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Russian reserves definitions

Renaissance Capital

20 June 2019

Russian oil & gas

Russian methodologies for calculating reserves and classifications of reserves differ materially from accepted practices in the West. Reserves calculations performed using different methodologies cannot be accurately reconciled.

In general, the estimation of reserves comes in two forms. Geological reserves represent the quantities of natural gas, gas condensate and crude oil contained in the subsoil that might be recovered. These would be deemed resources under Western classifications. On the other hand, extractable reserves represent the portion of geological reserves the extraction of which (from the subsoil as of the date the reserves are calculated) is economically feasible given market conditions and rational use of modern extraction equipment and technologies and taking into account compliance with subsoil use and environmental rules. This would be more akin to a Western definition of reserves.

2016 marked the introduction of the new Russian reserve classification system, which replaced the ‘temporary’ 2001 system, that, in turn, was a largely unchanged Soviet version dating back to 1983. The new Russian system allows for the use of economic assumptions for calculating oil & gas reserves, and was meant to resemble a traditional Western reserves classification system. The key change in the new system was the introduction of a new concept of extractable reserves, which previously were taken as being equal to the geological reserves. Under the new Russian classification system, reserves are subdivided depending on their degree of substantiation into the following categories: explored reserves are represented by categories A, B1 and C1; preliminary estimated reserves are represented by categories B2 and C2; potential resources are represented by category C3; and forecast resources represented by categories D0, DL, D1 and D2.

Russian calculations have historically not used economic assumptions in estimating reserves. Generally, Russian methodologies classify oil & gas deposits as reserves if such deposits are technically recoverable, even if the recovery of a portion of such reserves using currently available technology is uneconomic. In contrast, the Western methodology classifies oil & gas deposits as reserves only if such deposits are economically extractable on the basis of existing technologies, prices and costs. The new 2016 Russian classification system has introduced an option of using an economic approach, but it is not clear how this approach can be implemented in practice. Given the active involvement of the Russian state (via the State Committee on Mineral Resources) in the reserves approval process, we foresee many potential disagreements between the industry and the government on the model assumptions, particularly given over 3,000 oil & gas fields on record. It is therefore not surprising to us that the Ministry of Natural Resources issued a five-page clarification to the oil companies on 14 April 2016 detailing the simplistic, formal approach for re-classification of the reserves from the ‘temporary’ into the new system (shown in Figure 110). This document contains only one reference to the economic model, in the last paragraph, stating that such approach would require a detailed economic analysis (read: should be avoided).

The evaluation of reserves in newly discovered deposits under the Russian reserves system relies on volumetric methods. These determine the volume of reserves by examining the filtration and capacitive parameters of the deposit based on: 1) the area of the deposit; 2) the effective depth of hydrocarbon saturation; and 3) the porosity of the deposit and the level of saturation of the hydrocarbons, taking into account thermobaric (temperature and pressure) conditions.

Figure 108 summarises the tests that substantiate reserves under the Russian classification method, approved by the Order of the Ministry of Natural Resources No. 477, dated 1 November 2013, and effective from 1 January 2016, and provided courtesy of Gazprom.

A new Russian reserve classification system launched in 2016

Substantiation tests

Category A

Category A reserves are calculated on the part of a deposit (or a portion thereof) drilled with producing wells and being developed in accordance with either a technological development project or an approved technological development scheme (drilled reserves).

Category B1

Category B1 represents the reserves of undrilled deposits (or portion thereof) which are to be developed in accordance with an approved project documentation, the results of a seismic survey, drilling of prospecting, appraisal, development, transit or deepened production wells containing commercial flows of crude oil or gas (some wells may be not probed, however, their productivity is expected based on the results of geophysical, geological and technological studies, as well as the results of core examination) (productive, undrilled, developed).

Category D0 Category C2 Category C1 Category B2

Category B2 represents the reserves of undrilled deposits (or portion thereof) development of which is being designed in accordance with an approved project documentation (trial industrial development project or an approved technological development scheme), the results of a seismic survey or other high-precision survey, such reserved being proved by the results of geophysical, geological and technological studies and by well drilling data (productive, undrilled, estimated).

Category C1 represents the reserves of undrilled deposits (or portion thereof) of the fields that have not been brought into commercial development, in respect of which the trial exploitation of all or some of the wells can be carried out (developed), where in respect of such deposits a seismic survey or other high-precision survey has been carried out and the prospecting, appraisal, development wells containing commercial flows of crude oil or gas (some wells may be not probed, however, their productivity is expected basing on the results of geophysical, geological and technological studies, as well as the results of core examination) have been drilled.

In respect of discovered fields in the sea waters, including the continental shelf of the Russian Federation in the territorial sea waters, inland sea waters, as well as in the Caspian and Azov Seas, the category C1 reserves include deposits (or portion thereof) drilled with the first exploration well in which the qualitative results of hydrodynamic logging (HDL) permitting assessment of the reservoir saturation have been obtained.

Category C2 represents the reserves of undrilled deposits (or portion thereof) of the fields that have not been brought into commercial development, which are being developed in accordance with a pilot operation project, pilot operation project in respect of particular wells, where in respect of such deposits a seismic survey or other high-precision survey has been carried out, such reserved being proved by the results of geophysical, geological and technological studies and by well drilling data (estimated).

Category D0 represents the resources of oil, gas, and gas condensate containing in potentially productive reservoirs in the prepared for drilling traps located in the proved commercial oil-and-gas bearing areas or in the undrilled productive reservoirs (developed). The form, size and stratification conditions of the assumed deposit are estimated from the results of geological and geophysical research. The thickness, the reservoir characteristics of the formations, the composition and the characteristics of hydrocarbons are assumed to be analogous to those for explored fields.

Category DL

Category DL represents the resources of oil, gas, and gas condensate containing in potentially productive reservoirs in traps identified on the basis of the results of geophysical and geological studies carried out within the areas with proved commercial oil-and-gas bearing areas (localised).

Category D1

Category D1 resources are reserves in lithological and stratigraphic series that are evaluated within the boundaries of large regional structures confirmed to contain commercial reserves of oil and gas (prospective). Prospective reserves are calculated based on the results of regional geological, geophysical and geochemical research.

Category D2

Category D2 resources are reserves in lithological and stratigraphic series that are evaluated within the boundaries of large regional structures not yet confirmed to contain commercial reserves of oil and gas (anticipated). The prospects for these series to prove to be oiland gas-bearing are evaluated based on geological, geophysical and geochemical research.

Source: Gazprom's Eurobond prospectus, July 2017