.1 Marginal
Economi
c
Marginal economic quantities are
quantities that at the time of
determination are not economic,
but border on being so. They may
become economic in the
foreseeable future as a result of
changes in technological,
economic, environmental and/or
other relevant commercial
conditions.

Marginal
Economic
Marginal economic quantities
are quantities that at the
time of determination are not
economic, but border on
being so. They may become
economic in the foreseeable
future as a result of changes
in technological, economic,
environmental and/or other
relevant commercial
conditions.

E2.2 Sub-
Marginal
Economi
c
Sub-marginal economic
quantities are quantities that
would require a substantially
higher commodity price or a
major cost-reducing advance in
technology to render them
economic.

Sub-
Marginal
Economic
Sub-marginal economic
quantities are quantities that
would require a substantially
higher commodity price or a
major cost-reducing advance
in technology to render them
economic.

E3 Intrinsi
cally
Econom
ic
tonnes/volume with
grade/quality, estimated by
means of a geological study to be
of intrinsic economic interest.
Since the geological study
includes only a preliminary
evaluation of economic viability,
no distinction can be made
between economic and
potentially economic. These
resources are therefore said to lie
in the range of economic to
potentially economic. Generally
only in-situ quantity figures are
reported.
Intrinsic
ally
Economi
c

Quantities that are of
undetermined economic
viability or are of no
economic interest
(unrecoverable).

E3.1 Not used Non-sales Quantities that will be
produced but not sold

E3.2 Not used . Undeterm
ined
Economic viability
undetermined.

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minerals
2004 Petroleum
E3.3 Not used

Unrecove
rable
Additional quantities
remaining in-place, i.e. the
quantities initially in-place
less the produced and
remaining recoverable
quantities.

F1 Mining
Report
and/or
Feasibil
ity
Study
Mining Report and/or Feasibility
Study has demonstrated
extraction of the reported
quantities to be justified.

Cost data must be reasonably
accurate, and no further
investigations should be
necessary to make the
investment decision. The
information basis associated with
this level of accuracy comprises
the reserve figures based on the
results of detailed exploration,
technological pilot tests and
capital and operating cost
calculations such as quotations of
equipment suppliers.

Justified
Develop
ment
and/or
Producti
on
Project
Development and/or
production plans have
demonstrated production of
the reported quantities to be
justified.
F1.1 Mining
Report
A Mining Report is understood as
the current documentation of the
state of development and
exploitation of a deposit during
its economic life including current
mining plans. The operator of the
mine generally makes it. The
study takes into consideration the
quantity and quality of the
minerals extracted during the
reporting time, changes in
categories of economic viability
due to changes in prices and
costs, development of relevant
technology, newly imposed
environmental or other
regulations, and data on
exploration conducted
concurrently with mining.

It presents the current status of
the deposit, providing a detailed
and accurate, up-to-date
statement on the reserves and
the remaining resources.

Project in
Productio
n
The development project is
completed and the facilities
are producing.

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minerals
2004 Petroleum
F1.2 Not used Committe
d
Develop
ment
Project
Development projects for
recovery of a commodity are
committed when firm
commitments have been
made for the expenditures
and activities needed to bring
a discovered accumulation to
the production stage.

Undeveloped projects are
committed only when it can
be clearly demonstrated that
there is intent to develop
them and bring them to
production. Intent may be
demonstrated with funding /
financial plans, declarations
of commerciality, regulatory
approvals and satisfaction of
other conditions that would
otherwise prevent the project
from being developed and
brought to production.

These commitments should
be unconditional, except for
timing that may be
dependent on the
development of prior
committed projects. An
example of this would be
where production is
dedicated to a long-term
sales contract and will only
be developed as and when
the capacity is required to
satisfy the contract.

F1.3 Feasibilit
y Study
A Feasibility Study assesses in
detail the technical soundness
and economic viability of a
mining project, and serves as the
basis for the investment decision
and as a bankable document for
project financing. The study
constitutes an audit of all
geological, engineering,
environmental, legal and
economic information
accumulated on the project.
Generally, a separate
environmental impact study is
required.

Uncommi
tted
Develop
ment
Project
Development plans have
demonstrated production of
the reported quantities to be
justified, but commitments to
carry out the development
works have not yet been
made.

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minerals
2004 Petroleum
F2 Pre-
feasibili
ty
Study
A Pre-feasibility Study provides a
preliminary assessment of the
economic viability of a deposit
and forms the basis for justifying
further investigations (detailed
exploration and feasibility study).
It usually follows a successful
exploration campaign, and
summarizes all geological,
engineering, environmental, legal
and economic information
accumulated to date on the
project.
The pre-feasibility study
addresses the items listed under
the feasibility study, although not
in as much detail.
Conting
ent
Develop
ment
Project
Development and production
of recoverable quantities has
not been justified, due to
conditions that may or may
not be fulfilled.
F2.1 Not used Under
Investiga
tion
Activities are ongoing to
justify development and
production in the foreseeable
future.

F2.2 Not used Unclarifie
d or On
hold
Activities to justify
development and production
are unclarified or temporarily
suspended.

F2.3 Not used Not
Viable
Investigations have indicated
that development and
production will not be
technically justified.

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UNFC
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minerals
2004 Petroleum
F3 Geologi
cal
Study

A Geological Study is an initial
evaluation of economic viability.
This is obtained by applying
meaningful cut-off values for
grade, thickness, depth, and
costs estimated from comparable
mining operations.
Economic viability categories,
however, cannot in general be
defined from the Geological
Study because of the lack of
detail necessary for an Economic
viability evaluation. The resource
quantities estimated may indicate
that the deposit is of intrinsic
economic interest, i.e. in the
range of economic to potentially
economic.
A Geological Study is generally
carried out in the following four
main stages: reconnaissance,
prospecting, general exploration
and detailed exploration (as
defined below). The purpose of
the geological study is to identify
mineralization, to establish
continuity, quantity, and quality
of a mineral deposit, and thereby
define an investment opportunity.

Project
Undefin
ed
Project evaluation is
incomplete or lacks sufficient
definition to establish
feasibility. This includes
projects aiming to identify
the presence of petroleum
accumulation(s) or projects
to improve recovery.

G1 Detaile
d
Explora
tion
Detailed exploration involves the
detailed three-dimensional
delineation of a known deposit
achieved through sampling, such
as from outcrops, trenches,
boreholes, shafts and tunnels.
Sampling grids are closely spaced
such that size, shape, structure,
grade, and other relevant
characteristics of the deposit are
established with a high degree of
accuracy. Processing tests
involving bulk sampling may be
required. A decision on whether
to conduct a feasibility study can
be made from the information
provided by detailed exploration.

Reasona
bly
Assured
Geologic
al
Conditio
ns
Quantities that are estimated
to be recoverable from a
known (drilled)
accumulation, or part of a
known accumulation, where
sufficient technical data are
available to establish the
geological and reservoir
production performance
characteristics with a high
level of confidence.

Quantities in this category
that are associated with a
development project (i.e. F1)
may be subdivided to reflect
their development and
producing status.

