How Significant Is the P90 Value as a Measure of the Reserves' Downside?

Abstract

Summary Probabilistic methods for reserves estimation, including uncertainty quantification and probabilistic aggregation, have gained widespread acceptance in the oil and gas industry, since the first comprehensive guidelines were issued by the Society of Petroleum Engineers (SPE) (Swinkels 2001). The probabilistic methods now used in the oil industry, as proposed in these guidelines, are similar to those also used in portfolio theory and risk management by the finance industry. A significant amount can be learned from the extensive experience with probabilistic methods and quantification of risk with measures like value-at-risk (VAR), in financial risk management. Especially, the guidelines issued by the Basel II Accord (Bank for International Settlements 2006) and the discussions since the 2008 financial crisis contain important lessons. In this paper, we examine a fundamental question: "Is the P90 reserves value an appropriate measure for quantifying the reserves’ downside?" For the P90 reserves value to be considered a good measure of the reserves’ downside, it needs to possess a number of basic characteristics involving P90 reserves for each field and the probabilistically aggregated P90 reserves for the portfolio of fields. Analogous to the definition of a coherent risk measure used in the finance industry, we define these characteristics for P90 reserves. The P90 reserves are as good a risk measure as VAR used in the financial industry. However, like VAR, it is not a coherent risk measure. A possible uncertainty scenario, in which one of these necessary characteristics does not hold, is given. An alternative measure of risk for quantifying the reserves’ downside, defined as the average reserves over the confidence interval higher than P90, is presented. This is a coherent risk measure. In this paper, we highlight the appropriateness and limitations of using the P90 reserves estimate as a measure of the reserves’ downside. Understanding of the limitations posed by using the P90 reserves value is vital in management of reserves risk.