Chance of Development: What is it? Can we estimate it? How should we use it?

Abstract

Abstract The chance of commerciality is a concept that is fundamental to Reserves and Resources estimation. Within the SPE Petroleum Resources Management System (PRMS) it is the vertical, project maturity y-axis. In this context, it represents the chance of the recoverable volumes from a given project reaching commercial producing status. Undiscovered, Prospective Resources have both a chance of discovery, and a chance of development, which together comprise the chance of commerciality. Once discovered, the chance of discovery becomes one, so Contingent Resources and Reserves have only a chance of development, which represents the chance of the accumulation reaching commercial producing status. Reserves should have a very high chance of development, which reaches 100% once commercial production is actually achieved. PRMS guidance on the estimation of chance of development is not prescriptive. Instead, it indicates that all contingencies that prevent commercial development should be fully described, and that these may be quantified. However, a quantitative estimate of chance of development, often expressed as a percentage, is specified as a requirement when reporting Contingent Resources under some stock exchange reporting regulations. As a project-based system, the PRMS encourages project definition for Contingent Resources, and even for Prospective Resources. Therefore, chance of development estimates should be linked to defined development plans, timeframes and related cost and production profiles. Various methods have been used to estimate the chance of development, but there is no widely-accepted methodology currently in use. A consistent framework for estimating chance of development would be a useful tool given the rather subjective nature of many such estimates in use today, and their use in commercial transactions and regulatory disclosures. In order to do this a number of technical and commercial factors (that represent the contingencies) would need to be considered. These include: commitment to proceed, regulatory and partner approvals, infrastructure capacity and capability, technology requirements and availability of and access to markets. The impact of these factors varies from project to project, but is especially important for gas and unconventional resources projects as they move towards commercial development. Uncertainty surrounding future oil and gas price forecasts, political issues and contract negotiations also make chance of development quantification problematic. Chance of Development is commonly used as an input to economic assessments and valuations where it is often quoted without regard for timing and project definition, and with little explanation of the framework used. In such circumstances, it may be misleading and overly simplistic to multiply the project Net Present Value (NPV) by a single chance of development factor to derive a risked NPV as a proxy for value. Thus, in order to be meaningful, further definition of its estimation and application is required, in particular regarding the timing and scope of development. This paper will examine how chance of development can be better defined, methods for its estimation and its appropriate application as well as its common misuses. Factors considered include the correlation between chance of development and resource classification, stage gate decision-making processes, the contingencies as described in the PRMS, and the potential use in economic evaluations. Recommendations are also included for better definition of chance of development.