Resource, Reserves, and baking a cake.

Resource vs Reserves

Most but not all geoscientists working in oil and gas or minerals are aware of the distinction between resource and reserves, and the definitions are made quite rigorously, for example for hydrocarbons via the SPE (https://www.spe.org/en/industry/reserves/). Let’s not go into detail of that, but of interest is the general concept. 

Reserves are about what is good enough to make money, whereas resources are just something that exists that can be used – and the term makes no assumptions about whether it is profitable or otherwise. 

The key thing to note is that typically on human timescales a subsurface resource stays constant with time until it is produced. It’s either there or it isn’t. In the ground or not. Reserves however are altogether different and time variant for the same resource. The moment you start defining something around whether it makes money you integrate all sorts of much harder to constrain parameters. This list is far from exhaustive, but we can include: raw costs – capital and operating expenditures, investor dispositions, access to infrastructure, exchange rates, commodity sale prices, subsidies, tariffs, taxes, competition, new technologies, cost of finance, insurances, environmental penalties. All these things influence the ability to translate resource into profit - reserve. Immediately we can see there is vast range of parameters that are extraordinarily hard to predict, and which will vary a lot over time.

Without production or sudden natural change, the resource in the ground stays the same (however much of it we accurately perceive). Reserves don’t.

That is no excuse for not estimating them and doing some scoping economics.   The science and mathematics of estimating things which are a combination of probability distributions is not trivial but its not terribly difficult either, so the exercise to do so is standard. Going through the workflow helps emphasise the important point, that today’s reserve might not be a reserve tomorrow, and today's resource might become a reserve in the future even if it isn't now.

We use these terms – reserve and resource fairly frequently in oil and gas, and dangerously interchangeably at times, sometimes without thinking what we are saying. They have important differences. The concept though is applicable to any subsurface resource, be it mineral, hydrocarbon, geothermal, energy storage, or groundwater. If something in the ground has use and value it can be described in both manners.

Resource mapping: don’t worry, be mappy.

What does this mean for us in practice? We are interested ultimately in reserves. We want profit, otherwise in the very crudest terms, we simply can’t pay people to extract the resource. The important caveat to that is not just today’s reserves we are interested in, it is also anything that might be a reserve in the future. The best way to tackle that question is to map the resource. That involves for a moment temporarily suspending any economic presumption and just mapping where the commodity of potential use exists in the subsurface - “not worrying too much” about the economics of it. Then we can use this knowledge as our launch pad for economics at any time, to assess how reserves have changed. 

We can neglect this step and launch straight into reserves-focussed studies, but this puts us in a game of continual catch up whenever things change. It is better to have an understanding of overall resources. Then have the economics templates set up to adjust the various parameters controlling reserves as the need arises.

I have placed “not worrying too much” in quotation marks very deliberately, because there is a balance to be had. I have been involved in projects where, for example, a lot of work was spent on technical assessment only to realise that 10% CO2 and 70 km to the nearest pipeline was always going to be an economic non-starter. It sounds stupid in retrospect (and it was) but it is all to easy to get sucked into tunnel-vision syndrome. 

An eye firmly on some early scoping economics – “back of the envelope” right from the start, is always a good idea– just to save us from that scenario of working for months on something that is never going to work.   There is a balance also to resource mapping. For most things it is possible to go infinitesimally small and still claim that conceptually – in theory – it is a “resource”. The drop of oil idea. In practice most of us only have one lifetime and so the reality is we have to impose some guiding arbitrary size threshold that we consider of interest, below which we consider things uneconomic in almost all scenarios. It is possible to take this too far both ways. We wouldn’t want to spend all our life mapping oil accumulations at 0.1 mmbbl, but neither would we want to base our threshold solely on what was commercially viable today when the price could double next year (not suggesting that is likely). There is a balance to be struck.

What is clear, is that initial investigations should focus on mapping where the decent resource potential lies and not going overkill with too many a-priori assumptions about what will be commercial in coming years. That could change through all manner of parameters, including changes in use & market of the commodity, available infrastructure, commodity prices, tax regimes, cheaper and cleverer technologies for exploration and extraction, etc.

This isn’t a drive to ignore economics – that would be unwise. It is simply to make the point that we can become too obsessed with what is economic today, when the future is notoriously unpredictable. Optimisations and hybrid project synergies are happening all the time in every aspect of subsurface projects – they always have many moving parts, and that means lots of scope for optimisation.  

Beware though, further optimisations with time sounds great - diminishing costs and so on - but remember this is true not just of our own commodity and/or supply chain, but also the competition. If they do it better and faster, optimisation on it's own is not enough. It has to be optimisation better than them. Clearly there are different ways of measuring that, and it depends what precisely is measured to allocate "value" and over what timescale things are measured. Understanding how much the competition can do it for now, and where they are heading in the future, is just as important as knowing how good we can get it ourselves.

The scale thing

Economies of scale is an overworked phrase, but it’s a real thing, especially in industries where there is large capital outlay, long payback time, and inherent (inescapable) risk. It matters whether you can get 20 projects off the ground, 200, or 2. The efficiencies that can be obtained through sharing of the common costs, limiting mobilisation costs, sharing of human resource, recycling of equipment, and bulk ordering, can help. That means there is an added economic incentive to map the extent of the regional resource rather than focusing on the commercial feasibility of one small project. If you can map the resource and it’s big enough, the economies of scale mean you might lower the threshold for what constitutes a reserve.

