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Limited to Proved Reserves for Public Release

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Petroleum Resource Volume Requirements for Resource Classification and Value Realisation (including Proved Reserve Requirements) Sponsor: Approved by: Date of issue: ECCN number: SIEP-EPT S. Henry, EP Reserves Committee June 2005 Not subject to EAR-No US content

NOTICE
This version of the Royal Dutch/Shell Group of Companies (the Group) Resource Volume Requirements is intended solely to inform interested parties how the Group determines its Proved Reserves. Accordingly, this version has been revised to exclude certain proprietary information (such as pricing premises), discussions focused on the categorizations of hydrocarbon resources other than as Proved Reserves, accounting and auditing procedures, and information concerned with the Groups internal decision-making processes. Other changes also include defining acronyms and terms, deleting cross references, and formatting. One substantive change to the original 2004 text made subsequent to its internal Group publication but in effect for year-end 2004 reserves reporting is noted in the Attachment. Guidance in Appendices which is essentially repetition of material in the main body of the document has not been included in this version. The processes and procedures noted herein may or may not be appropriate for other organizations. While the information presented here is believed to be accurate and consistent with regulatory requirements, it is not legal or technical advice and external parties may not and should not rely upon this document in making their own, independent determinations. Application of standards described herein to a specific factual circumstance requires the exercise of professional judgment after internal review. This internal review occurs at numerous levels, including at the Global EP Reserves Committee and the Executive Committee. For additional information on the Reserves Committee and the Groups review processes for Proved Reserves, please see the Groups 2004 20-F Report, as amended, at pp. 76-78. The processes and procedures in this document are subject to further development and refinement over time in response to regulatory changes, professional advice and learnings gained from actual application. The Group undertakes no obligation to update publicly this Resource Volume Requirements, whether as a result of new information, future events or otherwise.

Copyright 2005. All rights reserved.

SHELL INTERNATIONAL EXPLORATION AND PRODUCTION B.V. RIJSWIJK, THE NETHERLANDS

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SUMMARY Petroleum Resources represent a significant part of the Groups upstream assets and are the foundation of most of its current and future upstream activities. This document describes the Groups Petroleum Resource Volume classification system. In relation to Proved Reserves, it complies with rules set by the SEC. It serves as a reference in the reserves reporting and control processes, as applied by the asset holders, and as a mandatory requirement for Proved Reserve reporting. The intent of this 2004 document is to assure SEC compliance for Proved reserves. A comprehensive review process was done to provide this SEC compliance assurance. The reviewers included external reserves consultants, internal and external legal staff and the EP Reserves Committee. The Reserves Committee consists of the following permanent members: EP Chief Financial Officer (EPF) Simon Henry, chairman of the committee EP Corporate Support Director (EPS) John Bell1 EP Director Shell Technology (EPT) John Darley EP Exploration Director (EPX) Matthias Bichsel EP Hydrocarbon Resource Coordinator (EPS-P) Jim Cooper SI Deputy Group Controller (FCG) Bob Deere Shell Legal representative Richard Bohan

KEYWORDS Petroleum Resource Volumes, Requirements, Reserves, Scope For Recovery, SFR, FASB, SEC

Replaced by Michiel Kool as of 2nd May 2005.

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TABLE OF CONTENTS SUMMARY 1. INTRODUCTION 1.1. Key Changes In Proved Reserve Determinations 2. PETROLEUM RESOURCE VOLUME CLASSIFICATION SYSTEM 3. PROJECT BASIS AND MATURITY 3.1. Project Basis Definition Of A Project 3.2. Technical Maturity 3.3. Commercial Maturity 3.4. Project Maturity 3.5. Projects In Support Of Long-Term Commitments (E.G., LNG Source Fields) 3.6. Maturity Status Proved Developed Reserves 3.7. Maturity Status Proved Undeveloped Reserves 4. GROUP SHARE 4.1. Contractual Share 4.1.1. Equity 4.1.2. PSC Entitlement 4.1.3. New Contracts 4.2. Group Share In EP Legal Entity 4.3. Licence Duration And Other Restrictions 4.3.1. Licence or Contract Extensions 4.3.2. Royalty 4.3.3. Overriding Royalty 4.3.4. Own Use And Losses; Composition As Sold Basis 4.3.5. Fees In Kind 4.3.6. Under-Lift And Over-Lift 4.3.7. Open Acreage 4.3.8. Gas Re-Injection 4.3.9. Oil Sands 5. ALIGNMENT OF RESERVES AND PRODUCTION 5.1. Proved Production Forecasts 5.2. Aggregation Of Proved Production Forecasts And Proved Reserves 5.3. Alignment With Financial Reporting Reported Production 6. PROVED RESERVES 6.1. SEC Proved Reserves Definitions 6.2. Proved Reserves Basics 6.3. Proved Reserves Technical Elements 6.3.1. Volumetric Reserve Determination Criteria 6.3.2. Technical Maturity Development/Production Plan 6.3.3. Performance-Based Reserve Determination Criteria 6.4. Proved Reserves Economics Elements 6.4.1. Oil And Gas Price 6.5. Proved Reserves Commitment Elements (Reserves Expected To Be Recovered) 6.6. Proved Reserves Further Topics 6.6.1. Revisions to Existing Projects 6.6.2. Improved Recovery 6.6.3. Reservoir Simulation (And Other Interpretative Analysis Methods)

I 4 4 6 7 7 7 7 8 10 10 11 12 12 12 12 13 13 13 13 13 14 14 14 14 15 15 15 16 16 17 17 18 18 19 20 20 22 22 23 23 24 24 24 24 25

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REFERENCES APPENDIX 1. APPENDIX 2. FURTHER SEC GUIDANCE DOCUMENT (REF. # 4) APPENDIX 3. TERMINOLOGY A3.1. Petroleum Resources Terminology A3.2. Probabilistic Terminology A3.3. Commercial Terminology A3.4. Exploration And Development Wells APPENDIX 4. TEMPLATE FOR IMPROVED RECOVERY ANALOGUES APPENDIX 5. SEC COMPLIANCE ASSURANCE

27 28 29 36 36 37 37 37 39 40

LIST OF TABLES Table 1: Summary Of Project Maturity Criteria

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1.

