Reserve Estimation

Reserve Estimation – Terry Engelder – Penn State

Let’s talk about estimating natural gas reserves. How do we do that? It depends on how much data is available based on past production.

The analysts, including those working for Wall Street or the Federal Government start with three categories of reserves characterized as possible, probable and proved. Each category is calculated in a different way depending on how certain the government regulators are that industry can deliver the reserves that they have promised to their investors.

Proved reserves are those that seem very real to government regulators and company stockholders. These reserves are the easiest to calculate because companies have a lot of production data to show the volume of the gas that comes out of a given area over a given amount of time.

In a sense, the companies have proven this with previous experience. If there are enough existing wells, the operator can see the extent of the reservoir and understand how different subsurface conditions affect the outputs.

All that production data gives us a very accurate estimate of how much gas we can look forward to getting out of the ground using existing technology. This must be able to be done in a profitable way for something to be called a proved reserve. Given those last two elements, existing technology and profitability, you can see how the concept of ‘proved reserves’ is based as much on economics and it is on volumetrics. As technologies and prices change, the same volume of gas in a formation can produce very different values for what would be called the ‘proved reserves.’

It’s more challenging (and exciting) to try to calculate reserves when nearby production data is sparse. Let’s use the Marcellus as an example, since I have gone through the exercise of calculating those reserves with very sparse data. If you have sparse production data, then you know a formation exists and it can produce under the right circumstances. If you have that much information, estimation of probable reserves is entirely reasonable.

We know the formation is there because of geological evidence from both sparse wells and outcrops around the edge of the basin.

Another piece of evidence that might be available is that drillers drilled through that formation while aiming for something deeper and they got a gas show coming up the line as they went through the layer in question.

If we know the gas or oil bearing formation is there, then the next step is to calculate the following things: the extent of the formation, its thermal maturity, porosity and thickness.

Geologists know the extent of formations by mapping the same rock in outcrop. When exposed or penetrated by a drill bit, the thickness can easily be measured at that location. Thermal maturity is a rock property that gives some indication of the amount of oil and gas the rock might produce because of its temperature and pressure history. That has to do with how deep it has been buried and for how long. Porosity is the open space in the rocks that can contain hydrocarbons and it is usually measured by recovering core samples from early wells that have been drilled. Because gas is compressible, we need to know something about the pressure of that gas. Pore space, thickness, and regional extent give us some idea of the size of the tank, as I call it. Thermal maturity gives some idea of what is in the tank, gas or oil. Pressure gives some idea of the amount of gas found in a tank of a certain size.

Now how much of that tank can we access and how much of what we can access can we actually extract? These are also questions that enter into reserve calculations. Some of the surface land simply won’t be drillable because it’s too geographically difficult, or landowners retain drilling rights, or local rules prevent drilling. That takes out a chunk of that tank. From what remains of the tank, using existing technology (that’s a key qualifier), I can estimate that we can recover about 10% of the total gas in place. More optimistic people sometimes use 30%. These are all numbers that go into a probable reserve calculation.

The third type of reserve is the possible reserve. Conservative Wall Street investors are unlikely to spend money betting on possible reserves. They are reserves that may have been defined by geological mapping but virtually no drill testing has taken place to confirm their presence. The size of the tank may be calculated as before but the state of the tank is unknown: empty or full. These reserves are more like speculative reserves where the chance of making money from them is low at best.

Any reserve can be estimated. It’s the quality of the estimate that varies based on the amount of data that is used in the calculations. As with all science, more data produces more accurate results.

1. University of Houston, 2015, Glossary of Terms used, http://www.uh.edu/~dguo/ (accessed June 30, 2015).