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UNFC
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minerals
2004 Petroleum
G2 General
Explora
tion
General Exploration involves the
initial delineation of an identified
deposit. Methods used include
surface mapping, widely spaced
sampling, trenching and drilling
for preliminary evaluation of
mineral quantity and quality
(including mineralogical tests on
laboratory scale if required), and
limited interpolation based on
indirect methods of investigation.
The objective is to establish the
main geological features of a
deposit, giving a reasonable
indication of continuity and
providing an initial estimate of
size, shape, structure and grade.
The degree of accuracy should be
sufficient for deciding whether a
Pre-feasibility Study and detailed
exploration are warranted.

Estimate
d
Geologic
al
Conditio
ns
known (drilled)
characteristics with a
reasonable level of
confidence.

G3 Prospec
ting
Prospecting is the systematic
process of searching for a mineral
deposit by narrowing down areas
of promising enhanced mineral
potential. The methods utilized
are outcrop identification,
geological mapping, and indirect
methods such as geophysical and
geochemical studies. Limited
trenching, drilling, and sampling
may be carried out. The objective
is to identify a deposit that will be
the target for further exploration.
Estimates of quantities are
inferred, based on interpretation
of geological, geophysical and
geochemical results.

Inferred
Geologic
al
Conditio
ns
known (drilled)
characteristics with a low
level of confidence.

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UNFC
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minerals
2004 Petroleum
G4 Recon-
naissan
ce
Study

A Reconnaissance study identifies
areas of enhanced mineral
potential on a regional scale
based primarily on results of
regional geological studies,
regional geological mapping,
airborne and indirect methods,
preliminary field inspection, as
well as geological inference and
extrapolation. The objective is to
identify mineralized areas worthy
of further investigation towards
deposit identification. Estimates
of quantities should only be made
if sufficient data are available and
when an analogy with known
deposits of similar geological
character is possible, and then
only within an order of
magnitude.

In the case of uranium,
reconnaissance studies identify
speculative resources, defined as
in-situ resources. This is uranium
that is thought to exist, mostly
on the basis of indirect evidence
and geological extrapolations, in
deposits discoverable with
existing exploration techniques.
The location of deposits
envisaged in this category could
generally be specified only as
being somewhere within a given
region or geological trend.

Potentia
l
Geologic
al
Conditio
ns
to be recoverable from an
un-drilled accumulation, on
the basis of inferred
characteristics.

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SPEE
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The Society of Petroleum Evaluation Engineers (SPEE) is an organization
composed of petroleum engineers, largely independent consultants, who are
engaged in the evaluation of oil properties, primarily estimation of reserves and
economic evaluation. SPEE is not a part of SPE but maintains a separate existence
and does not always conform to SPE. Nor does SPEE issue separate reserves
definitions, but generally attempts to work with SPE and similar organizations in
formulating reserves definitions and in other areas of evaluation practice. SPEE is
included in this discourse for two reasons. First, SPEE has generally taken the lead
in prompting the reconsideration of definitions. Second, in 1988 and in 1998 SPEE
published a volume entitled, Guidelines for Application of the Definitions for Oil and
Gas Reserves, known as Monograph I (as referred to hereafter). Both the 1988
and 1998 editions of Monograph I are expanded discussions of the way in which the
SPE definitions should be construed and applied. Both editions contain extensive
discussion of various reserve determination methodologies and how those methods
may relate to the category or sub-category of reserves that is applied to a
particular property or project. Both editions contain considerable discussion of the
meaning of certain parts of the SPE definitions in the context of actual property
valuation. In many areas this expanded discussion amounts to interpretation of the
SPE definitions that goes beyond the wording of the actual definitions. This is of no
particular concern to the present issue except in the area of price and cost
assumptions.

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Rule 468 of the California
R&T Code Definitions
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According to SBOE Rule 468(b):

The market value of an oil and gas mineral property interest is determined
by estimating the value of the volumes of proved reserves. Proved reserves
are those reserves which geological and engineering information indicate
with reasonable certainty to be recoverable in the future, taking into account
reasonably projected physical and economic operating conditions. Present
and projected economic conditions shall be determined by reference to all
economic factors considered by knowledgeable and informed persons
engaged in the operation and buying or selling of such properties, e.g.,
capitalization rates, product prices and operation expenses.

The first sentence is very clear that the market value of an appraised property is
a function of Proved reserves only. There is no discussion of Probable, Possible or
Unproved reserves. This is entirely consistent with the industry (SPE/API)
definitions of the period (1970s) which did not recognize any other class of
reserves and with government regulations (SEC) which likewise gave no reference
to Unproved reserves. The second sentence is taken from the 1965 SPE definition
with three modifications. Where SPE says, The quantities of crude oil, natural gas
and natural gas liquids, SBOE says, Proved reserves are those reserves
Where SPE says, information indicate, SBOE says, data demonstrate
Lastly, SBOE replaces under existing economic and operating conditions with
taking into account reasonably projected physical and economic operating
conditions.

This last addition is explained by the third sentence which says: Present and
projected economic conditions shall be determined by reference to all economic
factors considered by knowledgeable and informed persons engaged in the
operation and buying or selling of such properties, e.g., capitalization rates, product
prices and operating expenses. This last sentence has been correctly interpreted to
mean the use of market derived information, or at least information obtained from
knowledgeable and informed persons, and has been used as the rationale for
requiring that operators and buyers of properties provide extensive amounts of
data to assessors.
The definition of Proved reserves in paragraph (b) is quite rational in not
imposing a set of criteria for projecting prices and costs or operating conditions. It
simply requires the appraiser to assess the market and solicit or derive information
from which to make projections.
Assessors and their representatives have often argued that Proved reserves, as
defined by Rule 468, are a broader category of reserves than the reserves defined
by industry because Rule 468 allows escalation of prices and costs, whereas

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industry (SPE) definitions do not and, further, that appraisals or evaluations or
reports that refer to SPE definitions should not be allowed or given weight because
the SPE definition differs from the SBOE definition. The crux of this argument has
always lain in the supposed difference between the Rule 468 projected economic
conditions and the flat pricing interpretation of the SPE definitions. It has been the
practice of assessors to use this erstwhile difference in the definitions to argue that
industry definitions should be ignored and a broader definition of reserves, based
on their interpretation of Rule 468, should be allowed.
In past occurrences, the attempt to broaden the Rule 468 reserve interpretation
has not extended to include Probable or Possible reserves along with Proved. The
argument against the SPE definitions has most often been raised to prevent
introduction of discussion of the various classes of Proved reserves. This latter point
is important since discount rates have been shown to be related to reserves class
as an expression of risk.
The argument regarding interpretation of Rule 468, as it relates to Proved
reserves, is one that would not occur among appraisers familiar with oil properties.
It is only raised in an adversarial context, more often by attorneys than appraisers.
Having said that, the argument has several flaws.

Does reasonably projected physical and economic operating
conditions mean escalated prices and costs?

