August 22, 2012
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Home / Issue Archive / 2009 / June #6 / A Matter of Time: Natural Resources Ministry Pushes on With Reserve Classification Reform

№ 6 (June 2009)

A Matter of Time: Natural Resources Ministry Pushes on With Reserve Classification Reform

The All-Russia Scientific Research Geologic Exploration Institute (VNIGRI) fulfills governmental contracts for the re-estimation of unallocated petroleum reserves throughout the country.
Within VNIGRI, Yury Novikov, heads the special Oil and Gas Laboratory which estimates reserves offshore and in the Far East.

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   A qualified specialist in the area of marine geology, Novikov has worked at VNIGRI for over 30 years and is involved in the Ministry of Natural Resource’s project to update Russia’s Soviet-era reserve classification system.

   Projects seeking capital abroad are required to certify reserves under SPE (Society of Petroleum Engineers) standards. But for domestic purposes Russia uses another system which can lead to over-estimation of reserve volumes.

   As a follow up to Oil&Gas Eurasia’s earlier coverage of this topic (February 2009 archived at Novikov spoke to OGE about how the process is faring.

Oil&Gas Eurasia: How important is the new reserves classification system for companies and the state?
Yury Novikov: Just to the extent that it meets the interests of the companies and the state. We can hardly imagine a new classification of oil and gas reserves equally meeting everyone’s interests.
Even if we suppose that the discussion brings a consensus on a new classification version accepted by all interested parties, the procedures of its introduction will still be problematic. For example, the reserves of the largest project in the near future, Shtockman Field, are calculated based on geological and hydrodynamic models, i.e. on methodology that is not stipulated in the new classification and recommendations on its application. It is difficult to suppose that economics of an international project evaluated in tens of billions of dollars will be re-estimated after January 1, 2012 in connection with Russia’s conversion to a new domestic classification system.

OGE: What classifications are typically used worldwide? What are the pros and cons of the various classification systems?
Novikov: Three key classification systems are used worldwide: U.S. Securities and Exchange Commission (SEC), London Stock Exchange (LSE) and Society of Petroleum Engineers (SPE). These classifications are characterized with tough standards, first of all, based on degree of confidence of the reserves: SEC classification takes due account of proved and economic reserves only with a high degree of confidence (90 percent minimum); LSE classification considers proved and prospective reserves (degree of confidence – 50 percent minimum); SPE classification considers proved, prospective and possible reserves (degree of confidence – 10 percent maximum).

OGE: What is the principle difference between the new Russian classification and SPE classification?
Novikov: The new Russian classification is more liberal than the SPE classification. It implies consideration of the four categories of the reserves typically taken into account in the USSR, with new definitions: explored – Category A, established reserves – Category B, evaluated reserves – Category C1, and expected reserves – Category C2. Reserves of Categories A and B approximately correspond to proved reserves in SPE classification; reserves of Category C1 correspond to probable, and Category C2 correspond to possible reserves.
In the new Russian classification, the distinct boundary between proved (Category B) and probable (Category C1) reserves is blurred. The boundary completely vanishes in the methodical recommendations for how to apply the classification. In short, the sytem is maliable, which makes it possible, for example, to refer to Category B (established or proved) reserves, which previously were considered as Category C1 reserves (evaluated or probable). Hopefully, the international audit system will not detect the obvious substitutions.

OGE: What are the expected deviations in evaluating reserves with the help of different systems?
Novikov: To give a consistent answer to this question, one should probably provide for a representative sampling of various types of fields and to assess their reserves with the help of different classification systems. Such a comparative assessment might have already been done, however I have no idea of the outcome. One thing is certain: the tougher the classification standards, the higher the confidence and the commercial value of the reserves, and the lower the volume of total reserves. The new Russian classification is much more liberal compared with those used abroad. Essentially, Russian oil and gas reserves that were evaluated without regard to their commerciality and booked in the State Register many years ago, may be dramatically reduced when the modern classification is applied. This is with regard to proved and probable or explored and established reserves.

