Resource Classification can be FUN

Reserve classification is a moving target. Reserves are the ‘bottom line’ numbers, that many stakeholders from geologist’s through governments to the investment community hang their hats on. Yet classifications are a chimera! The recoverable reserves, be they from a single oil pool or from the whole world, are a complex function of technology, oil price and a host of other variables. Reserve numbers are ultimately a matter of interpretation. Sigurd Heiberg (Statoil) kindly provided Oil ITJ with a review copy of a paper (co-authored by Per Blystad and Erik Søndenå of the NPD) on ‘Resource Accounts, National and International Standardization.’ The paper offers a new look at reserves and their evaluation.

Petroleum reserves are hard to evaluate because they represent a ‘forecast of future production resulting from the effort invested in bringing such production about.’ If external circumstances lead to a change in the ‘effort’ – then the reserves will change too.


Reserve stakeholders fall into three groups with different agendas. Governments may want to evaluate reserves with a regard to tax take, or for the greater good. Oil companies may need to manage reserves to optimize production, cash flow or profits. The investment community requires ‘accurate’ reserve numbers to evaluate investment and lending opportunities.

Three categories

The 2000 SPE classification divides un-produced reserves into three categories, ‘reserves,’ ‘contingent reserves’ and ‘prospective reserves.’ Each category is divided into three bands – low, best estimate and high. Heiberg advocates a further sub-division of the three main categories according to project maturity. This means for instance that the ‘contingent’ category breaks down into three ‘development status’ subdivisions of – ‘not viable’, ‘on-hold’ and ‘pending.’ This classification potentially allows a distinction to be made between reserve variability stemming from a project’s maturity, and variability resulting from uncertainty in actual reserve estimation. Heiberg does note a potential source of confusion when comparing the new categories with older classifications – these sometimes allowed quantities associated with immature projects to be lumped-in with uncertain probable and possible reserves.


The introduction of a measure of uncertainty in reserve estimates opens the door to a more sophisticated, statistically-based categorization. Heiberg suggests that by shifting reporting from ‘proved reserves’ to the ‘expected value’ of reserves, several issues with current reporting would be circumvented. The gross under-reporting of ‘proven-only’ returns would be eliminated and greater transparency in reporting changes in reserves over time could be achieved. But Heiberg steers clear of complete advocacy of such a radical change stating that ‘there are good reasons to continue to report proven reserves, as the concept reflects both a reasonably certain value statistically and also the quantities that have been confirmed by direct observation.’


The NPD forum for Forecasting and UNcertainty evaluation (FUN) has been adapting the SPE classification to the Norwegian context, with particular attention to establishing project status categories. Industry partners appear satisfied with the NPD adaptation and the whole of the Norwegian reserve base will be described using the new scheme from 2001 onwards. The new Norwegian scheme introduces probabilistic reserve computation. This allows stakeholders to move away from the single value reserve estimate to a more informative indication including an uncertainty range. Probabilistic estimates also allow for uncertainty ‘management’ – particularly in computing the overall uncertainty in aggregated reserves. They are also more amenable to sophisticated decision support.

The informed investor

While ranges of uncertainty are grist to the mill of the financial modeler, they may be harder for the investment community to get its head around. US GAAP accounting principles roll reserve estimates into depreciation calculation – here a single number is obviously required, but which one? The US SEC has a set of widely used guidelines for reserve statement. It is important that all companies should report using the same methods.


The aim of the SEC guidelines is not to give neutral expected values as required for business planning, but rather to express reasonably certain, conservative and low values. But other, more liberal reporting régimes exist, such as those practiced on the London Stock Exchange. Some work is in progress to harmonize these reporting requirements – notably through the International Accounting Standards Board ( – which build on the SPE classification.

Unified scheme

Heiberg described a tentative unified scheme encompassing the SPE, FUN and a Russian classification. Ongoing work under the auspices of the UN Economic Commission for Europe may lead to a formal unification of the three schemes. Heiberg concluded by endorsing these international efforts at standardization. He also recommends using probabilistic reserve forecasting for management. Differences inherent in the reserve reporting can be reduced by standardizing on mean value reporting, while offering proved reserves reporting as a supplement.

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