rockdoc – I agree. I just used the sloppy “proven” to keep the conversation on track. You and I both understand “proven” and it takes more than some geologist throwing a number out. And it would irritate them more for me to tell that that I don’t really care what the actual “proven” number may be because that’s not a very meaningful category to me. At the end of the day the only proven reserve category that comes close to meaning anything to me is “proved developed producing”….PDP. Most don’t understand that that much of those “proven” reserves are what you and I call “proved undeveloped”: “PUD’s. A while ago US pubcos took a hit on their books when the SEC tightened up on the regs regarding PUD’s. They used to be rather loose with how far away from a producing well they would let a company count potential locations as PUD’s. Not working for a pubco I’m not 100% sure but I think the rule is now one step out location in four directions. Which is why companies will often not drill immediate offsets to good wells: skip a few spots and get another 4:1 bump.
Folks should also understand that there are some generally accepted criteria by which hydrocarbon accumulations are categorized. The gold standard that most utilize is that of the SPE: Society of Petroleum Engineer. If folks have an hour of their life to spare here it is. BTW they’ll find that the vast majority of those billions of bbls of “proved reserves” aren’t actually classified as proved. And they’ll see in the link that “proved” isn’t itself even a category per se.
http://www.spe.org/industry/docs/OGR_Mapping.pdfOf course, folks should remember what happens to the PDP reserve number: it decreases as the wells deplete. Which is a big part of that treadmill the pubcos are on: whatever a company has at the beginning of the year on the books as PDP can significantly decrease for those existing wells by the end of the year. And folks should also understand that PDP reserves are valued much higher than PUD’s…especially by financial institutions. My company only values PUD’s at 40% to 60% of the equivalent PDP. And when buying properties PDP reserves are priced much higher than PUD’s. So to increase PDP they have to drill a number of wells just to replace those PDP reserves that disappear from the asset balance as the wells deplete. And there’s the real trap: the more wells they drill the more PDP they book. But the more PDP they have on the books at the beginning of the year the more wells they have to drill just to replace those depleting PDP reserves by the end of the year. And those replacement wells have to be replaced, etc, etc, etc. IOW the more PDP reserves they put on their books the more wells they have to drill just to maintain their existing value let alone increase it.
But my main point wasn’t about reserves. The subject of the thread is about these great “new” fields that have been recently discovered. Except, of course, these plays were discovered and began development over half a century ago. They aren’t new. What’s new is oil selling several times more than it was a dozen or so years ago. That’s the important dynamic to appreciate IMHO. We didn’t discover anything new. We’re just utilizing technology and higher prices to economically recover what we’ve known was there for many decades. Many geologists today would love to take credit for these new discoveries but most us were either babies at the time or weren't even born yet. But what the heck: if they want to thow a Blue Bell ice cream party in my behalf who am I to argue. LOL.
By the way here's an example of what can happen to those "proved reserves" when they actually start drilling. I just looked at a deal offering almost 20,000 acres in Wilson County,Texas. Company X, late to the Eagle Ford Shale play, bought the acreage from another company for over $90 million. After spending over $40 million to drill EFS wells they are walking away and offering the entire acreage position for $6 million. And the company that came to use looking for financial support was interested in the Austin Chalk and Buda Limestone on that acreage...not the EFS. Company X generated a net loss of over $120 million drilling "proven" EFS reserves. And yes: by SPE standards there were almost no PUD EFS reserves on that acreage.
And no: we passed on the offer. Insufficent rate of return on the AC and BL in our humble opinion. And yes: the company that sold the acreage to Company X (at a nice profit) walked away with a smile on the face and never looked backed. That's what we do to our own sophisticated players. Wanna come play with us? LOL.
