PRMS WORKSHOP

J. Michael Gatens, CEO

Unconventional Gas Resources Canada

Calgary, AB

Small Independent’s View on Unconventional

Reserves

Presentation Overview

• “Special” characteristics of unconventional

gas reservoirs relating to reserves estimation

• Advantages of PRMS for unconventional gas

reservoirs

• Case Study Examples

– Warrior Basin CBM

– Canadian Tight Sand/Shale Montney

• UGR Executive Team perspectives on PRMS

• Summary

“Special” Unconventional

Gas Characteristics

• “Continuous”, rather than discrete accumulation of gas

• Large resource in place, relatively low recovery efficiency

• Resource is much larger than reserves, especially early in the

life of a play

• Complex reservoir leads to complexity in evaluation

– Sorbed gas contributes to production

– Natural and induced fractures and multi-phase flow yield complex

decline curve shapes

• De-watering leads to increasing gas rates (inclines) in some

cases

• Short-term decline rates can be very large, long-term declines

can be very small

• Inter-well interference can have significant impacts

– P/z doesn’t work

Reserve Analysts and Regulators Have had to

Adapt to Unconventional Gas

• Many traditional methods were deficient, but companies still needed reserves reports

• Many regulations built for conventional gas needed to be “modernized” as unconventional gas became more routine and important

– Well spacing

– Commingling

– Reservoir maintenance

– Data reporting

• PRMS is part of the ongoing “solution”

– Not strictly used in U.S./Canada, but close

PRMS is a Positive Step for

Unconventional Gas

• Recognizes importance of large R resource versus small r

reserves

– R can become r over time

• Incorporates calculation of original-gas-in-place in TPIIP and

DPIIP definitions

– OGIP limits are routinely used in evaluation of recovery estimates

as quality check on reserves estimation under PRMS

• Allows for estimation of Prospective and Contingent resources

and their valuation

– Especially important early in play life, when value of reserves does

not reflect fair value of asset

• Reduces, but does not eliminate, the subjectivity in the

reserves estimation process associated with uncertainty

Warrior Basin CBM Example

• Early CBM wells really challenged estimators

• Traditional methods and evaluators had trouble with inclining

gas production

– Early approaches tended to be very conservative

• Conflicts arose when asset values became important in

securing loans or making transactions

Warrior Basin CBM Example

• Many evaluators started to use reservoir simulation models to capture physics of CBM production process

– Incorporated sorbed gas and allowed practical limits on recovery efficiency

– Captured the de-watering behavior and inter-well interference effects

– Required expensive, difficult-to-obtain reservoir properties

– Still required substantial production history for “calibration”

– Significant uncertainty remained, even with “better” tool

• Early adaptors were not welcomed to the club

• Allowed asset owners to bridge the gap between the hyper-conservative estimates and the “new” simulator estimates

– Pre-cursor of R to r, in a fashion

• Carried over to Antrim Shales, other coals

8

FORT ST. JOHNFORT ST. JOHN

DAWSON CREEKDAWSON CREEK

BCBC

ABAB

0 50Kilometers

BC Montney “Shale” Play

Pre 20012001 to 20042005 to 20082009 to 2012

Year of Spud

All YearsHorizontal Wells

Montney North

Petronas

Talisman

Painted Pony

Shell

Suncor

• HZ wells with multi-fracs energized play in 2007

• Play extension growing in northwest

• Improving liquids yield boosting economics

• Good access to pipelines for LNG export from west coast

• Play started with vertical wells, stalled in early 2000’s

UGRC

9

Both Logs Printed on same vertical scale and porosity

scales

Density Porosity

Neutron Porosity

Fracture Height Growth From Micro Seismic

Gamma Ray

BC Montney is World-

Class Hybrid

Shale/Tight Gas Play

• >1,000 Tcf Resource•~300 m Thick• 1,990 – 2,400 m to Top• Over-pressured• 300-400 Bcf/sq. mi. OGIP

• Sorbed and Free Gas

• 3 plays in one• Upper• Middle• Lower

• Good Wells• 5-15 MMcf/D IP’s• 6-10 BCF/well/zone

Montney Log

Eagle FordLog

Montney Play has Benefitted from PRMS

• Early use of continuous resource concept to calculate and use

resource estimates

– TPIIP, DPIIP, Contingent Resource reports

– Use of recovery efficiency as QC check on reserve

estimates

– R >>> r early in play life

• UGR Example

– Investors were “nervous” about well costs, value

proposition

– Early reserve report (Jan/2012) reflected 2P value of only

$350 MM

– Contingent resource report indicated (1C/2C/3C) value

range of $1,100 - $2,040 MM for same asset

– Green light for further investment!

