The Ryder Scott Audit

Energy Chamber

 

 

Every year, the release of Ryder Scott’s annual audit report for this country’s gas reserves leads to misleading headlines and public commentary characterised by misconceptions about and misunderstandings of the country’s true reserves position. The Energy Chamber wishes to dispel these common misconceptions about the reserves audit as they are not conducive to helping society gain a better understanding of the reserves picture and how we as a country can better manage our energy resources. With the upcoming release of this year’s Ryder Scott audit, we decided to state some of the misconceptions associated with our gas reserves and provide clarity. 

 

 

The Definition of Reserves 

According to the Society of Petroleum Engineers, “reserves are those quantities of petroleum which are anticipated to be commercially recovered from known accumulations from a given date forward”. As such, even if oil and gas is present, it is not considered as reserves if it cannot be monetised. Reserves are physically located in reservoirs deep underground and cannot be visually counted. However estimates can be provided based on the evaluation of data that gives evidence of the amount of oil and gas present. 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.  Conversations around reserves typically make reference to three main categories of reserves namely, proved/proven, probable and possible reserves. 

 

 

In the first instance, the term “proven” refers to those reserves claimed to have a reasonable certainty (normally at least 90 per cent confidence) of being recoverable under existing economic and political conditions, with existing technology. In other words, these reserves may be produced with 90 per cent of certainty. Proven reserves are also known in the industry as 1P.

Probable and possible reserves are less certain to be recovered than proved reserves. Probable reserves are attributed to reserve accumulations which are known and have a 50 per cent confidence level of recovery (ie having a 50 per cent certainty of being produced).    Possible reserves are also attributed to known accumulations but they have a less likely chance of being recovered than probable reserves. This term is often used for reserves which are claimed to have at least a 10 per cent certainty of being produced.  Probable and possible reserves are referred to in the industry as “2P.”   Proven plus probable plus probable is referred to in the industry as “3P”. Reserves are placed under these three categories because of the different interpretations of geology, uncertainty due to seepage from near-by areas (reserve infill) and the fact that some reserves may not be producible at commercial rates. 

 

 

 

Misconception No 1 - The results of the Ryder Scott Audit are unquestionable and set in stone.

The first thing that needs to be understood is that the annual audit is just that: a review of the reserves data that is recorded in the books of the companies holding acreage and the geological and engineering procedures used, at a specific date. 

In other words, the Ryder Scott Company reviews the data held by companies and the Ministry and determines whether the methodology used to determine the figures is fair and reasonable. 

The reserves study is used as the basis of US Securities Exchange Commission (SEC) filings, for acquisitions/trades, for management decisions and it provides a guide for government actions.   It is important to grasp 5 key facts concerning the audit. 

 

 

 

Five Key Facts:

1. It is not a detailed study by a consultant- there is no “signing off” on reserves estimates and the estimates in the study can differ from those in any other detailed study by the consultant

2. It does not tell us “how much oil/gas is left” 

3. The estimates are not “fixed”

4. The audit never encompasses all reserves and all reserve estimates involve some degree of uncertainty

5. The audit does not rigorously test the economic guidelines in the reserves definitions of the SEC, the Society of Petroleum Engineers or the World Petroleum Congress or the Society of Petroleum Evaluation Engineers

 

 

 

Moreover, consider the auditing procedure used. The Ryder Scott Company receives the company reserves study and a description of the general method used to derive the estimates. Specialists are then assigned in areas to handle the audits where most of the reserves are located.  

The company meets those professionals who completed the initial studies, after which the company independently reviews the data provided by to complete its analysis. 

While this may seem to be a comprehensive procedure, it is important to recognise that it is not a full report.  The lack of universal rules and guidelines makes it difficult to interpret the estimates provided. 

Differences in reporting procedures and definitions used by governments and professional institutions, inaccurate reporting due to competitive secrecy and the different methods used to estimate reserves at different times in the life of a field, all contribute to variations in estimates and interpretations. 

