Opinion
- Editorial
TT's STCIC:
Understanding natural gas reserves
Over
the past few years there has been considerable debate
about T&T’s gas reserves and whether the
current reserves can sustain the anticipated expansion
in downstream plants and power generation capacity
(mainly linked to the proposed aluminium industry).
It
is widely accepted that understanding our reserves
is of critical importance for strategic planning
from the perspective of governments, investors and
oil and gas companies.
Reserves
form the most important component of an oil and
gas company’s balance sheet and for this reason
reliable and periodic assessments of oil and gas
reserves are essential to determine the value of
the company and forms an integral part of the annual
audit.
In
the case of T&T’s national reserves of
natural gas, the Government normally retains the
services of independent consultants to provide annually
audited reserve figures. These are determined through
an audit of the individual company figures.
Given
the structure of our economy this is one of the
most important pieces of data for forward planning.
It is critical that as a country we have a full
and comprehensive understanding of the our natural
gas reserves position and that such an understanding
be central to policy planning and project sequencing
in the energy sector.
There
needs to be a greater level of understanding about
what oil and gas reserves constitute. In physical
terms, reserves of natural gas are the commercially
recoverable portion of accumulations of natural
gas located in the pore spaces of reservoir rocks
buried sometimes thousands of feet below the surface
of the ocean bed.
Reserves
can therefore never be estimated with total certainty.
One prominent local energy expert has described
the process of estimating reserves as “guesstimating.”
Worldwide,
many fields show wide fluctuations in reserve estimates
through time at both the evaluation and production
stages, as different data become available. It is
not just physical uncertainly that leads to different
estimates.
One
of the main reasons for this uncertainty is the
commercial environment which can be as uncertain
as the geologic environment. Uncertainty in the
commercial environment is fueled by changes in the
economic, political and legal landscapes.
For
example, an increase in the price of oil or natural
gas can make deposits of oil and gas that were once
considered an un-commercial prospect now a profitable
venture. The same can be said of the tax structure
in the industry. Changes in the tax laws of a country
where the government attempts to increase its take
can negatively affect the commerciality of reserves.
The
effect of taxation on reserves was recently demonstrated
in the case of Repsol YPF in Bolivia. In an article
in the Petroleum Economist of March 2006, it was
reported that Repsol YPF had downgraded its reserves
of natural gas by some 25 per cent. This was due
to a number of factors one of which was a drastic
increase in the level of taxation in Bolivia where
the company had about 25 per cent of its reserves.
In
May 2005, a new hydrocarbon law was passed in Bolivia
which increased wellhead taxes from 18 per cent
to 50 per cent. (In 2004, Bolivia was reported to
have 31.4 trillion cubic feet of proven natural
gas reserves).
Technology
also has a role to play in determining reserves.
Technologies such as 3-D seismic and horizontal
drilling have contributed greatly to making the
economics of exploration and production more attractive
and have helped add to the proven reserves of oil
and gas around the world.
An
example of the role of technology in reserves is
the case of the Penguin Field in the North Sea.
This field first appeared as a “discovery”
in Shell’s statutory reports in 2002. However,
the field was actually physically discovered back
in 1974 but was, at the time, considered un-commercial.
In the 28-year period (1974-2002) advances in sub-sea
technology eventually made commercial exploitation
of this field possible and its reserves proven.
The
operating environment also plays a large role in
whether reserves can be commercially extracted.
For example, in the North Sea in 1988 an accumulation
of 30 million barrels was considered to be marginal
while, at the same time, in West Texas (an area
with extensive infrastructure), depositions of less
than one per cent that size were considered exploitable.
In
Russia large deposits of natural gas that were once
considered as stranded will soon be classified as
proven once LNG terminals are completed. The emergence
of a global LNG trade has also made natural gas
reserves once considered stranded now proven reserves.
A
problem with reporting reserves is the different
reporting standards in different countries.
There
are different reporting standards in Russia, China,
Canada, the USA, the UK and Australia. In 1997,
in an effort to standardise reserves reporting,
the Society of Petroleum Engineers (SPE) and the
World Petroleum Congress (WPC) jointly developed
a set of definitions on reserves. It is important
to note that T&T’s oil and gas reserves
are based on the SPE/ WPC definitions.
The
SPE/ WPC defines proved reserves as those quantities
of oil or gas which by analysis of geological and/or
engineering data can be estimated with reasonable
certainty to be commercially recoverable, from a
given date forward from known reservoirs and under
current economic conditions, operating methods and
government regulations. Proved reserves can be categorised
into developed or undeveloped.
Unproved
reserves are based on geological and or engineering
data similar to that used to determine proved reserves.
However, the difference is that technical, contractual,
economic and regulatory uncertainties preclude such
reserves being classified as proven. In such a situation
these unproved reserves are classified as probable
and possible.
Oil
and gas companies listed on the United States Stock
Exchange and the London Stock Exchange are required
to meet the standards for reserve reporting in those
stock exchanges. The US SEC requires that only proven
reserves be reported.
According
to the SEC, proved oil and gas reserves are the
estimated quantities of crude oil, natural gas,
and natural gas liquids which geological and engineering
data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs
under existing economic and operating conditions,
ie, prices and costs as of the date the estimate
is made.
Unlike
the United States SEC, the London Stock Exchange
recognises two classifications of reserves: proven
and probable.
According
to the London Stock Exchange listing rules, proven
reserves are those reserves which on the available
evidence and taking into account technical and economic
factors have a better than 90 per cent chance of
being produced. Probable reserves are those which
on the available evidence and taking into account
technical and economic factors have a better than
50 per cent chance of being produced.
In
the final analysis, due to the uncertainty factor
inherent in reserve reporting, countries like T&T
should adopt a conservative approach to the monetisation
of natural gas reserves. The expansion of natural
gas utilisation in T&T should be based on a
careful understanding of our reserves position.
To
add to this, there is also the need for transparency
and timely reporting T&T’s oil and gas
reserves and production data.
Former
Minister of Energy, Eric A Williams had made the
reporting of natural gas reserves and related production
data a standard feature of his address to Parliament
during budget debates. It is hoped that this trend
continues in 2006.
STCIC
is Trinidad's Southern Trade & Industrial Chamber
(www.southchamber.org) This is the first in a series
of columns by the STCIC on oil and gas reserves
in T&T. www.southchamber.org .
Petroleumworld
not necessarily share these views.
Editor's
Note: This commentary was published by Trinidad
Guardian, on June 8, 2006. Petroleumworld reprint
this article in the interest of our readers.
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