– Recent reports moving up

Montney Evaluation Practices Evolving

• Increase in the “radius” surrounding new wells that

“proves” surrounding land

• Continuing use of OGIP estimates to refine and QC

performance estimates via recovery efficiency

– Use of lower log cut-offs for calculating OGIP

– Recognition of sorbed gas as contributor to OGIP,

though still not being used in analysis

• Investigation of impact of induced fracture height on

assignment of producible thickness; could add 4th

layer

Small Independent’s View of Current Practice

• PRMS is an improvement from the past

• R is still much larger than r early in project life

– Huge impact on potential value gap between

prospective buyers and sellers

• Solicited opinions of key UGR team on PRMS as

applied to Montney

– CEO, CFO, Director/Investor, VP Geosciences, VP

Reservoir Engineering (internal evaluator),

External Reserves Evaluator

• Questions focused on reserves report, 20-yr cut-

off, and PRMS framework

Common Views

• Reserves Report is important to investors and

bankers

• Provides independent, intelligent, objective view

• Useful in transactions

– Underestimates unconventional asset value in early

stages, can be used as a “weapon” by buyer/seller

– 2-P is base value in Canada, Total Proved in U.S.

– For smaller companies, investment capital may be

limited for large development programs, “7-yr rule”

helps protect buyers

– Too much subjectivity still in process as applied

Common Views

• 20-Year Cut-off is too short, use 40-50 years

– Relatively small impact on value, creates problems

with F&D

• PRMS Framework provides a more fundamental,

inclusive framework for capturing both the

uncertainty, and upside associated with

unconventional gas plays

– Recognition of continuous resource is important

• Leads to early use of resource estimation, provides

better basis for true fair market negotiation

– U.S./Canada moving in that direction, increasingly

accepted by outside stakeholders

CEO Views

• Reserves reports tend to underestimate

unconventional asset values

• Strength of PRMS is a box that allows for

everything to be included, capture upside

– Devil is in details

– Need a generation or two of evaluators

with proper statistics training to get

comfortable with probabilistic methods

CFO Views

• For public companies reserve reports used to calculate

F&D

– Good measure of investment efficiency, quality of

management

• For unconventional gas, the 20+ year reserves life can be

a problem

– Some analysts view 50-year reserves as largely “air barrels”

– Some analysts apply their own subjective cut-offs for F&D

calculation

• Investors still don’t understand PRMS

– See unconventional numbers as too big, a “lie”, disbelief is

common

– Still thinking conventionally, fall back on reserves report, NI-

51-101 rules in Canada

Director/Investor Views

• Owners reserve estimates are usually too optimistic

• Don’t care about 20-yr +/- limit, most value is in first 4 years

– Apparent F&D too low, true F&D subjective

• PRMS categories have greater risk, uncertainty; less firm value for investors

– Do indicate option, upside value

– Good for possible value, like mining assets

– Price uncertainty is a problem

• More comfortable with well quality variability in unconventional plays

– “Average” well rules the day

– What does permeability really mean in unconventional rocks?

VP Geosciences’ Views

• Reserves report useful, but tend to be

conservative due to (overly?) stringent

assumptions by external evaluators

• Likes to compare estimator assumptions/values

to internal estimates

– Log cut-offs, mapping practices, frac height

assumptions

• Are geoscientists involved in report

preparation?

• Data reporting requirements in Canada improve

quality of reports, reduce uncertainty

VP Reservoir Engineering (internal evaluator)

Views

• Reserves alone miss full value for unconventionals

– Relationship w/external evaluator adds value

• Experience, exposure to “outside” data

• Check on internal work

– Probabilistic methods often create more confusion than

clarity

• Aggregation is a problem, often done incorrectly

• 20-yr limit too short, recommends discounted EUR for

calculating F&D

• PRMS provides platform for globalization

– Conventional thinkers can be educated and assimilated

– Resource value from external evaluator not as important as

internal estimate

External Reserves Evaluator Views

• External reserves reports reduce bias and conflict of

interest

– Avoids outright fraud, “shucksters”, but there are still

bad actors out there

– In transactions, there are often 4 opinions, buyer,

seller, and their advisors; this reduces risk

• This firm uses a changing “radius” for

assigning/categorizing reserves in resource plays

– Subjective, practical, looking for geo-statistical basis

• This firm uses 50-year cut-off on reports because of

software limit

– F&D is a problem, subjective judgment is commonly

imposed

External Reserves Evaluator Views

• Old school guys still don’t like PRMS

– Need better standards for assigning resource

value, still too subjective

– Resources don’t have to be “economic”

– Good for new plays, but can be a bit “fuzzy”

• What is Discovered? Their firm needs

“commercial” rate

• Allows new wells to increasingly improve the

picture in a broader framework

–Undiscovered to discovered adds value

–Prospective resources can be assigned

value (Quebec shale gas)

Summary

• PRMS is a positive step forward for unconventional gas

• Recognizes importance of large R resource versus small r

reserves

– R can become r over time

• Incorporates calculation of original-gas-in-place in TPIIP and

DPIIP definitions

– OGIP limits are routinely used in evaluation of recovery

estimates as quality check on reserves estimation under

PRMS

• Allows for estimation of Prospective and Contingent resources

and their valuation

– Especially important early in play life, when value of

reserves does not reflect fair value of asset

• Reduces, but does not eliminate, the subjectivity in the

reserves estimation process associated with uncertainty

Questions?