Will the well find oil or gas? What is the chance factor? How much might it find? What is the reserve estimate? Near Carlsbad, NM Permian Basin

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1 Three Statements his company s best guess is that the Mukluk structure contains 3 billion barrels of recoverable oil beneath a moderate-sized cap of natural gas -Anchorage Daily News 23 Oct 1983 In 1998, a USGS assessment of petroleum resources of the 1002 Area estimated the expected volume of technically recoverable oil beneath the 1002 area to be 7.7 billion barrels, with a 95 percent chance of 4.2 billion barrels and a 5 percent chance of 11.8 billion barrels. - -Interior Secretary Gale Norton, 6 June 2001 (Congressman) Hastings (R-WA), whose committee has jurisdiction over federal lands, said producing oil from ANWR could net the government between $150 billion and $300 billion through leasing and royalties. -Marketwatch, 7 Sept 11

2 Resource Assessment How large is an oil & gas field? How large is an ore deposit? How much oil & gas remains to be found? How much gold, lead... remains to be found?

3 Will the well find oil or gas? What is the chance factor? How much might it find? What is the reserve estimate? Near Carlsbad, NM Permian Basin

4 First: some context from known fields Note the scale bars on these graphs Baker et al 1984

5 First: some context from known fields Note the scale bars on these graphs and shapes of curves.

6 First: some context from known fields Note the scale bars on these graphs Baker et al 1984

7 Baker et al 1984 These are Log-Normal Distributions

8 Baker et al 1984 These are Log-Normal Distributions

9 Kesler 1994

10 Kesler 1994

11 How large is an oil & gas field? Area Net pay Porosity HC Saturation expressed as (1-S water ) Depth expressed as Bo or Bg Recovery Factor

12 Porosity

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15 Area Depth Net Pay

16 Res Seal Source Prospect Assessment Seismic Line Jurassic 6507/10-1 TWT 0 5

17 Heidrun Field Pre-Drill Assessment Commercial Minimum (190 MMBO) Mean 625 MM BO Proven Reserves B BO But what was it worth? Prospect Assessment

18 Annual Average Brent Spot Price Nominal Price Price Scenario $ / Barrel CPI Price 0 Prospect Assessment

19 At $35 per barrel, then $ billion, less expenses At $20 per barrel, the $ billion, less expenses Expenses thru end 2014 are 60,428 billion kroner Assume 7NoK per $U S = $8.6 billion expenses (To do the calculation correctly, we need annual expenses, annual average oil price, and annual average exchange rate.)

20 How do we choose which prospect to drill? Calculate Mean Risked Estimated Reserves: Mean Estimated Reserves X Chance Factor Viking Oil Field Prospect 1 Prospect 2

21 Mean Expected Reserves = Chance Factor * Mean Estimated Reserves

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23 How do we choose which prospect to drill? Prospect 1: 10 MMBBL Mean Estimated Reserves 25 % Chance Factor Prospect 2: 10 MMBBL Mean Estimated Reserves 10% Chance Factor Viking Oil Field Prospect 1 Prospect 2

24 How do we choose which prospect to drill? Prospect 1: 10 MMBBL Mean Estimated Reserves 25 % Chance Factor 2.5 MMBL Mean Risked Estimated Reserves Prospect 2: 10 MMBBL Mean Estimated Reserves 10% Chance Factor 1.0 MMBL Mean Risked Estimate Reserves Viking Oil Field Prospect 1 Prospect 2

25 How do we judge these estimates? Average Chance Factor = Success Ratio Sum of Mean Expected Reserves = Discovered Oil and Gas

26 Now for some vocabulary: Undrilled Prospect: reserves are estimated, not proven

27 Successful Exploration Well Adds Proven Reserves 1 Possible Reserves Probable Reserves

28 Successful Delineation Well Also Adds Proven Reserves 2 1 Possible Reserves Probable Reserves

29 Later Successful Delineation Well Also Adds Proven Reserves Possible Reserves Probable Reserves

30 Reserve Categories Proven: discovered hydrocarbons with a 90% to 100% chance of production Probable: undiscovered hydrocarbons with a 50% to 90% chance of production Possible: undiscovered hydrocarbons with a 10% to 50% chance of production See Rose (2007) for a detailed discussion.

31 Mining Ore Reserves Reserves: can be produced under current economic & other conditions at a profit. Reserve Base: includes Reserves and lower grade ore that may be mined at a later time. Resources: includes Reserves, Reserve Base, and undiscovered ore.