INTRODUCTION

Petroleum Resources represent a significant part of the Groups upstream assets and are the foundation of most of its current and future upstream activities. The Groups Exploration and Production (EP) business depends on its effectiveness in finding and maturing Petroleum Resources to sustain itself and drive profitable production growth. To aid systematic resource management, the volumes concerned are classified according to the maturity or status of their associated development (project) and operational (production) activities. The Groups Petroleum Resource Volumes and changes to them, both actual and planned, are reported to the EP Leadership Team regularly. This document describes the Groups Petroleum Resource Volume classification system. In relation to Proved Reserves, it complies with rules set by the SEC. It serves as a reference in the reserves reporting and control processes, as applied by the asset holders, and as a mandatory requirement for Proved Reserve reporting. Internally, Shell runs the business based on those volumes we expect to produce and sell. This recognises that future production cannot be exactly known and must be understood as a range of possible outcomes or represented as a single statistical value within that range, typically the mean. This philosophy is consistently applied to our internal volume estimates from the most immature, undiscovered scope-for-recovery*, to the most mature, Expectation Reserves**. Externally, Shell discloses volumes in accordance with regulations governing access to capital markets. For access to USA markets, the pertinent regulations are those of the US Securities and Exchange Commission (SEC). These regulations have the purpose of providing investors with reliable (thus low risk) and consistent (across all registrant EP companies) reserve estimates. To achieve this purpose, these typically conservative rules are provided and enforced. Properly determining both internal and external volumes is very important to Shell the SEC-compliant Proved Reserves estimation and reporting process to enable access to funds needed for our capital-intensive business, and the expected hydrocarbon resource volumes (including reserves) as a more realistic outlook needed to plan and run the business. Our company cannot succeed unless both estimations are executed and reported correctly. 1.1. Key Changes In Proved Reserve Determinations

Shells historical practices related to Proved Reserve calculations have been updated to reflect a clearly different approach to determining SEC compliant reserves. It is difficult to provide an exhaustive list of changes to the rules or this document as so much has changed primarily on Proved Reserves. However a selective list of key recent changes or past changes that need to be re-emphasised are: Proved Reserves will be determined by using deterministic methods only, fully honouring SEC directions. o This is the best way to show our Proved Reserve estimates fully honour all elements of the SEC rules.

Scope-for-recovery volumes are volumes that are not yet sufficiently technically and commercially mature to qualify as reserves. Expectation Reserves are the internal Group reserve category used for project decision-making and business planning.

**

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o It clarifies understanding that the Proved Reserve volume is a distinct and individually important calculation rather than a one-off approximation extracted from a probabilistic evaluation. The SEC requirement of reasonable certainty represents the rationally high standard of evidence/confidence consistent with the meaning of the word Proved. o As above, SEC rules specify exactly how uncertainties should be handled (e.g, Lowest Known Hydrocarbons (LKH )( by well penetration only). They do not give credit for being conservative when it is not required to allow other parts of the analysis to go outside required bounds. o Just because an analysis is seen to be conservative, does not mean it satisfies the SEC rules (e.g., I discounted the Expectation Reserves by X% to get conservative estimate for Proved Reserves does not work.) All Proved Reserves must be in compliance with the current rules at each year-end determination (meaning updated for rule changes and for new data on the field/project). o No legacy volume exemption designed to avoid the yo-yo effect of de-booking and re-booking will be permitted. o This means each year we must re-look at all volumes to assure nothing has changed to invalidate prior-booked Proved Reserves. o There will be no free pass for projects not being actively monitored. All changes to comply must be made where we know or should have known that a change was needed. New, sophisticated analysis methods are not accepted as better, more accurate methods until they have been tied to real experience and agreed by the SEC. o Seismic is only accepted (when tied to well control) as the primary determinant of structure; it is not accepted as the primary determinant of LKH, productive continuity, reservoir properties away from well control, etc. however it can be used as supporting evidence to other, acceptable methods for any of these. o Simulation must be tied to the reality of experience either with the modelled reservoir itself, using history matching of significant period, or by tie to analogues where the idealistic nature of simulation can be tuned to actual performance. o Simple Decline Curve Analysis (DCA) methods are often the most accepted basis for Proved Reserve forecasting when the chosen decline is shown to be properly representative of the physics in the reservoir and can be shown as applicable from prior history or analogue examples.

Documentation of Proved Reserve changes at the field/reservoir level must be done each year. o Within the Asset Holders reserve database to allow tracking of what changes were made when and for what reason over history, and o To provide a proper technical basis (audit trail) for the change being made. o This means the Asset Holders total Proved Reserves can only be calculated by summing the individually documented reserves from each field/reservoir This document has been re-organised to more clearly emphasize the requirements specific to Proved Reserves. Both summary and detailed guidance is given to provide the appropriate level of knowledge for the various needs of all staff involved in determining or using reserves data. The intent of this 2004 document is to assure SEC compliance for Proved Reserves.
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2.

PETROLEUM RESOURCE VOLUME CLASSIFICATION SYSTEM

In general, all companies, authorities, and other organizations that are involved in oil and gas exploration and production activities use a system for tracking Petroleum Resource Volumes as they mature from undiscovered prospects through to producing assets. All such systems aim to achieve similar objectives, but each is unique in terms of the nomenclature that is used and in the definition of certain terms. Often, the most fundamental differences stem from the differing areas of focus of the organizations that developed the systems: Governmental organizations tend to address all aspects of technically recoverable resources, however notional, whereas

Commercial enterprises tend to concentrate on those elements that can most readily be monetized. The Group continues to use its own classification system, developed over a number of years and tailored specifically to the needs of the Groups business. The system will continue to evolve over time as the needs of the business change. It is also important for all individuals involved in the preparation of Proved Reserves estimates to ensure compliance with the definitions and rules set by the United States Securities and Exchange Commission (SEC) and Financial Accounting Standards Board (FASB), as expressed and interpreted in these requirements. Within this document, all references to Proved Reserves should be taken as equivalent to SEC Proved Reserves or reserves compliant with SEC regulations or external proved reserves as each of these terms has the same meaning.

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3.

PROJECT BASIS AND MATURITY

3.1. Project Basis Definition Of A Project Reserves are associated either with a project (a development that is planned or in execution) or with an existing producing asset (i.e., a project that has been executed). A project is any planned creation or modification of wells, surface production facilities or production policy, aimed at changing an assets sales product forecast. For resource volumes to be classified as Proved Reserves, independent review and challenge is required (as a control) to validate the maturity of the project. For major projects, such reviews are routinely executed through the Groups Value Assurance Review (VAR) process, or by locally defined analogous processes in the case of minor projects. 3.2. Technical Maturity For a project to be technically mature, there must be a valid documented definition of a technically feasible project that is reasonably certain to be implemented. The project definition must include: A description of the development concept (including the planned recovery process); Specification of the engineering works required (number and type of wells, production facilities and associated support facilities, evacuation infrastructure); Drilling/engineering cost estimates;

