Reserve Estimate Training Endorsed

Ordinarily I tend to be skeptical of crusty old folks who are always claiming that "the younger generation is going to hell in a hand basket." Such attitudes often seem to just go with getting old and set in your ways.

Lately, however, I've been hearing some recurrent and disturbing reports about decay of key geotechnical skills in younger geologists, geophysicists and reservoir engineers from quite a few knowledgeable, experienced and objective E&P professionals -- men and women I know and respect. And these reports resonate with my own recent experience.

Let me give you a personal example.

From 1984 to 2003 I used a course exercise in which class participants were given a page-sized map covered with about 40 elevations and asked to prepare a contour map faithful to a geological model (pinnacle reefs, thrust-sheets, karst surfaces, listric faulting, etc.) described at the top of the page. There were 12 geological models; each student got only one, to contour overnight and bring back to class where all the maps would be displayed in all their variety.

The next morning I would announce the additional fact that the contour values for all 12 maps were identical.

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Ordinarily I tend to be skeptical of crusty old folks who are always claiming that "the younger generation is going to hell in a hand basket." Such attitudes often seem to just go with getting old and set in your ways.

Lately, however, I've been hearing some recurrent and disturbing reports about decay of key geotechnical skills in younger geologists, geophysicists and reservoir engineers from quite a few knowledgeable, experienced and objective E&P professionals -- men and women I know and respect. And these reports resonate with my own recent experience.

Let me give you a personal example.

From 1984 to 2003 I used a course exercise in which class participants were given a page-sized map covered with about 40 elevations and asked to prepare a contour map faithful to a geological model (pinnacle reefs, thrust-sheets, karst surfaces, listric faulting, etc.) described at the top of the page. There were 12 geological models; each student got only one, to contour overnight and bring back to class where all the maps would be displayed in all their variety.

The next morning I would announce the additional fact that the contour values for all 12 maps were identical.

The exercise was intended to demonstrate the inherent variations involved in contouring -- that no contour map represents a unique solution and that there is an envelope of uncertainty around every contour interpretation -- and the exercise accomplished its intended purpose very well.

But beginning in about 1995 (about the time workstations began to be widely used), I began to notice that an increasing number of geologists and geophysicists (some with as much as five years of experience) did not know how to contour data. Understand, please -- it wasn't that they did not have the skill or imagination to draw a map that reflected a given geological "style" -- it was that they couldn't draw a contour map at all!


Trading notes with experienced friends who teach and consult with many E&P companies worldwide, I heard similar disturbing experiences:

  • Maps of reservoirs, based on data from directionally drilled wells, in which the thickness calculations were done incorrectly (TVD or TST vs. TVT), resulting in erroneous estimated reserves.
  • Development geologists and reservoir engineers who didn't know the difference between isopach and isochore mapping, so their calculated trap volumes were overstated or understated significantly.
  • Geotechnical and engineering staff (not entry-level novices) who were unable to map -- and correctly calculate -- net pay in a reservoir.

My engineering colleagues, especially those involved with reserves auditing and consulting, relayed analogous accounts (such as engineers who were unable to calculate routine reservoir parameters without resorting to computer programs) -- all suitably sanitized, of course, so as to protect the good names of their clients.

Now, most E&P professionals know that getting the geology, geophysics and reservoir engineering right is just the first part of getting the reserves right. Other considerations such as economics, project completion and deliverability schedules and interpretations of U.S. Security and Exchange Commission (SEC) requirements also play substantial parts. And, sad to say, ethical lapses by staff and management have occasionally influenced official reserves reports inappropriately. But it all starts with the subsurface geotechnical picture and related reservoir engineering.

It's also true that fuzzy definitions and standards continue to contribute to inconsistent reserves usage, as well as archaic concepts and standards currently enforced by the SEC.

Regardless, when a publicly held company announces a substantial reserves write-down, public confidence in our E&P industry is damaged. And in these times of rising prices we should not be surprised if future write-downs generate calls for increased government scrutiny. That would constitute one of Bazerman and Watkins' (2004) Predictable Surprises, last month's recommended reading. So it's in our interest as E&P professionals to do what we can in our areas of expertise and influence to help make things better.

That is why more than 20 members of AAPG (led by the Division of Professional Affairs, represented by Dan Tearpock) and the Society of Petroleum Evaluation Engineers (SPEE, led by Ron Harrell and Richard Miller) have been working together over the past 15 months to explore and delineate programs that might lead to more reliable reserves estimates in our profession.

AAPG and SPEE representatives met on July 19 in Houston with seven corporate members of AAPG's Corporate Advisory Committee to identify and discuss initiatives and priorities that AAPG's various E&P friends would actively support. What emerged from this workshop was overwhelming support for enhanced practical training, based on real case histories, contributed by the companies, designed by AAPG and SPEE professionals and delivered via standard in-class training sessions (and eventual Web site offerings) to E&P professionals worldwide.

In addition, AAPG representatives will soon be participating in a joint initiative with SPE, SEG, WPC and SPEE to develop consistent, well-founded and universal reserves definitions, and cooperating to develop mutually supporting educational programs designed to improve the consistency and quality of reserves estimates.


As long as I am on the subject of reliable and consistent measurement of oil and gas reserves, I want to comment on another aspect of the whole reserves mess: I urge the adoption of probabilistic (as opposed to deterministic) expression of reserves throughout the E&P industry.

To be sure, regardless of whether predictions are expressed deterministically (single-value forecasts) or probabilistically (as ranges of values that correspond to perceived probabilities), they are still estimates, thus subject to the vagaries of nature, human error and various biases. But probabilistic estimating, now widely adopted by the "E-part" of E&P, has five important advantages:

  • Forecasting accuracy of estimators can be measured, so estimators can be accountable.
  • Use of statistical principles results in greatly improved estimating quality.
  • Proven "reality-checks" can pre-detect errors before drilling takes place.
  • It is faster, more efficient, and results can be directly entered into E&P portfolios.
  • It promotes more realistic communication of uncertainty to decision-makers and investors.

One simple remedy would facilitate the transition to probabilistic methods for the entire E&P industry -- for members of all professional geotechnical and engineering societies to specify that when they use the term "proved" they are explicitly affirming 90 percent confidence in their estimate, regardless of the SEC definitions of "reasonable certainty" (whatever that means!). This would immediately allow measurement and accountability, (example: "90 of my last 100 proved reserves estimates are on track to deliver at least the reserves I forecast"). The eventual consequence leads to the adoption of full probabilistic expression of reserves and resources throughout the E&P world.


Recommended Reading:

The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron, by Bethany McLean, Peter Elkind, Penguin Books, 2003.

This is a well-documented and fascinating (if depressing) account of the rise and fall of Enron written by the investigative journalists "who were there" -- and a useful cautionary tale for all corporate professionals.

Read it, you'll like it!

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