As noted, the interpretation favored by assessors is that (1) projected means
escalated prices and costs, and (2) escalated always means increasing. There is,
of course, no language in paragraph (b) or any other part of Rule 468 to support
that assertion. The simplest interpretation of projected is just what it says an
extension of physical and economic conditions into the future based on some
reasonable information obtained from the marketplace. All income approach
evaluations are projections of oil and gas production, well count, product prices,
capital investment and operating costs. Oil and gas production can be projected to
go down with natural decline; to go up due to new drilling or improved recovery; or
to remain relatively flat supported by workover and remedial programs and/or
pressure maintenance. Well count can go up, down, or flat as can capital
investment. Operating costs can go up with inflation or down as fluid volumes and
well counts decline. Oil and gas prices, as we all know, can go any direction over
any period of time. In Rule 468(b), the term projected is applied to all physical
and economic conditions. No direction to the projection is implied. As used in the
rule, projected simply reflects the reality of doing an income approach appraisal.
No appraiser would be foolish enough to value an oil property solely on the
production, prices and costs on the date of appraisal. A projection is accepted
practice, and Rule 468 simply incorporates that accepted practice.

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The reasonably projected phrase is contrasted with the existing economic and
operating conditions phrase of the SPE definitions to say that the latter means flat
prices and costs while Rule 468(b) means escalated. But, as noted above, existing
or current conditions are not defined by SPE as flat or without change only SPEE
makes that assertion. And, based on practical experience, it is an incorrect
interpretation.
It could be argued that, given the time frame in which Rule 468 was written, the
only definitions of Proved reserves were the SPE/API definitions and that in looking
for a model SBOE adapted the SPE/API definitions which, if the assessors are
correct, would mean that Proved reserves can only be derived using flat prices and
costs. But it is also true that by the late 1970's (Rule 468 was adopted in 1979) oil
and gas price projections were based on extreme (even embarrassingly) high
escalations that in hind-sight were ludicrous but nonetheless in common usage.
Therefore, SBOE may very well have taken note of what was being done by
"knowledgeable and informed persons" and concluded that a "reasonable"
projection based on market data was appropriate for assessment appraisal
purposes. Market transactions for the period and later suggest that this was a
correct interpretation.
As noted above, the SPE definitions issued in 1981, 1987 and 1998 add no
illumination to the issue and continue to use essentially the same language. And
there the issue sat from 1979 until 1996.

Assessors Handbook Section 566

In August, 1996 SBOE issued Assessors Handbook 566 (AH566) which includes a
discussion of Proved Reserves on pages 4-1 through 4-3. After quoting Rule 468(b),
AH566 states:

"In this definition, future expectations about prices and expenses are
specifically considered, because in determining market value, operators,
sellers, and purchasers will carefully consider the variation of product prices
from their current levels in order to determine the effect on the profitability
of the property. The significant difference between the Rule definition of
proved reserves and the SPE or SPEE definition is that Rule 468(b) allows
inclusion of reserves derived from future expectations for product prices and
operating costs. Rule 468 authorizes subtraction from taxable value for
deletions in proved reserves and increases in the taxable value of the
petroleum property where there are additions to proved reserves. A history
and analysis of this definition of proved reserves is further explained in
Lynch v. State Bd. of Equalization, p. 105."

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And elaborates by adding the following:

"The Society of Petroleum Evaluation Engineers (SPEE) maintains, as does
the SPE, that proved reserves do not include reserves that are the result of
projected increases in prices."

A quick reading of these passages in AH566 would suggest the SBOE accepts the
idea of Proved reserves based on escalation of prices and costs, but the tone of the
language is interesting, and a second reading is more informative. The second
sentence regarding the significant difference between the Rule 468 and
SPE/SPEE definitions4 is that Rule 468 "allows inclusion of reserves derived from
future expectations for product prices and operating costs."

This language used by SBOE, in the section of AH566 that is quoted above this
paragraph, is consistent with Rule 468 and in no way requires or suggests that
escalation is necessary or even preferred. The only criterion is the "reasonable"
projection required by Rule 468. The reasonable projection concept is reinforced
by the third sentence which refers to increases and decreases in reserves which,
despite the misplaced direct connection of reserves and value, is a correct analysis
of the evaluation process. The assertion by SBOE that SPE maintains that
"reserves that are the result of projected increases in prices" are not Proved
reserves is unfortunate and not entirely accurate. During the mark-up of AH566,
SBOE could not be moved off this argument, and there were larger issues at stake.
AH566 seems to assert the difference between SPE and Rule 468 in order to put
SPE in context and then goes on to discuss the SPE non-economic criteria for
Proved reserves and the sub-classes of Proved reserves. AH566 clearly states, in
two places, that: "Only reserves as defined by Rule 468(b) are subject to
assessment." And, referring to the SPE/SPEE sub classifications of Proved reserves,
states, "These are all taxable under Rule 468." There is no discussion of Unproved,
Probable or Possible and no suggestion that they are assessable.

Lynch v. State Bd. Of Equalization

The reference in AH566 to Lynch v. State Bd. of Equalization is particularly
useful in this regard in that the January, 1985 Lynch opinion clearly states in
reference to assessable reserves:

"They are limited only by the definition of the term "proved". They do not
include what are commonly referred to as "probable" or "possible" reserves."

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It is also interesting to note that the court further states:

"The capitalization method of valuation utilizes the concept of "proved
reserves," for which purpose the definition of the American Petroleum
Institute was adopted. Under this definition, proved reserves are the
volumes of crude oil and natural gas which geological and engineering
information indicate, beyond a reasonable doubt, to be recoverable in the
future from oil and gas reservoirs under existing economic and operating
conditions. They represent strictly technical judgments and are not
knowingly influenced by policies of conservatism or optimism."

As previously noted, the API definition is, for all intents and purposes, identical
to the 1965 SPE definition of Proved reserves. The subsequent discussion in Lynch
is a well considered and lucid exposition of the reserves and valuation issue. It is
interesting that while the court includes Rule 468 as a footnote, it refers to the API
definition in the body of the opinion and makes no suggestion that there is any
difference between the two. While affirming Rule 468 as appropriate for valuation of
oil and gas properties, there is no suggestion that the Rule 468 definition
encompasses a significant change in the concept of Proved reserves. And, while
acknowledging that economic conditions can and do change, the Court seems to
view the "existing" economic conditions criteria with greater flexibility than is
attributed to that phrase by
AH566.
Taken together, AH566, Lynch and Rule 468 indicate that the definition of
Proved reserves in Rule 468 has far more in common with the SPE (industry)
definition(s) of Proved reserves than it has differences. The only significant
difference between Rule 468 and industry usage is in the interpretation of the
"existing" or "current" economic conditions presented by SPEE, which may or may
not be a correct or, perhaps more important, practical interpretation.