In fact it is common for reserve estimates to differ or change. Consider that in 2004, Shell announced that it overestimated the size of its proved oil reserves by about 20 per cent from 19.4 billion barrels of oil (or the equivalent in gas) to 15.5 billion. 

This was due to the system for reporting reserves following the strict Securities & Exchange Commission rules which stipulated that oil fields can only be listed as proved if there is data showing actual flows, if the fields will be developed, and if they are commercially viable. This typically happens only after companies have made a final investment decision to develop a field. This error shook investor confidence and cost top executives their jobs.

The results of the Ryder Scott audit should be interpreted with caution especially since only a fraction of the information is shared in the public domain. 

There is no public knowledge of the guidelines and procedure used by each company or of the range of uncertainty.  

 

Misconception No 2 

Reserves are cast in stone

It is quite easy to view our gas reserves as static with the visual of a storage tank where withdrawals cause the tank’s gauge to permanently head from full to empty. This is not the reality. There are a host of diverse factors which impact on a country’s reserves trajectory. The price of energy commodities, technological advancements, the fiscal/taxation regime and changing global economic conditions are among a host of factors which can see a country’s reserves dwindling or increasing over short-, medium- or long-term periods. It is important to note that reserves can increase over time, through a number of different methods, including new exploration activity, and re-interpretation of the data on existing reserves. In T&T, we experienced a major increase in reserves in the period 1994 to 2000.  This increase in reserves came about as companies developed gas reserves to supply the Atlantic facility, which came on stream during this period. The demand led to a spike 

When we look at the United States’ proved reserves picture we also see the impact of technology as the combination of horizontal drilling and hydraulic fracking has made previously uneconomical shale gas acreage valuable. Shale gas has rejuvenated the US natural gas industry and has positively impacted on the country’s gas proved reserves Between 2006 and 2011, an additional 88.28 trillion cubic feet of gas has been added to proven gas reserves in the US. 

 

 

Misconception No 3 

Our proven reserves position is a cause for panic

We must approach any action plan to increase our reserves with a sense of urgency not panic. The bottom line is that activity needs to be generated and both the Energy Chamber and Government acknowledged and agreed there needs to be at least nine exploration wells drilled per year to maintain the country’s reserves base.  In 2010, the country had 35 per cent reserves replacement and based on the upswing in drilling activity in 2011 analysts anticipate a greater replacement rate in this year’s audit. The success of the 2010 bid rounds and this year’s deep water bid round will speak directly to boosting our future reserves.  However, it must be recognised that even the most successful bid round will not result in new gas production for at least seven to ten years. Based on upstream project cycles, companies obtain leases/contracts, conduct seismic surveys and appraise the results, then drill exploration wells and will not undertake infrastructural development for at least five years, assuming that commercial discoveries are made.  Despite this cycle, an eagle’s eye perspective must still drive our response to boosting reserves.  Ensuring there is a market for gas both domestically and in overseas markets is pivotal in adding to new gas reserves.  The local upstream, mid-stream and downstream gas industries are inexorably linked and development plans need to examine the entire value-chain.  This makes planning and achieving a balance between the competing demands all the more challenging.   Increasing understanding of gas reserves is an important element of ensuring a more informed discussion about the various priorities and the future of the gas industry.  

 

 

Conclusion

By addressing the misconceptions around our gas reserves, the Energy Chamber is not attempting to provide all the answers but rather give a better understanding of the entire reserves picture.  We are not an authority on the issue and even among experienced geologists and other professionals in the field there is no consensus on the many issues centred on the Ryder Scott audit and reserves in general. These specialists themselves raise questions on the methodology used by Ryder Scott, the findings of the audit and what the audit reveals about the country’s energy future. The chamber also wishes to incite the populace to really pay attention to all dimensions of the audit and inspire them to use their initiative to delve deeper into the report and come up with their own clear understanding of our gas reserves position, minus common misconceptions clouding their judgement.  

 

 

For more information on the article contact Nazera Abdul-Haqq at [email protected] and 

Sherwin Long at [email protected] 

Visit www.energy.tt