Hydrocarbon Reserves-Estimation, Classification and Importance in Evaluation of Exploration Projects
Hydrocarbon Reserves-Estimation, Classification and Importance in Evaluation of Exploration Projects
Hydrocarbon Reserves-Estimation, Classification and Importance in Evaluation of Exploration Projects
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277 . 281
ZAGREB 1996
1 Fig.
NCl'iew paper
PROCEEDINGS
Abstract
Saictak
1. INTRODUCTION
27~
R cscryc~ I~slimalioll,
279
cd calculations are sometimes used, to calcu late theoretically recoverable volumes, but they cannot reflect
<:II[ the complexities of real production.
3. ECONOMIC EVALUATION
1n this study, discussion of economic evalu<:Ition is
separated although in the m<:lrket economy it is an
inseparable part of the eSlim<:llion or both the degree of
certainty and quantity of" reserves. This is due to the fact
th<:lt only lhe quantities that can be profitably produced
and supplied to the market under definite technical and
economic conditions are considcred as reserves. The
By-law or the reserv es classific<:ltion issued by the
Republic of Croatia requests only a rough economic
evaluation. Such evaluation cannot be used either as a
basis of investment or for estimating the profitably
recoverable quantities of hydrocarbons, i.e. reserves.
The economic evaluation in the market economy is
based upon criteria accepted by the Stock Exchange
Commission, and the same criteria arc incorporated into
fnt ern<:l tional Accounting Standards. The economic value is determined by applying the method of cash flow
calculation at constant prices and costs at the end of the
previous year and a 10% discount rate (FINANCIAL
ACCOUNTING STANDARDS BOARD. 1982). The
result of such an approach arc various indices of the
project erfieieney and reserves esti mation. Among the
indices arc payout time, return on investment , rat e of
return and net present value. With a correc t prediction
of future ficld performance and all futurc costs, one can
obtain an evaluatio n which is a good basis for making
business decisions. There is no need to describe in
detail th e ca lculation methods, as they arc already well
known. When making the economic evaluation it is
very important to properly determine th e investment
risks. In the process of es tablishing the risk, the evaluation or geological and technical uncertainty is , in principle, less prob lema tic than that of political and economic
uncertainty, but they have to be evaluated too , as they
can substa ntially affect the final result.
The volume of hydrocarbons is dilTicult to quant ify. ]1 is estimated by means or various methods at d iffe rent stages of exploration or development. The accu racy of estimation increases with the number and reliabi li ty of the available data on the reservoir geological
model, fluid and rock properties as well as th e recovered fluid vo lumes.
The price of hydrocarbons is beyond company control an d prediction of fu ture prices represents a large
unknown when defining basic long term objectives.
Costs, including overheads, can and must be controlled by the business policy of the company and ind ivid uals.
Taxes are also beyond the control of a company as
they are controlled by the state depend ing on ils interests and needs.
Accordingly, this cquation indicates that making
profit involves several unfavourable factors and may be
controlled mainly by costs.
Geologists and petroleum engineers can contribute
to this business in two ways:
increasing and ma intaining volumes;
reducing or controlling costs per unit volumc produced.
While the other indices from this equa tion depend
on the economic, political and social conditions of a
certain country, the explorationist should also take into
account and direct th e activities toward conditions
which are Jllore favourable for the company. These are
general principles of profitable hydrocarbon reserves
exploration, and lheir cle ments will be discussed latcr
in more details.
The procedure for estimating the value of any given
exp loration area commences with determination of the
undiscovered potential rese rves value. This is determined by calculating the cash flow. Costs of failure
should a lso be estimated, e.g. those of a dry well. or
particular importance is determination of th e probability of a success. By these means a predicted cash value
is calcu lated, which may be simply represented as:
EMV
where VR is value of rese rves , PS probability of success, cr costs of failure an d EMV e xpected money
value.
An ex ploration well can be evaluated in a sim ilar
way. There is also the possibility for comparing th e
exploration well re sult s in a ratio obtained by dividin g
the expected cash now value by th e dry well cost.
Another index, which can be Llscd in project ranking, is
obtained by dividing the expected cash flow value by
current investment valu e. This index gives an expected
income per unit of investment. The approach, methodologically identical to this , applied in the proven
reserves estimate, facilitates the evaluat ion of th e
exploration projects. This evaluation is to be made not
only at the very start of the process, but also during
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each phase when changes occur due 10 either new technical perceptions or new econom ic conditions. 111 this
manner condilions will be created which would make it
possible 10 conduct the explora tion operations in an
extremely profitable way, and 10 achieve Ihe optimum
results by invcsting into hydrocarbon exp loration.
Various methods and rules arc used in the determination of the effects of inves tment s, which are applied
by oil companies when making decisions on investing
into exploration projects. Some of the si mple criteria
frequently used in world practice in exploration area
evaluation (JONES, 1992) may be considered:
1. If the llndiscollnted gross value of total production from the hydrocarbon accumula tion docs nol
exceed al least 40 times the discovery costs (land purchasing and drilling costs) the project is not cost effective and should bc abandoned. Thcre is a suggestion [o r
the rotio to be evcn 50: I (HA RDIN , 1958).
2. A project must not be sta rt ed in any case when
the rate of return is not greate r than ce rtain values
cstablished in advance:
For a high risk area
30-40%
20-30%
15 -25%
l{c~erve.~
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6. CONCLUS ION
The hyd roca rbon rese rves of th e Republ ic of Croatia, de fin cd according to the By-law , a re no t directly
co mparabl e wit h th e prove n, probable and possib le,
c lassi fi c ation used internationally, due to a d ifferent
nppronc h to th e es timation from th e techni ca l and economi c point of view. T here fore, a ne w es timation and
c lnssi fi cat ion sche me should be imple me nted in order
to establi sh the rinanc ial position of an oil company in
Croa ti a accordin g to internationa l stand ard s. A new Bylaw (at leas t int e rnal ) a bout classifica tion or reserves
should be pre pared , which would take into co nsideration internati onal standa rd s, i.e. be based upon th e marke t approach. The reserves es timated and c lass ified in
thi s mann er would be the bas is for ap proac hing th e
wo rld marke t. It docs not mea n that min eral e nergy
7. REFER ENCES
CA LDWELL. R.H. , GR ACE, lD. & I-l EATHER , D.1.
( 1993): Comparative reserves definition s : USA,
Euro pe, and th e Former Sov iet Uilion. - Jo urn a l of
Petrole um Technology, 45/9. 866-872.
FI NA NC IA L ACCOUNT ING STANDARDS BOA RD
( 1982): Statement or fi nan c ia l accoun ting standa rds
No. 69. - Fi nancial Accounti ng Standard s Boa rd ,
Stamford, Connecti cut , 1-49.
HARD IN, G.c. ( 195 8) : Economic factors in Ih e geolog ic al appraisal or wild c at prospects. - Gulf Coast
Association of Geolog ical Societies Transacti ons, 8,
1419.
SOCIETY OF PETROLE UM E V ALUATlON ENGI NEERS (1988 ): Gui de lin es for application of th e
de finition s for oil a nd gas reserv es.- Soc ie ty o f
Pe tro le lllll E val uati o n Eng ineers, Mon og raph , I,
lI ousto n. Texas, 1-69.
THE PETROLE UM SOCIETY OF THE CANAD IAN
INSTITUTE OF M IN IN G. METALLURGY AND
PETROLE UM (1994) : De termination of o il and gas
rese rv es .- The Pet roleum Society of th e Canad ian
Instit ute of Mining , Me tallurgy and Pe trol e um ,
Monograph , Calga ry, 362 p.
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