Perhaps even more importantly, if you can demonstrate scale you can also begin to convince investors and governments that incorporating your resource into their own strategic plans is worth considering. It is much more worth their while if there are lots of opportunities, as opposed to just a handful. It's a lot of hassle to sort out regulations and policies and incentives and so on. A government only wants to go down that path if the resource justifies it. Scale helps.

Defining resource isn’t simple, but it’s simpler than reserves, and the parameters of most interest can be relevant to a number of different types of resource.

Fluids, permeability, heat: let’s get together.

Some resources have been so lucrative for so long that the incentive to get clever about integrating different resources has been small. There was simply no need, and historically it would have been considered a dilution of human focus to spend much time on things that are not the main “bread-winner”. However, energy and the subsurface is now in a different mode. Many more operations are marginal across the various sectors, competition is fierce, and consequently anything which can add to the economic success of a project is deemed much more worthy of consideration. 

Eyes are also focusing much more firmly on reducing waste and cascading use of any energy or resource that is extracted. This, as environmental costs become more and more "tangible". Sometimes the synergies are over-played when things are just fundamentally different – it’s no magic wand - but it is no longer quite so stupid to think out of the box and ask the question – could exploitation of these resources work together?

Socially distancing resources, not interested in getting together

Increasingly some of the more interesting energy and subsurface resource projects are making great use of these combinations. Of course, initially, we will be interested in the economics of a single commodity – but there is potential to bring in additional layers of resource too – if it has been mapped. 

Then, what automatically falls out is an ability to overlap the mapping of different resources and see where opportunities for hybrid projects exist. That potentially impacts costs, rewards, and hence economics. It sounds like a lot of work for one project, and it is more work, but not that much. Once in the habit of turning over all the stones, and not just the biggest ones, its amazing what “life” the rock-pool can reveal. If we focussed just on the reserves relating to a particular resource first, that story would not fall out. The possibilities are many. 

Just to begin scratching the surface, we can think of geothermal energy extraction from hydrocarbon wells; lithium and other solute extractions from geothermal brines; geothermal energy from flooded mine-workings; shallow reservoir/aquifer thermal energy storage in conjunction with wind and solar. There are other combinations. 

None of these things are easy, or necessarily very common [yet], and not all are proven in a widespread commercial context. If it was that easy this approach would have been done long ago - but it illustrates the value in mapping resources – across all the subsurface and energy sectors and seeing where overlap potential exists. Some might argue that this kind of approach is only a big company game, where there are the people and tools to spread across multiple resource mapping – but that harks back to a time when big companies had big teams. These days every geoscience team is lean and mean, and having once been recruited to lead a team in a major to “do things the small company way” I can vouch that it is more about attitude and a bit of versatility than numbers of people.

Although this “holistic” approach to subsurface resource and energy sounds a little bit hippie, it has a sound geological basis. So many of all these subsurface resources we seek ultimately stem from the interaction of fluids and permeability in the subsurface and the overprint of thermal contrasts. The controls on permeability are related to reservoir depositions, dissolution, diagenetic chemical connections, and permeability related to deformation – fractures and faults. The flow of the fluids and the flow of heat too is controlled by seals - permeability and thermal seals. Their arrival at the thermal or fluid reservoir is controlled by thermal conductivity and permeability migration pathways.  

For many different types of subsurface resource, the tools and the parameters of most interest are similar

It is not so hard in passing through the regional geological mapping of any one of the big-ticket item commodities, to consider permeability and thermal conductivity character of all the section under consideration. What am I saying? I’m saying that the end commodities may be very different, but the processes behind many of them are not so dissimilar. Knowing where permeability lies, knowing what fluids are around, and understanding how heat is flowing – get to grips with those things and you are well on the way to capturing multiple resource potentials.

Baking a geocake

Baking a cake? It’s about knowing where to find all the ingredients, knowing where they are already mixed together, and knowing where the cooker lies. Get those three things in the subsurface and you can have your cake. Whether we have the right ingredients to get a good price for our cake is another thing.  We tend to do all these things for individual commodities, and for a lot of our world’s history that has been good enough to get by. 

Why not get in the habit of doing it across the sectors? Most big resource companies are being forced into that arena anyway, so why not just grab the bull the by the horns and do it systematically. Perhaps not everywhere, that would be silly, but where there is good reason to think other resources might be kicking around. Decide to be curious enough to check out the synergies.  To be clear, focus has value too, and there is a time to concentrate efforts – but we live in an age where multiple exploration techniques and regional mapping exercises can very quickly empower a whole lot more than just the controls on one commodity. The reasons for doing so are more than academic – it can help lift areas where both resources exist up into the realm where both become a reserve - where they wouldn’t otherwise.

Resources getting together in their bubbles and making reserve babies

To lose sight of the fact that it is reserves we are after, not resource, is dangerous. However, to let the momentary definition of reserves colour all that we do is to miss potential for the reserves of tomorrow. To catch those, mapping resource, and more than that - mapping resources - is the order of the day. Any day.

I don’t want to give the impression that these approaches are some silver bullet that will cure all our subsurface resource ills. Getting things working together is hard – the more moving parts there are the more complicated things become, and compromises involved in trying to do both are often just too great.  My message is rather that that it’s not so hard to consider multiple resources at play-level in passing when doing regional work, so why not?  It might not come to anything, but increasingly with modern technology it can. When it does, it can be worth it at many levels - not just profit, but minimising waste and impact, abandoment liability, and maximising long term value, data gathering, and employment. If our initial emphasis is on resource mapping, we place ourselves in a better position than if we focus on present day reserves too soon. 

Cake. Yum. Multi-layered, with icing – even better. Get the ingredients ready from the pantry.