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Canadian
Definitions
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In Canada, three specific groups are working on a made in Canada set of
definitions and guidelines: The Alberta Securities Commission (ASC), the Petroleum
Society of Canadian Institute of Mining and Metallurgy (CIM), and the Calgary
Chapter of the Society of Petroleum Evaluation Engineers (SPEE).
The process began in the late 1980s, with the formation of the CIM Standing
Committee on Reserves Definitions. The result of this work was published in 1993,
which was included in the Petroleum Society Monograph Number 1, entitled
Determination of Oil and Gas Reserves. At that time, the definitions did not catch
on, but the Standing Committee continued and, in mid-1998, submitted a revised
set of reserves definitions to the ASC. The timing was opportune, since the ASC had
recently formed a task force to make recommendations for improved reporting and
disclosure by issuers operating in the oil and gas industry. Since that time, the ASC
has made considerable progress toward their mandate, including reviewing the CIM
draft reserves definitions. In early 1999, the Calgary Chapter of the SPEE formed a
Standing Committee on Reserves Evaluations to complement the CIM efforts. Their
objective was to form an organization to standardize and enforce the new
Canadian Reserve Definitions. Enforcement and disciplinary action will be the
responsibility of the Association of Professional Engineers, Geologists and
Geophysicists of Alberta (APEGGA). Progress has been made by all organizations,
with completion targeted for the end of 2000.
The terminology used in classifying petroleum substances and the various
categories of reserves have been the subject of much study and discussion for
many years. Attempts to standardize reserves terminology began in the mid 1930s
when the American Petroleum Institute considered classification for petroleum and
definitions of various reserves categories. Since then, the evolution of technology
has yielded more precise engineering methods to determine reserves and has
intensified the need for an improved nomenclature to achieve consistency among
professionals working with reserves terminology. Working entirely separately, the
Society of Petroleum Engineers (SPE) and the World Petroleum Congresses (WPC)
produced strikingly similar sets of petroleum reserve definitions for known
accumulations which were introduced in early 1987. These have become the
preferred standards for reserves classification across the industry. Soon after, it
became apparent to both organizations that these could be combined into a single
set of definitions which could be used by the industry worldwide. Contacts between
representatives of the two organizations started in 1987, shortly after the
publication of the initial sets of definitions. During the World Petroleum Congress in
June 1994, it was recognized that while any revisions to the current definitions
would require the approval of the respective Boards of Directors, the effort to
establish a worldwide nomenclature should be increased. A common nomenclature
would present an enhanced opportunity for acceptance and would signify a common

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Canadian
Definitions
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and unique stance on an essential technical and professional issue facing the
international petroleum industry.
As a first step in the process, the organizations issued a joint statement which
presented a broad set of principles on which reserves estimations and definitions
should be based. A task force was established by the Boards of SPE and WPC to
develop a common set of definitions based on this statement of principles. The
following joint statement of principles was published in the January 1996 issue of
the SPE Journal of Petroleum Technology and in the June 1996 issue of the WPC
Newsletter:
There is a growing awareness worldwide of the need for a consistent set of
reserves definitions for use by governments and industry in the classification of
petroleum reserves. Since their introduction in 1987, the Society of Petroleum
Engineers and the World Petroleum Congresses reserves definitions have been
standards for reserves classification and evaluation worldwide.
SPE and WPC have begun efforts toward achieving consistency in the
classification of reserves. As a first step in this process, SPE and WPC issue the
following joint statement of principles.

SPE and WPC recognize that both organizations have developed a widely
accepted and simple nomenclature of petroleum reserves.
SPE and WPC emphasize that the definitions are intended as standard,
general guidelines for petroleum reserves classification which should allow for
the proper comparison of quantities on a worldwide basis.
SPE and WPC emphasize that, although the definition of petroleum reserves
should not in any manner be construed to be compulsory or obligatory,
countries and organizations should be encouraged to use the core definitions
as defined in these principles and also to expand on these definitions
according to special local conditions and circumstances.
SPE and WPC recognize that suitable mathematical techniques can be used as
required and that it is left to the country to fix the exact criteria for
reasonable certainty of existence of petroleum reserves. No methods of
calculation are excluded, however, if probabilistic methods are used, the
chosen percentages should be unequivocally stated.
SPE and WPC agree that the petroleum nomenclature as proposed applies
only to known discovered hydrocarbon accumulations and their associated
potential deposits.
SPE and WPC stress that petroleum proved reserves should be based on
current economic conditions, including all factors affecting the viability of the
projects.

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Canadian
Definitions
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SPE and WPC recognize that the term is general and not restricted to costs
and price only. Probable and possible reserves could be based on anticipated
developments and/or the extrapolation of current economic conditions.
SPE and WPC accept that petroleum reserves definitions are not static and
will evolve.

A conscious effort was made to keep the recommended terminology as close to
current common usage as possible in order to minimize the impact of previously
reported quantities and changes required to bring about wide acceptance. The
proposed terminology is not intended as a precise system of definitions and
evaluation procedures to satisfy all situations. Due to the many forms of occurrence
of petroleum, the wide range of characteristics, the uncertainty associated with the
geological environment, and the constant evolution of evaluation technologies, a
precise classification system is not practical. Furthermore, the complexity required
for a precise system would detract from its understanding by those involved in
petroleum matters. As a result, the recommended definitions do not represent a
major change from the current SPE and WPC definitions which have become the
standards across the industry. It is hoped that the recommended terminology will
integrate the two sets of definitions and achieve better consistency in reserves data
across the international industry.
In March 1997, the Society of Petroleum Engineers (SPE) and the World
Petroleum Congresses (WPC) approved a set of petroleum reserves definitions
which represented a major step forward in their mutual desire to improve the level
of consistency in reserves estimation and reporting on a worldwide basis. As a
further development, the SPE and WPC recognized the potential benefits to be
obtained by supplementing those definitions to cover the entire resource base,
including those quantities of petroleum contained in accumulations that are
currently sub-commercial or that have yet to be discovered. These other resources
represent potential future additions to reserves and are therefore important to both
countries and companies for planning and portfolio management purposes. In
addition, the American Association of Petroleum Geologists (AAPG) participated in
the development of these definitions and joined SPE and WPC as a sponsoring
organization.
In 1987, the WPC published its report "Classification and Nomenclature Systems
for Petroleum and Petroleum Reserves," which included definitions for all categories
of resources. The WPC report, together with definitions by other industry
organizations and recognition of current industry practice, provided the basis for
the system outlined by the combined organizations.
Nothing in the resource definitions should be construed as modifying the existing
definitions for petroleum reserves as approved by the SPE/WPC in March 1997.

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Canadian
Definitions
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As with unproved (i.e., probable and possible) reserves, the intent of the SPE and
WPC in approving additional classifications beyond proved reserves is to facilitate
consistency among professionals using such terms. In presenting these definitions,
neither organization is recommending public disclosure of quantities classified as
resources. Such disclosure is left to the discretion of the countries or companies
involved.
For the purpose of these definitions, the term petroleum refers to naturally
occurring liquids and gases which are predominately comprised of hydrocarbon
compounds. Petroleum may also contain non-hydrocarbon compounds in which
sulfur, oxygen, and/or nitrogen atoms are combined with carbon and hydrogen.
Common examples of non-hydrocarbons found in petroleum are nitrogen, carbon
dioxide, and hydrogen sulfide.
Petroleum reserves are not easy to define since there are many factors that
affect their definition. A proper petroleum reserves classification system should be
understandable to technical people, financial advisors, analysts, and politicians.
The great challenge has always been to compare different systems and different
definitions. Because of the existence of different definitions, confusion and
misunderstanding are common when governments communicate with oil companies
and international organizations.
This proposal aims towards revising a petroleum reserves classification system
to be adopted by OPEC member countries. The basic principles for the OPEC
petroleum resource classification system are as follows:
the petroleum resources should be considered as a whole,
possess clear and consistent definitions of the terms,
general and flexible guidelines,
clear boundaries between different levels, and
easy to be used as well for the governmental agencies as for the petroleum
industry.