A production forecast (including sensitivities) and economics. There should be no technical issues identified that could prevent the project from proceeding. 3.3. Commercial Maturity A project is deemed commercially mature, when: (1) Its profitability meets the Groups investment screening criteria , or Final Investment Decision (FID) approval has been received, (2) Market availability is assured and (3) Funding by the Group is reasonably certain to be provided (based on prior track record of similar project funding). In some situations (especially where Shell is not operator and does not have a controlling interest), the above investment criteria may not be used in project decision-making. Organisations with this situation should seek guidance from the Hydrocarbon Resources Coordinator (HRC) and the Reserves Committee for an approved alternative. There should be no commercial issues identified that could prevent the project from proceeding. Assurance of market availability for oil (and/or NGL) means at least the reasonably certain availability of a pipeline to a shipping terminal or other outlet (e.g., a refinery), whilst for existing gas provinces this means that the product is: 1) Contracted to sales; or 2) Considered reasonably certain of being sold into existing markets, through existing or firmly planned transportation and delivery facilities. For major gas reserves that rely on the creation of access to market (e.g., those reliant on negotiation of LNG sales contracts), Proved Reserves booking should be deferred until certainty exists concerning sales agreements. There are various stages of agreement that
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typically occur between the buyer and seller from an initial expression of interest up to the final Sale and Purchase Agreement (such as Letter of Intent, Heads of Agreement). Proved Reserves can be booked when the buyer and seller have an executed agreement that: Represents a binding (with financial recourse) commitment by each of the buying and selling companies; Includes sufficient details on volume (both minimum and maximum takes), term of agreement, prices, delivery conditions (e.g., pressure, composition) to determine required contract reserves and project costs. In all cases, Proved Reserves should only be booked to the extent that they are supported by firm tranches of the sales agreement. Optional tranches especially those executable at buyers discretion should not be used as the basis for booking Proved Reserves unless and until commitments are made for the volumes in question or precedents demonstrate that it is reasonably certain that said volumes will be produced and sold. Similar conditions apply to planned spot market sales of, for example, LNG cargoes. Generally there should be precedents demonstrating that it is reasonably certain that said volumes will be produced and sold. For Proved Reserves, there must be a clear historical track record of such sales and the forecast of future spot sales cannot have any annual sale that exceeds the actual sales of reporting year. The condition of marketability for gas reserves also applies to any associated NGL products. If the gas market is not assured, neither the gas nor the associated NGL volumes can be reported externally. In some situations, potential buyers of gas or financiers of the associated development projects require evidence of proved reserves as part of their own assurance processes. Since the assurance of market or finance availability is often a pre-requisite for booking Proved Reserves via the Annual Report to the SEC, marketing and financing requirements may need to be satisfied not with reference to the SEC Proved Reserves, but instead to candidate proved reserves, i.e., the volume that would qualify as Proved Reserves once all commercial requirements (e.g., project financing, sales contracts/markets) had been met. In no event, however, may Proved Reserves be reported unless a project is commercially mature as defined above. 3.4. Project Maturity A project can book Proved Reserves when the above elements of technical and commercial maturity are met. This maturity is typically tested and validated as projects progress by review and challenge sessions at specific milestones in the project lifecycle. With one possible exception discussed below, for large projects (of significant impact to the Group) this maturity requires an approved FID. For smaller projects, of minor impact to the Group and approved at a much lower organisation level, inclusion in an approved Field Development Plan and the approved Business Plan, and a clear track record of such project execution, provide sufficient evidence. Table 1 below shows criteria for various sized projects. In each case, the evidence required should clearly establish the reasonable certainty of project execution. Obviously for major projects, these are significant and unique efforts that need the individual commitment of FID to provide reasonable certainty. For smaller projects, local organisations may handle many of such routine business investments to be able to establish reasonable certainty from a clear track record of execution of such projects (where all other elements are met e.g., economic criteria, project included in the Business Plan, Field Development Plan covering the project has been approved, etc.). In such cases, the historical track record (over several years) must show a high correlation of
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execution once these conditions are met (say, 90%). Without such a high correlation of execution, the track record does not support the high confidence needed for reasonable certainty.
Table 1: Project Category Major Summary Of Project Maturity Criteria Category Basis Primary Total Cost 100 mln $ US OR Intermediate Total Cost < 100 mln $ US AND Small Total Cost < 100 mln $ US AND Category BasisSecondary Expectation Reserves 50 mln BOE Group share Expectation Reserves 10 mln BOE Group share Expectation Reserves < 10 mln BOE Group share Required Evidence of Project Maturity Project FID approved Additional Elements - 1 Project identified and included in approved Business Plan Project identified and included in approved Business Plan Project not identified but covered by general funds in approved Business Plan Additional Elements - 2 None

Project passed local decision authority criteria for execution* Project Field Development Plan approved

Clear track record of execution of similar projects Clear track record of execution of similar projects

*For example, if an organisation uses a Decision Review Board to grant approval to a matured project (after a project challenge by external (to the project team) reviewers such as the equivalent of a VAR3 ), and this approval includes the Project Field Development Plan (that includes the project), then this is acceptable evidence of project maturity (together with the requirements noted as additional elements). Alternative methods must include these same constituents (i.e., external challenge, an approved Field Development Plan, commitment to execute). Seek guidance from HRC if these criteria do not represent your organisations decision/commitment process.

[Editors Note: the term VAR3 refers to a maturity step in connection with the Groups Value Assurance Review Process.] Major project Proved Reserves cannot be reported until a project has been sanctioned (Final Investment Decision: FID) as shown in the table above, with one possible exception. In certain specific cases, reserves for major projects may be registered in advance of FID provided that there is a clear public demonstration of the Groups intention to proceed with executing the project and all other criteria are met. When Proved Reserves from a major project are booked in advance of FID based on a clear public demonstration, this should be noted in reserves reviews/audits and properly documented to assure the basis for this decision is fully understood. Major projects must not be split into several smaller projects solely to avoid the requirement to await FID before booking Proved Reserves (appropriate project phasing is allowed). Similarly, estimates of Expectation Reserves should not be played down for the same reason. It is emphasized that all Proved Reserves bookings require full Group, Region and Asset Holder commitment that the associated projects will indeed be executed. This should be demonstrated by, for example, inclusion of the projects concerned in the current Business Plan, or by a clear demonstration that the projects will be done.

