This Week In Petroleum November 4, 2009

Proved Reserves of Crude Oil Fall in 2008, Reflecting Low End-of-Year Prices
The Energy Information Administration’s (EIA) U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Proved Reserves, 2008 reports that proved reserves of crude oil fell by more than 10 percent in 2008, primarily because of low end-of-year prices used to estimate proved reserves, even though discoveries of crude oil rose for the third year in a row. In contrast, proved reserves of natural gas rose by 3 percent in 2008, despite low end-of-year prices.

Proved reserves are those volumes that geological and engineering data demonstrate with reasonable certainty to be recoverable from known reservoirs under existing economic and operating conditions. Under Securities and Exchange Commission (SEC) rules in effect since 1982, operators assessed their 2008 proved reserves based on the market price on the last day of the year.

Crude Oil. The end-of-year crude oil price for 2008 - $44.60 per barrel for West Texas Intermediate (WTI) crude oil - was less than half the end-of-year price for 2007 - $95.95 per barrel. As a result, operators reported record negative net revisions of more than 2 billion barrels to their proved reserves estimates, more than they produced during the year.

Under updated SEC rules issued in 2008 that take effect in 2010, operators will instead use an annual average of first-day-of-the-month prices to develop their reserves estimates. This average price will be less sensitive to volatility in prices. The SEC's new rules would have shown an increase in oil prices from $71.79 per barrel in 2007 to $101.63 per barrel in 2008, a 42 percent price increase rather than the significant decline operators actually used. Under the new rules, there would likely have been a smaller drop (or possibly even an increase) in crude oil proved reserves.

Despite the record negative revisions to proved crude oil reserves, 2008 saw a drilling boom in the first half of the year and an increase in new discoveries of crude oil for the year. One notable source of increased discoveries was North Dakota (167 million barrels), representing rapid proved reserves growth in the Bakken shale and the underlying Three Forks formation. Operators can produce oil from the Bakken using the same horizontal drilling and hydraulic fracturing techniques used so widely for natural gas shale production. (Note, however, that the production of oil from the layers of shale like those in the Bakken Formation is not the same as the extraction of oil from oil shale plays. See This Week In Petroleum, March 4, 2009.)

http://tonto.eia.doe.gov/oog/info/twip/c...