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Chinese
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Introduction

The following classifications and definitions have been prepared by the
Petroleum Reserves Office (PRO) of the Ministry of Land & Resources (MLR) after
many years of consultations and deliberations on the basis of previous national
standards: Oil Reserves Regulation (GB269-88) and Gas Reserves Regulation
(GB270-88). In the opinion of MLR, these classifications and definitions must be
followed by oil companies when reporting and booking reserves of oil and gas and
related substances to the MLR.
The standard is applicable to estimation, auditing and statistics of resources /
reserves, also applicable to the approvals of domestic concession and development
plan, transfer of mineral ownership and the appraisal of property by third party in
the financing activities during petroleum exploration and development.

Figure 1: Classification Framework of Chinese Petroleum Resources/Reserves

Terms and definitions

The following terms and definitions are applicable to the standard.

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Chinese
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2.1 Initially-in-place Volumes: Generally, the initially-in-place volumes are the
natural accumulation quantities of oil and gas resulted from geological process in
the crust. In other words, they are the volumes of hydrocarbon and related
substances existed in a reservoir before any volume has been produced and are
expressed in the measurement of surface standard condition (20 , 0.101 MPa).

2.2 Recoverable Volumes: Recoverable volumes are the expected or estimated
recoverable parts of petroleum initially in place.

2.3 Resources: Resources are a general designation of initially-in-place volumes
and recoverable volumes.

2.4 Reserves: Reserves are a general designation of discovered resources which
are particularly called Geological reserves and Recoverable reserves, respectively
refer to the discovered initially-in-place volumes and recoverable volumes. The
recoverable reserves refer to Technically estimated ultimate recovery and Economic
initially recoverable reserves.

2.5 Technically Estimated Ultimate Recoveries (TEUR): Technically estimated
ultimate recoveries are those quantities of petroleum which are theoretically or
analogically estimated to be recoverable from discovered accumulations under
given technological condition.

2.6 Economic Initially Recoverable Reserves (EIRR): Economic initially
recoverable reserves are those quantities of petroleum which are anticipated to be
economically recoverable from discovered accumulations under existing economic
conditions (such as prices, costs, etc.) and under current executed or planned to be
established technical operating conditions.

2.7 Residual Unrecoverable Volumes (RUV): Residual unrecoverable volumes
are the differences between initially-in-place volumes and recoverable volumes.

Exploration and development phases

Petroleum exploration and development is a progressive process. The complete
exploration and development process can be divided into five phases: regional
reconnaissance, general exploration, reservoir appraisal, development construction
and production operation.

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Chinese
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3.1 Regional Reconnaissance: in the phase, the regional geology survey is made
in the basin, depression and their surrounding areas, then selective seismic and
nonseismic reconnaissance surveys are made, regional reconnaissance well is
drilled in order to understand the basic petroleum geological conditions about
hydrocarbon source rocks, potential reservoirs and seals etc. and the potential
plays or favorable hydrocarbon bearing zones are delineated.

3.2 General Exploration: the detailed seismic and other necessary geochemical
surveys are made in the favorable hydrocarbon bearing zones in order to ascertain
the traps and their distribution, then the favorable traps are selected to drill the
preliminary prospecting well in order to identify the basic features of structure,
reservoir and seal, finally the oil and/or gas reservoirs/fields are discovered with
the understanding of basic characteristics of the reservoirs.

3.3 Reservoir Appraisal: after the oil and/or gas is discovered in the general
exploration phase, the following work should be done progressively in order to
develop the reservoirs scientifically and economically, which includes detailed
seismic survey or 3D seismic exploration and appraisal well(s) drilling for the
purpose of identifying structure configuration, fault location, reservoir distribution
and reservoir properties variation, identifying reservoir type, pore morphology,
drive mechanism, fluid properties, distributions and productivities, and
understanding the recovery operation conditions and economics. Then the
development plan is carried out.

3.4 Development Construction: production wells are drilled according to the
development plan, the construction of associated facilities is fulfilled, necessary
additional data are acquired, oil and gas reserves are reviewed and productivities
are re-examined. The reservoirs are ready for production.

3.5 Production Operation: planned oil and gas production in the blocks/fields is
operated with fulfilled facility construction, and necessary production adjustment,
reconstructing or improvement are made in appropriate time in order to improve
recovery, reasonably utilize the oil and gas resources and enhance the economic
benefit.

Reserves Economic Criteria

The economic viabilities for an oil and gas reservoir/field development are
judged through the feasibility study in different exploration and development

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phases. Generally, the reserve economic criteria are divided into three categories:
economic, sub-economic and undetermined economic.

4.1 Economic: based on the market condition of the time, i.e. oil and gas prices
and development costs at the time of the reserve estimation, oil and gas production
is believed technically feasible with the other conditions allowable, such as
environment, etc. The economic viability refers to the reserves revenue can return
the investment.

4.2 Sub-economic: based on the market condition of the time, oil and gas
production is not economic, but in the projected feasible market condition or in the
conjectural probably occurring market condition, or the in the condition with the
investment environment improved, the production would be economic.

4.3 Undetermined Economic: only the general geological study is made for the
reservoirs/fields. Since there are only some preliminary assumptions with many
uncertainties existed for the reservoir complexity, reservoir scale, development
technology applications and future market, it is impossible to determine the
economic viability is economic or sub-economic.

Resources / Reserves Classification

Resources/reserves classification is made based on the phases of exploration
and development, the degree of geologic certainty and productivity confirmation.

5.1 Classification Framework:
The Classification framework is shown in Fig. 1.

5.2 Initially-in-place Volumes Classification

5.2.1 Total Petroleum Initially-in-place Volumes (TPIIP): Total petroleum
initially-in-place volumes are the total initially existed oil and gas in known and
unknown accumulations which are estimated by adopting the pertinent method,
based on the geological, geophysical and laboratory data provided in different
exploration and development phases.

5.2.2 Geological Reserves (GR): geological reserves (i.e. discovered petroleum
initially-in-place volumes) are the total oil and gas quantities estimated based on
seismic, drilling, well logging and test data in the known reservoirs/fields after the

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oil and gas was found by drilling. Geological reserves are subdivided into three
categories: Measured, Indicated and Inferred.

5.2.2.1 Measured Geological Reserves (MEGR): Measured geological reserves
are estimated with a high level of confidence and relative error not more than
20% after the reservoirs have been proved economically recoverable by appraisal
drilling at appraisal phase. The estimation of measured geological reserves should
identifying the reservoir type, pore morphology, drive mechanism, fluid properties,
distributions and productivities, etc. Fluid contacts or the lowest known
hydrocarbon should be determined by drilling, logging and test data or reliable
pressure data. The reasonable well spacing or primary development well pattern
should be used in the delineation of measured limits. All parameters in the
volumetric approach should have a high degree of certainty.

5.2.2.2 Indicated Geological Reserves (IDGR): Indicated geological reserves
are estimated with a moderate level of confidence and relative error not more than
50% when oil and/or gas economic flow is obtained from prospecting well at
general exploration phase. The estimation of indicated geological reserves should
preliminarily ascertaining structure configuration, formation continuity, oil and gas
distribution, reservoir type, fluid properties and productivities, etc. The geological
confidence degree is moderate, which can be as evidence for drilling reservoir
appraisal wells, making conceptual design or development plan.