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3.5. Projects In Support Of Long-Term Commitments (E.G., LNG Source Fields) Special consideration may be given to source field development projects that support longterm supply contracts (e.g., LNG sales), for which a commitment has effectively been made to execute the overall supply portfolio for the contract, but for which the due process of achieving full maturity of each development project might not yet be complete. Such situations can arise when certain of the development projects within the source field portfolio will not be executed until far into the future and, consequently, detailed value assurance work has yet to be carried out (VAR3 or higher). Generally, commitment to the supply contract represents a clear public demonstration of intent to execute the development projects that are necessary in support of it. Also, value assurance work usually will have been undertaken prior to signing the contract or taking FID on any infrastructure in support of it. In such cases, it may be appropriate to register Proved Reserves for the projects that are expected to feed the long-term contract. Proved Reserves so registered must adhere to the SEC definition of Proved Reserves and must be constrained where necessary by a reasonably conservative estimate of the volumes that will be lifted under the contract (i.e., limited to the duration of existing contracts, unless extension is certain, limited to the Take or Pay volume where applicable, and excluding optional tranches that cannot be considered reasonably certain to be lifted). Where the supply can be taken from a portfolio of potential new development projects, specific fields and projects must be identified to support their allocated share of the supply contract and thus be allocated Proved Reserves. The remaining supply volumes in these or other projects in the portfolio cannot be considered Proved until contracted supply can be allocated to them. 3.6. Maturity Status Proved Developed Reserves Proved Developed Reserves are that part of Proved Reserves that are producible through currently existing completions, with installed facilities, using existing operating methods. Volumes behind pipe can only be considered Developed if the additional activity (e.g., lower zone abandonment, perforating, stimulating) does not require a full well entry/re-completion and if the cost of this activity (normally OPEX) does not exceed 10% of the cost of a new well. Proved Developed Reserves should, whenever possible, be estimated through extrapolation of existing well performance trends if sufficient performance data exists for a definitive reserves analysis. This may be done either through decline curve analysis or through history matched simulation modelling. If no significant history is available to match, Proved Developed Reserves will be based on pre-development (simulation) model projections, updated for observed well geological and petrophysical data and well rates. In all cases, Proved Developed Reserves should represent the production that will be contributed by the existing wells through the currently installed facilities, assuming no future development activity (the No Further Activity or NFA forecast), other than any minor amounts as indicated above. In general, the NFA forecast for mature assets may include volumes that will require a relatively modest (and clearly economic) level of future Capital Expenditure in order to safeguard existing facilities and equipment (excluding wells, which are discussed separately above). It should be reasonably certain that this expenditure will be made, based on the robust economics and a track record of similar project approval and execution. Where substantial new investment is (found to be) required in order to safeguard or, in the worst case, replace ageing facilities, the reserves associated with these activities must be classified as Proved Undeveloped Reserves.
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At the end of contract life for certain long-term supply situations (LNG), there may be remaining NFA volumes available to serve spot or local markets. This NFA production tail can be considered Proved if there is reasonable certainty of both the continued operation of the supply infrastructure and the demand from these markets (including a clear track record of purchase) as well as all other requirements for Proved Developed Reserves being met. 3.7. Maturity Status Proved Undeveloped Reserves Proved Undeveloped Reserves are that part of Proved Reserves that cannot be considered Proved Developed Reserves, as defined above. They require capital investment through future projects (new wells and/or production facilities) in order to be produced. These projects must be technically and commercially mature as noted above. Gas reserves that require the installation of planned or anticipated future compression should be classed as Undeveloped Reserves until the compression equipment has been installed. Incremental field development projects, which add Proved Reserves in their own right, may defer field/platform abandonment and may thereby also increase the Proved Reserves producible from existing completions. Such gains should be included in the economic evaluation of the incremental development project and should be included in Proved Reserves when the incremental development project concerned reaches technical and commercial maturity. Future wells or facilities may accelerate reserves that would otherwise be produced by existing assets. The portion of Proved Reserves expected to be accelerated by the new investments should be classified as Developed with the existing investments. If future investment accelerates production such that additional reserves are recovered within time limits (e.g., sales contract periods, licence duration), the additional reserves should be classified as Undeveloped until this investment has been made. The Proved Undeveloped Reserves attributed to a field should be evaluated for each of the specific identified future development activities with which they are associated. The preferred method is through detailed static and dynamic reservoir modelling. Deriving Proved Undeveloped Reserves simply by subtracting Proved Developed Reserves from an assumed total recovery estimate (e.g., from recovery factor correlations) is NOT acceptable.

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4.

