From my point of view, you bring up an important and very provocative discussion. However, this is really an interesting discussion without a straightforward answer.

I talked to a friend who works in the field in question and please see his reply

Ah yes, Oil Reserves...this is  difficult question to answer.

The short answer would be, no, this description of how reserves are calculated is completely wrong.  Normal distributions are not assumed for all reservoirs.  In fact, it is well known amongst most reservoir engineers and geo scientists that most fields' reserves follow a log-normal distribution...although I am not strong enough in probability and statistics to explain how or why this difference is important, I do know it to be true.

The real key to understanding a field's reserves is a long and reliable production history, good knowledge of the reservoir and good analogies for comparison.

However, the use of 90% confidence intervals to explain reserves are used within the industry, and are liberally applied at best.  What I mean by this, is that there are many different techniques used to evaluate reserves, and not all of them are probabilistic in nature.
However, they are reviewed in detail by a number of different regulatory bodies to ensure that corporations follow generally accepted practices to ensure the reliability is high.  These methods can be deterministic, probabilistic, analogies or a combination...essentially with the end goal of always being conservative in their estimate.

We actually have three different levels of reserves one at a P90, one at P50, and the final at a P10 (I believe) level.  By definition, the P90 is meant to ensure the given reservoir will produce 'at least' the estimated amount with 90% confidence.  P50 and P10 carry on, so these have a very low reliability by definition.

The key thing that most people don't realize is reserves must be 'economic' to be considered a reserve.  This means that reserves by definition are tied to commodity prices.  There is always a 'technical reserve' (the amount that can be produced with current technology)and the 'economic reserve' (the amount that can be produced economically)...so, this means reserves can increase when prices go up, and decrease when they fall.  I'm not exactly sure how you can build this into the probabilistic determination!

 As always theory can sometimes differ from practice.

-----Original Message-----
From: A UK-based worldwide e-mail broadcast system mailing list [mailto:[log in to unmask]] On Behalf Of Allan Reese (Cefas)
Sent: 23 June 2008 14:29
To: [log in to unmask]
Subject: Oil reserves

New Scientist (14 June, p4) reports a concerning mis-use of statistical methods.  It cites Richard Pike, CEO of the Royal Society of Chemistry, reporting that oil companies assume a normal distribution for each oil reservoir they find, and hence calculate a 90% certainty for its content.  For multiple reservoirs, they sum the 10%iles for each, but publish this as the 10%ile for the expected total.  Pike is quoted, "The figures are almost meaningless and just provide a conservative estimate for shareholders."

Since estimated reserves affect the market valuation of the companies and the futures price of the commodity, is this "lies, damned lies, and market manipulation"?

Allan Reese




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