5.2.2.3 Inferred Geological Reserves (IFGR): Inferred geological reserves are
estimated with a rather low level of confidence in the probably existing oil and/or
gas reservoirs with certain degree of exploration potentiality at general exploration
phase when oil and/or gas flow is obtained from preliminary prospecting well or in
the case that the integrative interpretation indicates that there is probably oil
and/or gas layers existed. The estimation of the inferred geological reserves
requires basically understanding the structure configurations and reservoir
conditions.

5.2.3 Undiscovered Petroleum Initially-in-place Volumes (UPIIP):
Undiscovered petroleum initially-in- place volumes are the quantities of the total oil
and gas estimated in unknown accumulations based on prediction, which are
categorized as Petroleum initially-in-place in prospects and Unmapped petroleum
initially-in-place.

5.2.3.1 Petroleum Initially-in-place In Prospects (PIIPIP): Which is referred
to the total petroleum initially-in-place in the known favorable traps or
blocks/formations adjacent to oil and/or gas field estimated by trap method at the

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early stage of general exploration phase. The estimation is based on the analysis
and analogy of petroleum geological conditions.

5.2.3.2 Unmapped Petroleum Initially-in-place (UMPIIP): Which is referred to
the total petroleum in place estimated in the phase of regional reconnaissance or
other exploration phase in the prospecting basin, depression or sags and belts. The
estimation is based on geological, geophysical and geochemical reconnaissance,
regional exploratory well data. Unmapped petroleum initially-in-place generally is
the result of subtracting the difference of the Geological reserves and the Petroleum
initially-in-place in prospects from the Total petroleum initially-in-place.

5.3 Recoverable Volume Classifications
Recoverable volumes are divided into Recoverable reserves and Recoverable
resources.

5.3.1 Recoverable Reserves (RR): Recoverable reserves are the recoverable oil
and/or gas quantities from Geological reserves. Based on the degree of geological
confidence and economic viabilities there are seven classifications (Note the
inferred geological reserves are undetermined economic, which is not applicable to
the economic recoverable reserves).

5.3.1.1 Proved Technically Estimated Ultimate Recoveries (PVTEUR): which
are the Technically estimated ultimate recoveries meeting the following
requirements:
a) The technology (including oil and/or gas recovery technology and enhanced
recovery technology, the same as hereinafter) has been operated or planned
to be operated in the near future;
b) Already have conceptual design or development plan and which have been
carried or will be carried in the near future;
c) Based on the recent average prices and costs, the feasibility study indicates
that the
d) development is economic or sub-economic.

5.3.1.2 Proved Economic Initially Recoverable Reserves (PVEIRR): which are
the Economic initially recoverable reserves meeting the following requirements:
a) Based on the different requirements, the prices and costs are on the as of
date or stipulated in the contracts or agreements, and other related economic
conditions are observed;
b) The technology has been operated or the technology demonstrated by pilot
project to be favorable for operation, or the technology which is actually
successful in the analogous oil and/or gas field and assured to be installed;

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c) Already have development plan and which will be carried out in the near
future; for gas there should have existing gas pipelines or gas pipeline
construction agreement, and also have sales contract or agreement;
d) The reserve boundaries are on the fluid contacts confirmed by drilling or
reliable pressure test data, or the lowest known hydrocarbon in the
encountered well, and within the boundaries a reasonable well control is
fulfilled;
e) The economic productivity is supported by either actual production or
conclusive test, or the economic productivity in the objective formation is
confirmed to be similar to the same formation in the wells located beyond
direct offsets or the similar formation in the same well which have indicated
economic production;
f) Feasibility study shows the development is economic;
g) There should be at least 80% probability that the quantities actual recovered
in the future will equal or exceed the estimated Economic initially recoverable
reserves.

5.3.1.3 Proved Sub-economic Initially Recoverable Reserves (PVSEIRR):
which are the differences between the Proved technically estimated ultimate
recoveries and the Proved economic initially recoverable reserves, which includes
two parts:
a) Those Proved Technically Estimated Ultimate Recoveries that the feasibility
study indicates the development is sub-economic;
b) Those Proved Technically Estimated Ultimate Recoveries anticipated be
economic but the uncertainties of contractual and/or technical in enhancing
recoveries preclude such volumes being classified as Proved Economic Initially
Recoverable Reserves.

5.3.1.4 Probable Technically Estimated Ultimate Recoveries (PBTEUR):
which are the Technically estimated ultimate recoveries meeting the following
requirements:
a) Presume the probably executed operation technology;
b) The feasibility study shows the development is above sub-economic.

5.3.1.5 Probable Economic Initially Recoverable Reserves (PBEIRR): which
are the Economic initially recoverable reserves meeting the following requirements:
a) Feasibility study shows the development is economic;
b) There should be at least 50% probability that the quantities actual recovered
reserves.

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5.3.1.6 Probable Sub-economic Initially Recoverable Reserves (PBSEIRR):
which are the differences between the Probable technically estimated ultimate
recoveries and the Probable economic initially recoverable reserves.

5.3.1.7 Possible Technically Estimated Ultimate Recoveries (PSTEUR): which
are the Technically estimated ultimate recoveries meeting the following
requirements:
a) Optimistically presume the probably adopted operation technology;
b) There should be at least 10% probability that the quantities actual recovered
reserves.

5.3.2 Recoverable Resources: Recoverable resources are the recoverable
petroleum quantities from petroleum initially-in-place, which are categorized into
Recoverable resources in prospects and Unmapped recoverable resources, and the
recovery factors are estimated by empirical analogy.

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Definitions
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The CCOP (Committee for Coastal and Offshore Geoscience Programmes) was
initiated in 1966 by China, Japan, Republic of Korea and The Philippines under the
auspices of ESCAP and the United Nations. CCOP became an independent
intergovernmental organization in 1987 based on the common understanding of its
member countries and the aspirations of the United Nations. The name was
changed in 1994, but the acronym CCOP was retained. CCOP has during this period
devoted itself to the co-ordination of, and co-operation in, scientific activities
related to coastal and offshore areas with respect to geological/geophysical
surveys, regional map compilations, database development, development of human
resources and transfer of state of the art technology.
The following CCOP definitions are taken from the CCOP Petroleum Resource
Classification System, March 1999:

Petroleum and petroleum resources

Petroleum includes crude oil, condensates, natural gas and related substances;
i.e., (1) thermal or biogenic gas found in conventional reservoirs or in gas hydrate,
tight reservoirs, fractured shale, and coal; (2) condensates, crude oils, and asphalt
found in nature. Petroleum is predominately comprised of hydrocarbon compounds.
However, petroleum may also contain non-hydrocarbon compounds in which
sulphur, oxygen, and/or nitrogen atoms are combined with carbon and hydrogen.
Common examples of non-hydrocarbons found in petroleum are nitrogen, carbon
dioxide, and hydrogen sulphide.
Petroleum Resources are defined as the total quantities of discovered (including
hydrocarbon produced already from known accumulations) and undiscovered
petroleum at a specific date in a given area.