GROUP SHARE

All Resource Volume estimates reported to HRC must be on the basis of Group share. Group share is determined by three factors: (1) the contractual share of produced hydrocarbons, as agreed with the resource holders (usually the host government), (2) the Group share in the assets or the venture that holds the contractual share, and (3) licence duration and other restrictions. If it is not clear in your contractual situation how Group share of Proved Reserves should be determined, contact the HRC for guidance. 4.1. Contractual Share Resource Volumes can be distinguished according to three different types of agreement: Equity, PSC and New Contracts. These are described below. If a company has interests in several licence areas subject to different types of agreement, a separate report must be made with respect to Proved Reserves for each of the contract types. In some cases, contractual share will not be a pre-defined fraction (e.g., PSCs, New Contracts) but must be estimated based on future conditions and contract specifications. In such cases, the Group share is determined from our economic entitlement in the venture. For Proved Reserves, the SEC notes, In general, two methods of determining oil and gas reserves under production sharing arrangements have been proposed by registrants: (a) the working interest method and (b) the economic interest method. Under the economic interest method, the company's share of the cost recovery oil revenue and the profit oil revenue is divided by the year-end oil price, which represents the volume entitlement. The lower the oil price, the higher the barrel entitlement, and vice versa. Reserve volumes determined by various owners should add up to 100% of the total field reserves, but that is not always the case using the working interest method. If the working interest is different from the profit entitlement, the economic interest method is the method acceptable to the staff because it is a closer representation of the actual reserve volume entitlement that can be monetized by a company. Also, use of the economic interest method avoids violating the prohibition in paragraph 10 of SFAS 69 against reporting reserves owned by others. (Ref. 4; Appendix 2) Thus the economic interest method should be the basis for Group Share determination using actual year-end price for Proved Reserves. 4.1.1. Equity Equity resources are the Group share of Resource Volumes in Concessions. Concession agreements lay down the general terms and conditions of operation, define the applicable tax rules, the Group share of Resource Volumes in the Concession and the duration of the production licence. These agreements are generally with the host government, but in the USA they may also be with the private owners of the mineral rights (lease or fee conveyance of rights to the operator). Such agreements may also be referred to as Tax / Royalty agreements. 4.1.2. PSC Entitlement PSC Entitlement resources are the Group share of production in acreage governed by a Production Sharing Contract (PSC). The Group entitlement share of production is the Group interest in the sum of cost oil plus excess cost oil plus profit oil, in accordance with the PSC terms. The entitlement share is calculated from economic modelling reflecting
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current estimates of future costs and sales value. The entitlement calculation should be based on actual year-end price for calculating Proved Reserves. 4.1.3. New Contracts A number of resource-holding countries have introduced innovative production contracts in order to attract investment by foreign oil companies while preserving the principle of national resource ownership. These agreements typically provide for the contractor to recover costs and profits from hydrocarbon revenues while holding no title to, or entitlement to receive, petroleum resources. Any new contract that is under consideration must be assessed for the right to disclose reserves on its own merits. Thus, for each new contract, the HRC should be contacted for guidance and a decision from the Reserves Committee on the approved treatment of Shells volumes under the contract. 4.2. Group Share In EP Legal Entity If the Group holds only a partial share (i.e., less than a 100% share) in the company or entity (note: this does not apply to joint ventures) that holds the concession or contractual share with the resource owners, this share must be taken into account in the Proved Reserves submission. FASB rules stipulate that when the Group share of such entities exceeds 50%, Proved Reserves are reported on a 100% basis, with the contribution that the minority interest shareholding makes to the total being noted in external disclosures. Prior agreement must be obtained from Group Finance before such reporting is considered. When the Group share of such entities is 50% or less, reserves are reported on the basis of the share holding. Regardless of the level of Group ownership, volumes reported as Proved Reserves must fully comply with the requirements noted in this document. 4.3. Licence Duration And Other Restrictions 4.3.1. Licence or Contract Extensions For external reporting, Group share of Proved Reserves and Proved Developed Reserves is limited to future production within the existing licence or contract period, including any extensions or renewals that are covered by documented agreement, by legally enforceable rights or where a long and clear track record demonstrates that extension or renewal is granted as a matter of course by the applicable authorities. Estimates of post-licence volumes which cannot be reported as Proved Reserves due to licence expiry are also collected, so that the impact on reserves of licence extension can be judged, but these volumes cannot be included in external disclosures. 4.3.2. Royalty Outside the USA and Canada, royalty is a payment made to the host government for the production of mineral resources. It is usually calculated as a percentage of revenues (payable in cash) or production (payable in kind). Where in practice royalty obligations are met in kind (i.e., by delivering oil instead of cash), the Group share of production and Proved Reserves should be reported excluding these volumes. Where royalty is payable in cash or is in principle payable in kind but the government has formally elected to receive, or customarily receives, payment in cash, Group share of production and Proved Reserves should be reported including these equivalent royalty volumes. Such in-cash payments should be treated as a production cost in the qualifying Proved Reserve economic limit test.
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Within the USA and Canada, royalties are payable to the owner of the mineral rights, who can either be a private or a public entity (e.g., State government). In line with SEC regulations, these are always excluded from Group Proved Reserves whether paid in cash or in kind, for these properties. 4.3.3. Overriding Royalty In the USA (and some other locations), there may be Overriding Royalties payable to the owner of mineral rights or third parties. These shares of reserves are excluded from Group Proved Reserves. Third party Overriding Royalties payable to Shell are included in Group Proved Reserves. 4.3.4. Own Use And Losses; Composition As Sold Basis Group share Resource Volumes must exclude any volumes consumed as own use (fuel for production facilities, compressors etc) or lost (flared or vented) in the upstream operations prior to transfer of the product to the buyer (Third Party or Downstream). This is consistent with the definitions applied for, e.g., Gas Production available for Sales from own reserves (GPafS), as applied in financial reporting. Likewise to maintain this consistency, the gas composition must be that actually delivered as allowed by the sales/delivery contract because this is the basis for sales volume calculations. Thus any non-hydrocarbon inert gases (e.g., CO2, N2) that are allowed in the sales gas by contract and are in the gas as sold (i.e., the basis for revenue determination) can be included in the Proved Reserve volume. However, if the inert gas amounts exceed contract specification and/or are removed before the gas is sold, then the Proved Reserves volume must be based on the composition of the sales gas (i.e., with the inerts removed), and the cost of such removal should be taken as a production cost against revenue in the Proved Reserve economic limit test. 4.3.5. Fees In Kind Third Parties may in some cases pay Fees in Kind or Tariff in Kind for the use of infrastructure (e.g., pipeline tariff, processing fee). Such volumes received by the company (to the extent that they originate from non-Group owned resources) do not constitute a Group share in resources and should be excluded from reported volumes. Condensate volumes recovered from a pipeline system related to transportation of Third Party gas volumes and sold by the company are equivalent to Fees in Kind received. All Fees in Kind received should be included as a purchased volume in the company accounts. Where a company pays Fees in Kind (from its own fields/resources) to a Third Party, these do constitute a Group share in resources and should be included in the reported volumes. Annual volumes produced and used as Fees in Kind should be included in sales volumes, with associated revenues (at an agreed or fair market value) equivalent to booking of the incurred operating cost (i.e., taken as a production cost against revenue in the Proved Reserve economic limit test). 4.3.6. Under-Lift And Over-Lift Group share should allow for any historic under-lift or over-lift by partners or government. A Group historic over-lift should be reflected as an equivalent reduction of Group reserves, a Group historic under-lift as an equivalent increase of Group reserves. Group share should reflect the effect of swap deals, for example in gas fields in which early production capacity in one field is traded against later production repayment by the other. Reserves booked for each field should reflect the volumes actually produced (and sold) from the field in question.
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Treatment of take-or-pay volumes should be aligned with financial treatment of the cash received and booking of production volumes. This generally means that volumes paid for but not yet taken (produced) should be included in reserves. It is essential that the treatment of reserves and production in the above cases are consistent with the corresponding treatment of Group income in financial reporting. 4.3.7. Open Acreage Group share of Resource Volumes is non-existent in open acreage and acreage for possible future acquisition or farm-in. 4.3.8. Gas Re-Injection Gas volumes re-injected in a reservoir, for pressure maintenance, gas conservation, Underground Gas Storage (UGS, including cushion gas), or other reasons, without transfer of ownership, remain part of a companys resource base and should be included in the Group Resource Volume estimates. These gas volumes may be classified and reported as Proved Reserves, depending on the recovery anticipated through future developments (also taking into account anticipated re-saturation losses). Gas volumes re-injected in a UGS project on behalf of a Third Party (either following transfer of ownership by the company to this party, or following production by the third party itself) do not constitute a Group share in resources and should be excluded from reported volumes. 4.3.9. Oil Sands Petroleum volumes (heavy oil, bitumen, syncrude, gas, liquids, etc.) recovered from unconventional reservoirs (oil sands, tar sands, coals, oil shales) by a manufacturing process must be reported separately from the conventional resource base. This includes conventional reservoirs where recovery occurs through a mining operation. However, conventional Proved Reserves can be claimed for otherwise unconventional reservoirs if the petroleum is recovered in its natural state and original location (i.e., has not been manufactured in situ by alteration from natural state) through the use of conventional methods (wells). Examples of this are coal bed methane produced from wells or heavy oil produced from wells using conventional thermal recovery methods.

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5.

ALIGNMENT OF RESERVES AND PRODUCTION

Proved Reserve reporting and production forecasting are fully interdependent and must be aligned for proper consistency in each. The Proved production forecast can produce no more than the Proved Reserves present, and the Proved Reserves can never be more than the sum of the Proved forecasts production volumes in future years. Any factor that limits future production then also limits Proved Reserves even if the reservoir capacity to produce is not impacted. 5.1. Proved Production Forecasts The following notes are intended to guide the preparation of Proved production forecasts in support of Resource Volume reporting and in particular in support of Proved Reserves reporting. The basis for all Resource Volume reporting is either an existing producing asset or a project, however notionally defined. Resource Volume estimates should be supported in all cases by a Proved production forecast for the corresponding reservoir development scenario, linked to a specification of the recovery process, the number and type of wells necessary, facilities requirements and the costs of installing and operating the required wells and facilities. The Proved production forecasts should be defined at a level of resolution that is appropriate for the needs of the business and the maturity of the assets concerned: for example reservoir unit, reservoir, or field. Account should be taken, where necessary, of overriding constraints, such as evacuation system capacity, OPEC quota levels, or funding levels, particularly if these affect the timing of development activities and the Resource Volume for the project concerned is dependent on the timing of execution. These constraints must be considered for the Proved Reserves forecast case. For the Proved forecast, uncertain elements such as future OPEC quota must be considered as no better than prior year (or year-end) value. Only when a constraint change is fixed and determinable (as in a parameter specified by binding contract terms), can an improvement over the prior years constraint be considered in the Proved forecast. It is required that a Proved production forecast for each asset is prepared, not least because this is required to create the Standardized Measure of Discounted Cash Flow for external disclosure, calculate project economics (undiscounted, actual year-end prices and costs method), and to reliably estimate volumes producible within the licence period (Proved Reserves disclosures must be constrained by licence expiry). Where Proved Reserves are based on reservoir modelling, the Proved production forecast should be based on a specific modelled Proved Reserves scenario. The Proved production forecast for Developed Reserves should equal the Expectation production forecast at its starting point and thereafter it should gradually fall further and further below the Expectation production forecast. The Proved production forecast for Undeveloped Reserves may commence at a lower level than the Expectation production forecast to reflect uncertainty in the initial production rate. The aggregated Proved production forecast for a business or collection of assets should at no point in time exceed the aggregated Expectation production forecast (i.e., the business planning forecast), unless there are clearly defined circumstances that would make it possible for this to happen. If such circumstances do arise, the situation should be noted in the Audit trail documentation and highlighted to reviewers (including the Group Reserve Audit team) for discussion.

