Investor Centre

Reserves

Cooper Energy provides the following briefing for investors so that they may become more knowledgeable about oil and gas industry practices. This briefing should not be construed as advice and investors are solely responsible for making their own investment decisions.

Reserves are a common term to describe hydrocarbons that are expected in the future to be produced from a subsurface reservoir and sold into a market for an economic gain.

Reserves can also be termed recoverable hydrocarbons or future production. There is nothing magical about the term.

In Australia there is no common standard for reporting oil and gas reserves. In some countries the Government or legislator may specify a hydrocarbon reporting standard or place reporting restrictions or requirements on listed companies.

There are three main tests for reserves:

1. There is a reasonable assumption that they can be sold in the future (i.e. there is a market for the hydrocarbons that will pay to buy them).
2. They should be economic (i.e. expect to be produced at positive cash flow using reasonable forecasts of commodity prices and costs).
3. The company has tenure to the reserves (i.e. they fall within the current permit term or the company is in receipt of confirmation that the permit term will be extended).

There are three types of reserves that are the most important:

1. Discovered Developed Producing.
2. Discovered Undeveloped (and by definition, not producing).
3. Undiscovered (and by definition, not producing).

Some standards break reserves into many other categories but in reality these three categories inform an investor everything they need to know about a company.

Discovered Developed Producing Reserves are those quantities of hydrocarbons that are currently being accessed by infrastructure. If that infrastructure continues to produce until the project goes cash negative or the permit life comes to an end then the volume of hydrocarbons between now and that point can be termed reserves that are developed and producing. These reserves firmly underpin the cashflow of a company.

In some standards these are called Proved Reserves.

Discovered Undeveloped Reserves are those quantities of hydrocarbons that are currently not being accessed by infrastructure but it is expected that infrastructure will be put in place to access these reserves at a future date. These reserves have more risks associated with them than the developed producing reserves such as construction risk and appraisal risk. These reserves must have at minimum an approved conceptual development plan and the volumes will eventually be moved into the developed producing category once the project has been constructed.

In some standards these may be termed proved undeveloped or probable reserves, depending on the distance from proved reserves and the timeframe for development.

Undiscovered Reserves are those quantities of hydrocarbons that have not yet been discovered but are the target of an exploration well. These are subject to very high risks as an exploration prospect has a chance of success in the 3-40% range.

In some standards these may be termed prospective resources.

All reserves categories should be quoted at the best estimate level. Some companies will also provide low and high estimates for all categories, should they wish to do so.

All reserves have recovery risk. In some cases a company may recover less than the best estimate, in some cases a company will recover close to the best estimate, in some cases a company will recover more than the best estimate. The evaluation process is not precise – it is only an estimate. Different evaluators may deliver different estimates for the same project – this is not unusual.

Undiscovered reserves have more risk than undeveloped reserves. Undeveloped reserves have more risk than developed reserves. The risk generally moves from existence (for undiscovered reserves) to uncertainty of estimate (for developed reserves).

As oil and gas reserves are used as an indicative measure of the value of oil and gas companies, companies at a minimum are usually obliged to report the best estimate of developed and undeveloped reserves – preferably as two separate categories. Companies can report undiscovered reserves when a well is proposed for drilling. There is little benefit in oil companies reporting large undiscovered reserves portfolios unless a well is about to be drilled on a prospect.

Note that oil and gas reserves can only give an indicative measure of value because value is dependent upon many other variables such as – location, taxes, development costs, operating costs, oil or gas, production rate and commodity prices. Value is a complex net present value equation that does not have a 1:1 relationship with reserves. In very general terms however, the larger the reserves the larger the value.

Oil and gas companies should use competent and experienced personnel to prepare their reserves estimates and companies should be very careful that they do not over-inflate the estimates.

Investors should always ask, even if a reserves estimate is provided:

1. What is your best estimate of your developed producing reserves prior to the project going cash flow negative and prior to the end of the permit?
2. What is your best estimate of your undeveloped reserves prior to the project going cash flow negative and prior to the end of the permit and has the project got an approved conceptual development plan?
3. What is your best estimate of your undiscovered reserves for this exploration prospect?

These questions should tell the investor everything they need to know to provide an insight into the company’s current and future potential.

Cooper Energy keeps abreast of best practices in reserves reporting and will continue to push for clear and transparent reporting in this area.

For further detailed reading investors should consult the Recoverable Hydrocarbon Guidelines on Cooper Energy’s website – policies section.