Petroleum resources originally in-place

Resources originally in place comprise the petroleum resources which are
mapped/unmapped by geological methods, and which are estimated by geological
and petroleum technological methods, to be in place in a deposit. Gas originally in
place is divided into free gas and associated gas. According to SPEs definition (H.B.
Bradley: SPE: Petroleum Engineering Handbook, 1987) associated gas is defined as
natural gas, commonly known as gas cap, that overlies and is in contact with crude
oil in the reservoir. Non-associated gas is defined as natural gas in reservoirs that
do not contain significant quantities of crude oil. This means that gas cap and
solution gas are categories under associated gas, and that gas in reservoirs that not
contain significant quantities of crude oil or do not contain crude oil at all are

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classified as non-associated gas. By NGL (Natural Gas Liquid) originally in place is
meant components dissolved in free gas, all of which will be converted to NGL
phase by means of the current/planned gas processing.

Recoverable Resources

Recoverable resources comprise the total deliverable petroleum quantities, from
the start of production to the cease of production, based on the current
understanding of the quantities in place and the recovery factor. Recoverable
resources can be subdivided into two categories: potential recoverable resources
and reserves. Only reserves are anticipated to be commercially recoverable at
present date.
Undiscovered recoverable resources are defined as the total estimated quantities
of petroleum at a specific date to be recoverable from accumulations that remain to
be discovered.

Framework of the CCOP petroleum resource classification system

In order to have a consistent system the CCOP Petroleum Resource Classification
System is entirely based on recoverable petroleum resources. The classification
system comprises the following two major parts (Fig.1): undiscovered recoverable
resources and discovered recoverable resources.
The undiscovered recoverable resources are further subdivided into speculative
and hypothetical resources. The discovered recoverable resources are further
subdivided into potential recoverable resources and reserves. For further
subdivision (see Fig. 1) of the reserves, the CCOP Petroleum Resource Classification
System has adopted the Reserve Classification as described and published by the
Society of Petroleum Engineers (SPE) and the World Petroleum Congresses (WPC)
in March 1997.
Some organizations, companies and countries might want to report their
petroleum resources as in-place quantities on an aggregated level. Even though
this is not in accordance with the proposed CCOP Petroleum Resource Classification
System, the basic CCOP classification concept can also be used for in-place
resources.

Undiscovered Petroleum Resources

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Definitions
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Estimates of undiscovered resources are arrived at by means of geological,
geophysical, and geochemical data, which are chiefly derived from surface
geological and geophysical surveys. Based on compilation of these data into
geological models and maps, hydrocarbon plays are defined. Discovery of
petroleum accumulations in such plays is contingent upon that a set of geological
factors is in place simultaneously.
The estimated quantities of hypothetical and speculative resources are based on
the probabilistic approach. The estimated quantities are displayed on a frequency
distribution curve and are subdivided into Low, Expected (or Mean) and High values
as shown in Fig. 3.

For example, the Low and High values may mean that at least the quantities at
the 90-percentile and the 10-percentile, respectively, remain to be discovered. Note
that different organizations and companies may chose different percentiles for the
Low and the High values. The Low percentile may vary from 75 to 95%, and the
High percentile may vary from 5 to 25%. Expected value means the area under the
cumulative frequency curve.
The geological risk or the probability of geological success is the chance of the
geological model being correct, i.e. the chance of finding at least the minimum
quantity of recoverable petroleum as indicated at the distribution curve. The
geological risk is established based on technical assessment of key geological
variables (e.g. trap, reservoir, source and retention). In play analysis, the

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geological probability factor is subdivided into a play probability factor and an
average prospect probability factor. For confirmed plays the play probability factor
is equal to one.
Undiscovered petroleum resources can be subdivided into two categories:
speculative resources and hypothetical resources.

Speculative Resources

Speculative Resources is referred to the unmapped prospects that have not yet
been mapped in the basin. The unmapped resources are estimated by play
assessment methods. The total resources of such plays comprise both discovered
and undiscovered resources. The unmapped resources are the difference between
the plays total resources and the discovered and mapped resources. In general,
most organizations carry out play assessments only on the undiscovered resources.
A statistical aggregation of all play assessments will give the estimate of the total
undiscovered resources.

Hypothetical Resources

Hypothetical resources comprise resources which are mapped in the form of
prospects, but which have not yet been discovered by drilling. It is uncertain if the
estimated resources are actually in place. Prospects may be identified in undrilled
frontier provinces as well as in reservoirs underlying or adjacent to producing fields.
The resource estimates are given a probability of discovery. The estimates of the
total hypothetical resources are given by statistic aggregation of the risk-weighted
resource estimate of each prospect in a play or a basin.

Discovered Petroleum Resources
The Discovered Petroleum Resources can be sub-divided into potential resources
and reserves.

Potential Resources

Potential Resources is defined as the discovered resources that are
recoverable but not economically producible at a specific date due to
economic, political, environmental or technological reasons. Potential
Resources include all volumes of known hydrocarbons that lack the

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technology to be produced or are economically unacceptable in todays
environment. While these volumes do not meet the requirements to be
classified as reserves, they are a potential resource to the country where they
exist.
Generally, potential recoverable resources refer to the amount of
petroleum, of which the recovery project would be feasible based on
reasonable assumptions about the success of additional data acquisition, an
improved technology from current research, relaxation in the market
constraints and/or the term and conditions for implementation. Potential
Resources may include:
Accumulations being held in inventory such as marginal fields,
relinquished fields, fields under dispute, or reservoirs with inconclusive
data.
Accumulations that will probably be commercially recoverable in the
near future/short term, under currently forecasted conditions but
further evaluation work will be required before they can qualify as
reserves. Examples are new discoveries undergoing appraisal or fields
under negotiation.
Accumulations that have no plans for developments in the near
future/short term because they are judged to be non-commercial under
currently forecasted conditions based on their size, location, technology
requirements or economics.
Improved Oil Recovery (IOR) that changes characteristics of the fluid in
the reservoir through steam, gas, or chemical.
Non-producible reservoir due to:
a) adverse parameters such as very low or erratic porosity
development, low permeability, high pressure and geo-pressure
dissolved gas.
b) unfavorable petroleum parameters such as gravity and
viscosity.
c) extreme non hydrocarbon content, e.g. CO2 and H2S.

In order to separate between Potential Resources and Reserves (see
chapter 4.2), there should be less than 10% probability of the Potential
recoverable resources to be commercially recovered if the probabilistic
approach is used for definition of reserve categories.

Depending on national needs, potential recoverable resources can be
subdivided into two subcategories, long-term potential recoverable resources
and short-term potential recoverable resources. The size of the hydrocarbon

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volume is in most cases the main criteria to differentiate between these
categories.