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5.2. Aggregation Of Proved Production Forecasts And Proved Reserves The aggregated Proved production forecast of an entity must be consistent with its reported Proved Reserves. This also holds for the Proved forecast, as defined by the aggregated reasonably certain amount of petroleum forecast to be produced by the appropriate development/production scenario, duly respecting license duration and overall constraints (e.g., quota). The total Proved Reserves disclosed by an Asset Holder should be underpinned by a corresponding production forecast that at no point in time exceeds the Asset Holders aggregated Business Plan forecast. In general, it is expected that the production forecast for Proved Reserves will start at the same level as the Business Plan forecast and that it will gradually fall below it over time, reflecting the decreasing level of certainty that is normally associated with longer term elements of the Business Plan. The Proved production forecast should contain only the current Proved Reserves and the corresponding projects. In principle, project scheduling should be the same as that of the Business Plan forecast, or somewhat accelerated if this can be justified. (If this acceleration occurs, the situation should be noted in the Audit trail documentation and highlighted to reviewers (including the Group Reserve Audit team) for discussion). Proved Reserves are aggregated at various levels (reservoirs, fields, areas, etc) during the Resource Volume assessment and reporting process. As all Proved Reserve estimates are deterministic, arithmetic addition is the proper aggregation method. 5.3. Alignment With Financial Reporting Reported Production Proved Reserves and production must be reported consistently with procedures adopted by the Asset Holders finance department, guided ultimately with reference to the Group Financial Accounting Policies Manual. Close co-operation is therefore required between the finance and technical functions to ensure that alignment exists. Areas for attention include, but are not limited to, the reporting of: Total Oil Sales; Total Net Gas Production Available for Sale; quantities used in the calculation of depreciation through the Unit Of Production method; gas volumes paid for but not lifted; volumes reported in relation to Group consolidated companies; etc.

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6.

PROVED RESERVES

6.1. SEC Proved Reserves Definitions The basis for Proved Reserves comes from the US SEC (as of December 1978):
United States Securities and Exchange Commission (SEC), Rule 4-10(a) of Regulation S-X, produced pursuant to the United States Securities Exchange Act of 1934: Proved oil and gas reserves. Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. (i) Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any; and (B) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir.

(ii) Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the "proved" classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. (iii) Estimates of proved reserves do not include the following: (A) Oil that may become available from known reservoirs but is classified separately as "indicated additional reserves"; (B) Crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; (C) Crude oil, natural gas, and natural gas liquids, that may occur in undrilled prospects; and (D) Crude oil, natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite and other such sources. Proved developed oil and gas reserves. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved. Proved undeveloped reserves. Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates, for proved undeveloped reserves be attributable to any acreage for
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which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir.

6.2. Proved Reserves Basics (This topic is provided as a short summary of key features of Proved Reserves; details follow in subsequent sections.) Proved Reserves are those reserves that meet the US SEC definition (see above) including further guidance from US SFAS, other SEC documents and practices known to be accepted by the SEC in the EP industry (see Appendix 1). Proved Reserves are the only reserve volumes RD and ST&T can disclose externally. The SEC rules begin Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Further SFAS 69 requires Net quantities of an enterprise's interests in proved reserves and proved developed reserves shall be disclosed as of the beginning and the end of the year. Since we report our Proved Reserves as of year-end, 31 December is the official date the estimate is made. Thus all Proved Reserve volumes, each year, must be compliant using all available information as of year-end to meet these FASB and SEC rules. Specifically in the SEC regulation, the requirements that reserves must meet to be classified as Proved Reserves can be summarized in three general criteria: (1) Technically recoverable (using geologic and engineering data) (2) Economic (judged under existing economic conditions) (3) Reasonable certainty of recovery (commitment to and likelihood of production) The basis for each of the above is the test of high confidence that the estimated proved ultimate recovery is more likely to increase with time (and further knowledge) than to decline. This is expressed as reasonable certainty when applied to the inherently unknowable exact average value of parameters like porosity, thickness or saturation (where mean values of ranges can be used). For other elements, the higher standard of certainty is required for productive continuity away from well control, for the lowest structural limit on commercial hydrocarbon saturation and for discrete and knowable elements like having sales agreements or government regulatory approvals for new projects. The specific details of Shell interpretations and practices are described later in this document. However, a brief summary of the Shell approach to each of these three parts of the SEC standard is as follows: Reasonable certainty technically recoverable volumes Using all available data and appropriate engineering/scientific methods (several if possible), a DETERMINISTIC, high confidence estimate should be made. This does not mean an absolute certainty case constructed by using the lowest possible value of all factors (porosity, HC saturation, net thickness, recovery efficiency, etc.) but rather up to the expected value of each (within SEC limits on proved area as controlled by the lowest known HC, lateral extent, etc.) when available data provides a reasonable distribution. Where data is absent (say, recovery mechanism unknown), the more conservative outcome should be used to assure high confidence. All estimates must be tied to actual experience via trend analysis (DCA)

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or history matching of a producing reservoir and use of analogues representative of a newly (or not yet) developed reservoir. Notwithstanding specific guidance on each parameter, the calculated volume must be supportable as reasonably certain or it should be lowered to a value that can be. Economic volumes Within the reasonable certainty technically recoverable volumes, both Developed and Undeveloped volumes must satisfy defined hurdles when valued by two cumulative net cash flow analyses. One is a discounted analysis, using Shell's forecast of oil and gas prices and Expectation Reserves, which is used as evidence to support the likelihood of project execution. The Group hurdle rate for Undeveloped volumes is the annual advised minimum investment criteria. The other one is an undiscounted analysis, using defined price and cost criteria (actual YE prices and current costs, kept constant) and candidate Proved Reserves (which are volumes that satisfy the technical criteria but have not yet been shown to meet all Proved Reserve criteria). This is called the Economic Limit Test. Also only those volumes to which Shell has legal title or economic entitlement (i.e., Shell Net or Group Share) can be claimed as Proved Reserves. Reasonable certainty of recovery Proved Reserves should be volumes that ultimately will be produced. Generally if volumes are technically recoverable and economic, one might assume they will be produced. However, other circumstances may intervene. For Undeveloped volumes, there may be reasons why the needed investment would not be made too large a capital requirement, does not fit desired portfolio, may cause image/reputation issues, etc. Shell requires that Proved Undeveloped Reserves for major new projects cannot be booked until FID (or when a clear commitment to develop is evident) and that the current business plan includes development of all Proved Undeveloped volumes. This assures the reasonable certainty requirement is met. For Developed volumes, such factors also exist. An example would be likely well failure before end of producing life. Such producing volumes at risk must show proper allowances to manage or account for this risk to be classified as Proved. Here also the current business plan should include production volumes consistent with the stated Proved Developed Reserves to confirm we expect these volumes will be recovered within the licence period.