OGE: How far along is the new classification and what aspects require additional study?
Novikov: The classification has drawbacks in my mind. First, there is the uncertainty of the further fortune of the reserves, which are currently considered as non-commercial. By default they are not subject to re-evaluation in accordance with the categories of the new classification, and they loose the initial categorizing within the frameworks of the former classification, now ineffective. Meanwhile, some of these fields have been qualified as strategic, in accordance with the federal decree, and shall not be transferred to Gazprom ownership. The reserves of these fields under the former classification have been integrated into long-term (up to 2030) plans of increment of reserves. It is not clear if these plans are to be adjusted with respect to the re-evaluation of reserves.
Secondly, C1 reserves will not be differentiated near the wells demonstrating the so called “commercial oil and gas flow rates” as they were in the prior classification. This artificial restriction of differentiation of C1 reserves was required to expand the possibilities of differentiation of B reserves at their cost.

OGE: What are the roadblocks in development, if any?
Novikov: If one looks upon the conversion to the new classification as on a systematic and long-term process rather then a one-time action, he will have to admit that the links of an integrated system has not been worked through.
Reserve data for unallocated fields is not availabe in either the Rosgeo Fund, or in regional geological funds. Companies still keep this data in their archives.
In many cases, the data has not been documented properly; it is incomplete, it contains multiple inaccuracies and errors and the values shown in initial documents may differ from those entered into the State Balance. C1 reserves were calculated with the help of different and incompatible methodical tools.
Multiplicities are observed in the new classification itself, and methodical recommendations for its application aggravate them rather than remove, varying the key provisions of the classification.
The evaluation procedure is not clear as well: probably it has to be different for the fields of unallocated and allocated subsoil funds, and in the last case it has to differ for the fields, which have been just prepared to commercial development and those at various stages of development.
The counting method and statistical reporting on re-evaluated (commercial importance) and not re-evaluated (non-commercial) reserves.
Fundamental coordination of the new classification with its potential users for whom it has been created (Russian oil and gas producing companies and international audit) is a must. If the classification in its current form is not acceptable to neither party, it means that its objective has not been achieved and conversion to this classification is senseless.

OGE: Is it reasonable, in your opinion, to postpone the conversion due to the fact that the application of the new classification may seriously impact the value of the companies? If so, which companies?
Novikov: It is obvious that subject to the above circumstances it is reasonable as well as necessary to postpone the validation of the new classification. In relation to drastic decrease of the reserves value of Russian oil and gas producers, the rumor is essentially exaggerated. In my view it is based on misunderstanding of differences between the fields of allocated and non-allocated subsoil funds.
About 2,500 of the 3,000 or more fields discovered in Russia belong to the allocated fund. It is clear that they were not included there by chance. It was done after careful selection by the subsoil users, during many years striving to minimize the risks of buying a pig in a poke. The unallocated fund still includes the most difficult of access and the least explored fields with the least explored reserves evaluated many years ago, very often based on the data obtained from one-two wells. The peculiar features of evaluation of the high categories reserves fulfilled in Soviet times aggravate even more the risks related to acquisition of these fields, which are still in the unallocated subsoil fund.
I do not expect that the new classification will seriously impact the structure of the well-explored reserves penetrated with hundreds of wells. Moreover, we may expect the optimization of the structure and increase of the commercial value of the field reserves as far as the extent of their exploration grows. For sure, this will require the increase of scope of geological explorations; on the other hand their results will be transparent, compatible and controllable. Perhaps this is the issue that the oil and gas producers do not like.

OGE: The OGE editorial staff is aware that VNIGRI re-evaluated the reserves of the fields of the unallocated fund with the help of the new classification. What are the key conclusions resulting from the study?
Novikov:  The results of re-evaluation of the reserves of the unallocated subsoil fund shall be in no case primitively extrapolated to the reserves of the allocated fund. I suppose the experience of re-evaluation of the reserves of the unallocated subsoil fund give grounds for the following key conclusions:
Firstly, conversion to new classification is necessary and inevitable. Secondly, this conversion shall be preceded by the revision of all fields of the unallocated subsoil fund in terms of their support with the data verifying the original evaluation of their reserves. Nowadays the revision of this kind is performed in relation to all targets prepared to deep drilling with prospective resources of Category C1. Thirdly, based on the existing versions of the new classification and methodical recommendations for its application the reserves cannot be re-evaluated in a consistent and perfect manner as a matter of principle. Coordinated reconciliation of these two documents is required with participation of all parties concerned. Fourthly, re-evaluation will prominently reduce the volume of reserves of high categories. It would better occur before the fields are moved to the allocated fund: government will have actual knowledge of the amount, structure and value of the resources for the nearest future; subsoil users will be aware of the quality of the commodity they acquire.

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