Reserves

Reserves are those quantities of petroleum, which are anticipated to be
commercially recovered from known accumulations from a given date
forward. All reserve estimates involve some degree of uncertainty. The
uncertainty depends chiefly on the amount of reliable geologic and
engineering data available at the time of the estimate and the interpretation
of these data. The relative degree of uncertainty may be conveyed by placing
reserves into one of two principal classifications, either proved or unproved.
Unproved reserves are less certain to be recovered than proved reserves and
may be further sub-classified as probable and possible reserves to denote
progressively increasing uncertainty in their recoverability.
Estimation of reserves is done under conditions of uncertainty. The method
of estimation is called deterministic if a single best estimate of reserves is
made based on known geological, engineering, and economic data. The
method of estimation is called probabilistic when the known geological,
engineering, and economic data are used to generate a range of estimates
and their associated probabilities. Identifying reserves as proved, probable,
and possible has been the most frequent classification method and gives an
indication of the probability of recovery. Because of potential differences
in uncertainty, caution should be exercised when aggregating reserves of
different classifications.
Reserve estimates will generally be revised as additional geologic or
engineering data becomes available or as economic conditions change.
Reserves do not include quantities of petroleum being held in inventory, and
may be reduced for usage or processing losses if required for financial
reporting.
Reserves may be attributed to either natural energy or improved recovery
methods. Improved recovery methods include all methods for supplementing
natural energy or altering natural forces in the reservoir to increase ultimate
recovery. Examples of such methods are pressure maintenance, cycling,
water-flooding, thermal methods, chemical flooding, and the use of miscible
and immiscible displacement fluids. Other improved recovery methods may
be developed in the future as petroleum technology continues to evolve.

Unproved reserves

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Unproved reserves are based on geologic and/or engineering data similar to that
used in estimates of proved reserves; but technical, contractual, economic, or
regulatory uncertainties preclude such reserves being classified as proved.
Unproved reserves may be further classified as probable reserves and possible
reserves.
Unproved reserves may be estimated assuming future economic conditions
different from those prevailing at the time of the estimate. The effect of possible
future improvements in economic conditions and technological developments can
be expressed by allocating appropriate quantities of reserves to the probable and
possible classifications.

Possible Reserves

Possible reserves are those unproved reserves which analysis of geologic and
engineering data suggests 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. In general, possible
reserves may include:
(1) Reserves which, based on geological interpretations, could possibly exist
beyond areas classified as probable.
(2) Reserves in formations that appear to be petroleum bearing based on log
and core analysis but may not be productive at commercial rates.
(3) Incremental reserves attributed to infill drilling that are subject to technical
uncertainty.
(4) Reserves attributed to improved recovery methods when (a) A project or
pilot is planned but not in operation and (b) Rock, fluid, and reservoir
characteristics are such that a reasonable doubt exists the project will be
commercial, and
(5) Reserves in an area of the formation that appears to be separated from the
proved area by faulting and geologic interpretation indicate the subject area is
structurally lower than the proved area.

Probable Reserves

Probable reserves are those unproved reserves which analysis of geologic and
engineering data suggests 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

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estimated proved plus probable reserves. In general, probable reserves may
include:
(1) Reserves anticipated to be proved by normal step-out drilling where sub-
surface control is inadequate to classify these reserves as proved.
(2) Reserves in formations that appear to be productive based on well log
characteristics but lack core data or definitive tests and which are not analogous
to producing or proved reservoirs in the area.
(3) Incremental reserves attributable to infill drilling that could have been
classified as proved if closer statutory spacing had been approved at the time of
estimate.
(4) Reserves attributable to improved recovery methods that have been
established by repeated commercially successful applications when (a) A project
is planned but not in operation and (b) Rock, fluid, and reservoir characteristics
appear favorable for commercial application.
(5) Reserves in an area of the formation that appear to be separated from the
proved area by faulting and the geologic interpretation indicates the subject area
is structurally higher than the proved area.
(6) Reserves attributable to a future work-over, treatment, re-treatment,
change of equipment, or other mechanical procedures, where such procedure
has not been proved successful in wells which exhibit similar behavior in
analogous reservoirs, and
(7) Incremental reserves in proved reservoirs where an alternative interpretation
of performance or volumetric data indicates more reserves than can be classified
as proved.

Proved Reserves

Proved reserves are those quantities of petroleum which, by analysis of
geological and engineering data, can be estimated with reasonable certainty to be
commercially recoverable, from a given date forward, from known reservoirs and
under current economic conditions, operating methods, and government
regulations.
probabilistic methods are used, there should be at least 90% probability that the
Establishment of current economic conditions should include relevant historical
petroleum prices and associated costs and may involve an averaging period that is
consistent with the purpose of the reserve estimate, appropriate contract

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obligations, corporate procedures, and government regulations involved in
reporting these reserves.
In general, reserves are considered proved if the commercial producibility of the
reservoir is supported by actual production or formation tests. In this context, the
term proved refers to the actual quantities of petroleum reserves and not just the
productivity of the well or the reservoir. In certain cases, proved reserves may be
assigned on the basis of well logs and/or core analysis that indicate the subject
reservoir is hydrocarbon bearing and is analogous to reservoirs in the same area
that are producing or have demonstrated the ability to produce on formation tests.
The area of the reservoir considered as proved includes:
(1) The area delineated by drilling and defined by fluid contacts, if any.
(2) The undrilled portions of the reservoir that can reasonably be judged as
commercially productive on the basis of available geological and engineering
data.

In the absence of data on fluid contacts, the lowest known occurrence of
hydrocarbons controls the proved limit unless otherwise indicted by definitive
geological, engineering or performance data.
Reserves may be classified as proved if facilities to process and transport those
reserves to market are operational at the time of the estimate or there is a
reasonable expectation that such facilities will be installed.
Reserves which are to be produced through the application of established
improved recovery methods are included in the proved classification when:
(1) Successful testing by a pilot project or favorable response of an installed
program in the same or an analogous reservoir with similar rock and fluid
properties provides support for the analysis on which the project was based, and
(2) It is reasonable certain that the project will proceed.

Reserves to be recovered by improved recovery methods that have yet to be
established through commercially successful applications are included in the proved
classification only:
(1) After a favorable production response from the subject reservoir from either
(a) A representative pilot or
(b) An installed program where the response provides support for the analysis
on which the project is based
(2) It is reasonably certain the project will proceed.

Reserves Status Categories

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Reserve status categories define the development and producing status of wells
and reservoirs.

Undeveloped Reserves

Undeveloped reserves are expected to be recovered:
(1) From new wells on undrilled acreage.
(2) From deepening existing wells to a different reservoir, or
(3) Where a relatively large expenditure is required to
(a) Recomplete an existing well, or
(b) Install production or transportation facilities for primary or improved
recovery projects.

Developed Reserves

Developed reserves are expected to be recovered from existing wells including
reserves behind pipe. Improved recovery reserves are considered developed only
after the necessary equipment has been installed, or when the costs to do so are
relatively minor. Developed reserves may be subcategorized as producing or non-
producing.
Producing: Reserves subcategorized as producing are expected to be recovered
from completion intervals which are open and producing at the time of the
estimate. Improved recovery reserves are considered producing only after the
improved recovery project is in operation.
Non-producing: Reserves subcategorized as non-producing include shut-in and
behind-pipe reserves. Shut-in reserves are expected to be recovered from (1)
completion intervals which are open at the time of the estimate but which have
not started producing, (2) wells which were shut-in for market conditions or
pipeline connections, or (3) wells not capable of production for mechanical
reasons. Behind-pipe reserves are expected to be
recovered from zones in existing wells, which will require additional completion
work or future recompletion prior to the start of production.

Petroleum Reserves Definitions

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