6.3. Proved Reserves Technical Elements A significant portion of the SEC rules relate to the technical calculation of potentially Proved Reserves. As noted above, these should be applied to a specific Proved deterministic case that has been created to fully comply with all SEC criteria. These criteria can be separated into those that primarily apply to either undeveloped fields or immature fields (when volumetric reserves determination methods are used) and those that apply to mature fields (when performance-based reserves determination methods are used). 6.3.1. Volumetric Reserve Determination Criteria The SEC guidance that applies mainly to volumetric reserve estimates are: Proved Area Highest and Lowest Hydrocarbons: Within a single reservoir (see Lateral Extent), the lowest known hydrocarbon (LKH) that can be included in the Proved Reserve volume is that structurally lowest commercial hydrocarbon penetrated by a well and shown by log, core, and/or well test data. Other techniques, like pressure gradient vs. depth plots or 3-D seismic amplitude terminations are not acceptable as sole evidence. These can be used in support of acceptable methods.

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Likewise, the highest structural oil is that seen by a well penetration limits the upward extent of Proved oil reserves. If another well structurally higher has penetrated the reservoir and seen commercial natural gas down-to elevation higher than this upward oil limit (oil-up-to), a judgment must be made about the volume between the gasdown-to and oil-up-to elevations. Assuming all evidence supports that this portion of the reservoir is reasonably certain to be commercially productive, then the only remaining issue is which hydrocarbon. Consistent with conservative reserve assumptions, this issue should be based on the lesser valued of the hydrocarbons. This means in a setting lacking a gas market, it should be assumed this volume is gas filled. On the other hand, if the contract terms were such that the operator only received revenue on gas (oil belonged to others), then the volume should be assumed to be oil filled. In settings with strong markets (i.e., near equal value and demand) for both oil and gas, either could be assumed but the preferred answer would be to honour PVT and pressure gradient data to estimate the Gas Oil Contact. Proved Area Lateral Extent: The lateral area within a single reservoir that may be allowed as Proved is limited by any faulting or other discontinuity that could be a barrier to reservoir (hydraulic) continuity. Within this limit, only the area that can be shown as one offset location away from an existing well penetration showing economic producibility can be included in Proved Area, and then only if there is reasonable certainty the properties of the neighbouring well extend to this offset area. (With a very heterogeneous reservoir, such extension to an offset location may not be reasonable.) However, a potential larger area can be considered Proved if proof of reservoir continuity exists (and other tests, including having a development plan, are met). Note that this requires clear (absolute) certainty of continuity such as provided by a pressure pulse or interference test; seismic data alone is insufficient. Thickness, Saturations, And Porosity: These properties are estimated at their values based on maps of variations across the reservoir. The values used can be up to the statistical mean value from maps prepared for the Proved case. These maps must honour the data from all existing well penetrations with the limit that no values better than that seen in a well can be included in the mapping. For example, if seismic suggests the formation thickens away from well control, this cannot be included in the Proved case map. The maximum thickness can be only that seen in a well. Fluid And Rock Flow Properties: To book Proved Reserves in a new field, the SEC requires actual production or conclusive formation test (with the exception of certain US Gulf of Mexico situations for details, contact the HRC) to demonstrate economic producibility in at least one reservoir. This means a full flow test (not just wireline sampling) long enough to establish the wells ability to produce at economic rates. For the remaining reservoirs in the field, the SEC states: If the combination of data from open-hole logs and core analyses is overwhelmingly in support of economic producibility and the indicated reservoir properties are analogous to similar reservoirs in the same field that have produced or demonstrated the ability to produce on a conclusive formation test, the reserves may be classified as proved. (Ref. 4; Appendix 2). Although the SEC statement does not mention requirements of fluid samples and pressure measurements in the other reservoirs, Shell sees these data as mandatory for booking Proved Reserves.

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These flow and/or downhole measurements should provide the data on reservoir pressure, fluid properties and formation flow properties needed for the volumetric estimate. Again the standard of no better than seen in a well and conservative when uncertain should be used to distribute these properties and calculate mean values. Recovery Factors: In the absence of clear and conclusive evidence to determine the recovery factor, an assumed recovery factor should represent the most conservative of the plausible cases which will be different with different situations. For example, in an oil reservoir, a primary depletion case may be the most conservative; while in a similar situation, in a gas reservoir, a strong water drive would be the most conservative. Recovery factors should honour all existing data (e.g., dont claim there is no aquifer after downdip wells start cutting water) and should be the conservative case until only one-option remains that fits the data. Area studies of similar reservoirs and their (performance proven) recovery factors can help bracket the likely range for new reservoirs. (Note: for improved recovery projects, see the improved recovery section.) Resulting volumetric calculation: Notwithstanding specific guidance on each parameter, the calculated volume must be supportable as reasonably certain or , if not, the input parameters should be appropriately revised so that the calculated volume is supportable as reasonably certain.

