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Energy & Resources
(Re)Classifying oil reserves
Mineral Resource of the Month: Clays


(Re)Classifying oil reserves

On Jan. 9, the Royal Dutch/Shell Group of Companies (Shell) announced a 20 percent reduction in its recoverable hydrocarbon reserves. The company assured investors and regulators that there is no difference in the volume of oil and gas in place, saying that development has been slower than originally thought. Nevertheless, the significant downgrade is raising questions as to the legitimacy of the earlier estimates and whether there should be an international and industry-wide standard for reserves classification; currently, there is none.

“Reserve” refers to the amount of oil or gas that has been discovered and that can be extracted profitably with existing technology under present economic conditions. Following an internal review of its reserves late last year, Shell recategorized approximately 3.9 billion barrels of oil and the natural gas equivalent, representing the company’s largest recategorization of reserves ever.

According to company executives, more than 90 percent of the recategorization is a reduction in the “proved undeveloped” category, with the remaining 10 percent in the “proved developed” category. And much of the recategorized reserves were in Australia and Nigeria. The company said in a press release that “most of these reserves will be re-booked in the proved category over time as field developments mature.”

Under Shell’s system, “proved undeveloped” is differentiated from “proved developed” based on whether or not the infrastructure is in place to extract the hydrocarbons, says Peter McCabe, a geologist with the U.S. Geological Survey (USGS).

“Unfortunately, there are many disparate ways of calculating reserves and resources,” he says. “Definitions vary between companies, between countries, and even between organizations within a country.”

Together, the Society of Petroleum Engineers (SPE), World Petroleum Congress (WPC) and the American Association of Petroleum Geologists (AAPG) have developed three primary categories of their own for reserves. They define “proved” reserves as the amount of oil and gas believed to be recoverable with “reasonable certainty” (90 percent probability), based on current economic conditions and technology. “Probable” reserves indicate additional resources more likely to be recovered than not (50 percent probability). And “possible” reserves are less certain to be recovered (10 percent probability).

The proved reserves represent an estimate based on geology, engineering and economics, McCabe says. It’s all “risk management,” says Robert Laing, a geophysicist with Chevron/Texaco. Recategorization of reserves, such as with Shell, however, should not affect the market for petroleum geology, Laing says.

Indeed, reclassifications happen frequently for various reasons, says David Abbott Jr., a consulting geologist in Denver who spent many years as a geologist with the U.S. Securities and Exchange Commission (SEC). “Changing oil and gas prices can make a big difference for some projects,” he says. And some geologic or engineering parameters may only become apparent after the first few wells are drilled and produced.

McCabe adds that reserve estimates may also be recategorized because initial estimates were based on poor geologic interpretations, overly optimistic calculations of engineering costs, or unreal expectations of market demand. “One would require a lot of knowledge about the internal decision-making process in a company to know the full story,” he says.

Still, in the wake of the Shell recategorization, industry insiders are speculating whether or not the SEC might now mandate independent reserves audits, greater transparency in reporting of reserves, or industry-wide standardization of classification schedules. The SEC has guidelines for companies reporting proved reserves and allows for reclassification of proved reserves. The agency has not yet announced whether any changes to the system will be made nationally.

On the international stage, a committee of the United Nations has been working for seven years to address reserve and resource terminology. In 1997, the U.N. Economic and Social Council passed a “framework” classification standard for reserves and resources of solid fuels and minerals commodities. And in 2002, an ad hoc committee formed to further classify world energy reserves and resources.

“The ultimate goal is to have a harmonized terminology and definitions for each category of reserves and resources to permit international comparisons and facilitate communication, valuation and trading,” says Thomas Ahlbrandt, chief of the World Energy Project at USGS and vice chairman of the ad hoc committee.

For petroleum, the committee has already developed a classification system that incorporates the SPE/WPC/AAPG reserve and resource classification, which it has presented at meetings throughout the world. It remains to be seen, however, if an international classification standard will be adopted and followed, Ahlbrandt says.

Still, the sticky business of classifying oil reserves continues. “It’s all a matter of managing uncertainty,” Laing says. “We never know what we will find until we drill the well.”

Megan Sever

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Mineral Resource of the Month: Clays

Clays represent one of the largest mineral commodities in the world in terms of mineral and rock production and use. Many people, however, do not recognize that clays are used in an amazingly wide variety of applications. Use continues to increase worldwide as populations and their associated needs increase. Robert Virta, clay and shale commodity specialist for the U.S. Geological Survey, has prepared the following information about clays.

Contrary to popular belief, clays are not just the orange dirt that mars household halls in wet weather. In addition to the more obvious brick, pottery and roofing tile applications, there are also thousands of unseen uses for clays.

Manufacturers use the electric charge on clay surfaces to bind chlorophyll and other organics in semi-processed oil to clay particles that are later removed. Companies are able to make hand lotions and paints that have a smooth, even consistency because the solid clay components stay in suspension due to their edge-to-plate bonds, which form a stable network. Clays also give a glossy surface to this magazine paper by forming a smooth, thin, ink-receptive film over the rough cellulose paper surface. Additionally, clays play a role in lightweight aggregate for construction applications because gases that generate from shale at high temperatures cause the viscous material to expand or bloat into a porous, low-density structure.

Industry uses six types of clays: ball clay, bentonite, common clay and shale, fire clay, fuller’s earth and kaolin. Mineral composition, particle size, plasticity, absorption qualities, firing properties and oil clarification properties are a few of the major characteristics used to distinguish among the different industrial clay types. The term “clay” is applied to particles less than 2 micrometers in size, but clay minerals can have particle sizes ranging from tens of angstroms to millimeters.

In 2002, about 39 million metric tons of clays were sold or used in the United States. This averages out to about 270 pounds or 123 kilograms of clay used annually for each man, woman and child in the United States.

Common clay and shale dominated the clay industry with a production of 23 million tons in 2002. Its primary uses were the manufacture of brick, cement and lightweight aggregate. Kaolin ranks next, with about 8 million tons sold or used in 2002, primarily for paper coating and filling applications. Bentonite, with about 4 million tons sold or used in 2002, was the third most used clay. Major uses were in absorbents, drilling mud, foundry sand bond and iron ore pelletizing. Fuller’s earth, ball clay and fire clay followed respectively by use. Although there is no accurate accounting of world clay production, it undoubtedly exceeds 150 million tons per year.

For more information on clay and shale, visit: minerals.usgs.gov/minerals/pubs/commodity/clays/

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