32 Mining Ore Reserves: Australasian Terms Mineral Resource: ore with a reasonable chance of extraction Measured Mineral Resource: estimate of ore body size base on data that confirms both geological and grade continuity Indicated Mineral Resource: estimate of ore body size is reasonably assumed but not verified Inferred Mineral Resource: estimate of ore body size based on limited geologic data

33 How Do We Estimate Ore Reserves? Estimate = volume x density x ore grade But this is too simple... the Earth is heterogeneous

34 How Do We Estimate Ore Reserves? Estimate = B 1 + B 2 +B 3 +B 4 +B 5 +B 6 + B For each block of the ore body, estimate B i =Volume i x density i x ore grade i

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38 El Aouj Iron Discovery, Mauritania

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42 Mining & Petroleum Terms Reserves = Proven Hydrocarbons Reserve Base = Proven + Probable HC s Resources = Proven + Probable + Possible HC s

43 Mineral Resource Estimation Resource-driven models: based on understanding of geology of the resource. Limited allowance for changing economy Limited allowance for changing technology Commonly assume growth rates projected from existing patterns

44 Arabian Peninsula and Gulf Regional Assessments

45 Regional Hydrocarbon Assessments Delphi: average of expert Opinions Area Yield: barrels/acre Volumetric Yield: barrels/acre-foot Geologic Analogy: This looks just like GOM Extrapolation of Discovery Rate Geochemical Mass Balance Field Density Summation of Assessments: prospects, plays, AU s

46 White and Gehman 1979 Delphi

47 White and Gehman 1979 Volumetric Yield

48 Geologic Analogy Does this basin resemble the North Sea s Viking Graben?

49 Extrapolation of Discovery Rate White and Gehman 1979

50 North Sea Discovery History: How Much Remains to be Found?

51 60 Oil Discoveries 1930 to

52 Geochemical Mass Balance

53 Mass Balance: CBM in Chahilis Basin, SW Washington Regional Assessment

54 Centralia Coal Mine (closed) Transalta Big Hanaford Power Plant Chehalis Basin, WA Mt Rainier Regional Assessment

55 Mass Balance Coal Bed Methane Monte Carlo Simulation Chehalis Basin, Washington Cell F6.029 Forecast: Chehalis CBM Gas in Place Frequency Chart 4,932 Trials 142 Recovery Factor In Place BCF Rec Factor Recoverable Gas = Gas-in-Place * Recovery Factor Cell H6.027 Forecast: Chahilis CBM Basin Recoverable Gas Frequency Chart 4,901 Trials BCF Regional Assessment

56 Summation of Prospects or Plays

57 USGS Estimates 2000

58 USGS

59 UK Lower Permian Rotliegendes Play Area Regional Assessment

60 1988 Estimated Undiscovered Gas Rotliegendes Formation UK Southern Gas Basin Mean = 487 BCF Discoveries

61 Who actually uses these techniques? Danish Parliament Building, Copenhagen

62 Industry To enter new ventures: prospects, plays, basins, countries To exit old ventures: prospects, plays, basins, countries Government To choose among basins/blocks for licensing To forecast future oil and gas revenues To adjust license and revenue policies Application

63 Danish Oil and Gas Concessions Norway Sweden North Sea Denmark Application

64 Danish Oil Production

65 Danish Oil and Gas Recovery

66 Danish Oil Production Scenario

67 Danish Oil and Gas Revenue Forecasts

68 Danish Oil and Gas Revenues $28/Barrel Forecast Application

69 Conclusions: Dealing with Uncertainty Chance of discovery: we do not know if hydrocarbons before drilling Size of discovery: we do not know the size of a field before drilling Value of discovery: we do not know oil or gas prices before production To address these uncertainties, we need probability distributions and multiple scenarios.

70 Three Statements his company s best guess is that the Mukluk structure contains 3 billion barrels of recoverable oil beneath a moderate-sized cap of natural gas -Anchorage Daily News 23 Oct 1983 In 1998, a USGS assessment of petroleum resources of the 1002 Area estimated the expected volume of technically recoverable oil beneath the 1002 area to be 7.7 billion barrels, with a 95 percent chance of 4.2 billion barrels and a 5 percent chance of 11.8 billion barrels. - -Interior Secretary Gale Norton, 6 June 2001 (Congressman) Hastings (R-WA), whose committee has jurisdiction over federal lands, said producing oil from ANWR could net the government between $150 billion and $300 billion through leasing and royalties. -Marketwatch, 7 Sept 11

71 Three incomplete Statements his company s best guess is that the Mukluk structure contains 3 billion barrels of recoverable oil beneath a moderate-sized cap of natural gas -Anchorage Daily News 23 Oct 1983 In 1998, a USGS assessment of petroleum resources of the 1002 Area estimated the expected volume of technically recoverable oil beneath the 1002 area to be 7.7 billion barrels, with a 95 percent chance of 4.2 billion barrels and a 5 percent chance of 11.8 billion barrels. - -Interior Secretary Gale Norton, 6 June 2001 (Congressman) Hastings (R-WA), whose committee has jurisdiction over federal lands, said producing oil from ANWR could net the government between $150 billion and $300 billion through leasing and royalties. -Marketwatch, 7 Sept 11 What is the chance of making a commercial discovery? What is the range of commercially recoverable field sizes? What is the assumed future oil or gas price? What is the minimum commercial field size?

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