6.3.2. Technical Maturity Development/Production Plan Under Technical Maturity, the requirements for Proved Reserves have already been discussed. As noted above under volumetric determination, to properly honour the requirements for such a determination (indeed for any Proved Reserve determination), specific details of the project development/production plan must be known and considered. For example, the number and location of future development wells must be known to judge how many wells are one-offset location from existing penetrations. Thus, an approved development plan is needed for Proved Reserves. 6.3.3. Performance-Based Reserve Determination Criteria Performance-based reserve methods are appropriate when sufficient performance data exists to reliably predict future reservoir production. This means ample performance-data (not just a few early points) showing a clear trend (untrendable, erratic data does not work). If a potential variation in the trend can be defined (i.e., a separate low case and mean case exist), then the low case is always the Proved Reserve case. Expectation and Proved Reserves are equal in such situations only when there is only one reasonable case. As always, the Proved Reserves must meet the reasonable certainty test of being much more likely to see upward revision than downward over time. There is no definable standard (e.g., x% of ultimate recovery produced) for how mature a reservoir must be to achieve the condition of no uncertainty in forecast trends such that Proved Reserves equal Expectation. This will be unique and specific to each reservoir. Performance-based reserve determination can be done using basic, historical methods such as production rate vs. time (production decline) curves, log oil cut vs. cumulative production (cut-cum) plots, gas P/z versus cumulative production trends or single-cell material balance calculations. Or they may use complex static and dynamic modelling in a reservoir simulator. Proved Reserve issues on simulation are discussed below. The basic methods are often a more easily documented Proved Reserve justification, as the assumptions, input, and calculations are much less complex than a full simulation.
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Decline Curve Analysis (DCA) includes plots of performance data such as production rate, water cut or gas-oil ratio against either time or cumulative production. These are plotted to define a trendable relationship that allows forecasting future production or cumulative production at well end-of-life. The trend can be a straight line or defined curve (e.g., exponential, hyperbolic) depending on the physics of the reservoir performance and the graphing parameters (linear or logarithmic). For calculating performance-based reserves, the DCA method chosen must be done at the lowest producing level (i.e., per completion if multiple zones or per well if single reservoir) since DCA at higher levels (e.g., reservoir or field-wide) gives an inaccurate estimate. The trend line chosen (exponential, hyperbolic, etc.) must be consistent with the physics of the recovery mechanism/reservoir setting and be shown as valid by historical data from other wells in the reservoir or by wells in analogue reservoirs. The end of reserve life should be the more conservative of the practical producing limit (e.g., flowing well dies, flow assurance limit reached) or economic limit (using actual YE price). For gas reserves in conventional reservoirs (e.g., not tight sands or coal bed methane), it is recommended all reservoirs have a pressure (P/z) versus cumulative production plot showing key historical data (initial pressure, prior and current pressure during production) and future data (abandonment pressure both natural and under compression if planned/installed). This is a useful summary of gas reservoir characteristics even when reservoir dynamics (e.g., water drive) do not give a straight-line trend. 6.4. Proved Reserves Economics Elements Determination of Proved Reserves whether determined by volumetric or performance methods requires two analyses, one representing Group view of economics and one honouring SEC/FASB requirement, the economic limit test. The Group economics, used to show the profitability of beginning a new project or continuing to operate an existing project, are typically done based on Expectation Reserves using guidance from the annual project evaluation criteria. For Proved Reserves, this means that the project operations needed to produce these reserves meet the economic test for commercially mature (i.e., project profitability meets the Groups investment criteria). In some cases, projects will receive FID without meeting these internal profitability criteria. When this occurs, this requirement of internal economics is deemed to be met. However, the SEC test is still required. Proved Reserves are defined using the SEC economic limit test based on instructions from US SFAS 69. This test is undiscounted, uses flat (unescalated) actual year-end prices (as of the date of estimate) and uninflated costs (current, as of the date of estimate), includes only project-specific liabilities (e.g., royalties, production taxes) and excludes corporate income taxes, sunk costs and depreciation. This analysis also uses a Proved case specific production forecast (rate versus time). Here the project is economic (and reserves are Proved) if it produces positive net cash flow. 6.4.1. Oil And Gas Price For Proved Reserves, entitlement share and project economics including economic limit calculations should be done using actual year-end price of the reporting year. (Note: the Groups disclosure of the Standardized Measure of Discounted Cash Flows is calculated at the actual year-end price.) In certain unusual cases, use of actual year-end price may cause the calculated Proved Reserves to exceed the Expectation Reserves. This can happen with PSC assets if the yearend price is lower than the Shell premise (such that entitlement share is greater for the Proved Reserves case) or with tax/royalty situations with actual price greater than Shell premise where reserves are defined by the economic limit. In the former case, Proved
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Reserves should be reduced to the entitlement share defined by the Expectation calculation. In the latter case, the Proved Reserves should be limited to the economic limit defined by the Expectation calculation. This treatment is required to assure that Proved Reserves meet the test of being expected to be recovered even though the allowed economic calculation may give a greater volume. [Editor's note: this paragraph was later changed. See Attachment 1.] 6.5. Proved Reserves Commitment Elements (Reserves Expected To Be Recovered) The commitment to develop and produce is required for Proved Reserves and must be shown at the local, regional, and corporate level. This is also required from all partners (sufficient that the activity will be done), especially the operator, when the project is a nonoperated venture. Another item related to this element is the agreements of all key stakeholders (the host government, regulatory agencies, financial institutions, etc.) that they approve of the project. All of these must be present to meet the certainty test that the project will be done. As noted in Project Maturity, major projects must achieve FID before Proved Reserves can be booked. There is no commitment issue for major projects as all organizational levels must agree to proceed before the project is sanctioned. For other projects (intermediate or small), other measures must provide the needed demonstration of commitment. These are an approved field development plan, inclusion in the approved business plan and a clear Operating Unit track record that shows consistent execution of such projects. 6.6. Proved Reserves Further Topics In addition to the general elements noted above, certain special items should be noted for their specific requirements in determining Proved Reserves. 6.6.1. Revisions to Existing Projects Proved Reserves that already have been booked but which no longer satisfy the criteria for technical and commercial maturity should be de-booked immediately it is not acceptable to retain Proved Reserves that cannot be justified. All Proved Reserves that are identified as potentially exposed (because of questions concerning whether they are in violation of these Requirements) should be promptly notified to the HRC for guidance on de-booking. Proved Reserves that no longer satisfy requirements can occur for varied reasons. Some examples are: new technical data that shows the prior basis was incorrect; operational changes that change the Proved Reserve estimates; changes in the contractual or legal assumptions impacting Reserves (including litigation issues). In all cases, Proved Reserves can be only those volumes of which we are reasonably certain to be recoverable in future years under existing economic and operating conditions. Thus reserves at risk based on such changes or new situations must be removed until it can be shown they are no longer at risk. 6.6.2. Improved Recovery Improved recovery can include any of the following basic methods: fluid injection after a period of primary production to re-pressure and/or displace hydrocarbons, fluid injection at the start of production to maintain reservoir pressure. For a reservoir to have Proved Reserves incrementally attributable to the Improved Recovery project, the [improved recovery] technique [must have] been demonstrated to be technically and economically successful by a pilot project or installed program in that specific rock volume. (Ref. 4; Appendix 2)
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It is further possible to qualify if the intended technique has been verified by routine commercial use in the area. Based on this guidance, Proved Reserves from the application of an improved recovery technique can only be booked when (1) a pilot test in the target reservoir has been done or (2) an installed project using this technique in either the same reservoir or an area analogue reservoir exists. Obviously, the actual results from the pilot or analogue must fully support the intended booking of improved recovery Proved Reserves. The criteria for a suitable analogue is very specific to assure the analogue results provide the reasonable certainty needed to support improved recovery Proved Reserves in another field. Ideally the analogue would be in the same formation, very close to the target reservoir (same basin, same area) with identical rock and fluid properties, developed in the same manner. As obtaining a perfect match is often difficult, it is acceptable if the analogue has different properties as long as those properties are poorer/worse than in the target reservoir (e.g., analogue porosity = 30%, target porosity = 32%). A template showing the key parameters to compare to qualify a suitable analogue is found in Appendix 4. Further guidance is provided on the timing of classifying such reserves as developed. Proved developed reserves from improved recovery techniques can be assigned after either the operation of an installed pilot program shows a positive production response to the technique or the project is fully installed and operational and has shown the production response anticipated by earlier feasibility studies. In the case with a pilot, proved developed reserves can be assigned only to that volume attributable to the pilot's influence. In the case of the fully installed project, response must be seen from the full project before all the proved developed reserves estimated can be assigned. If a project is not following original forecasts, proved developed reserves can only be assigned to the extent actually supported by the current performance. (Ref. 4; Appendix 2). The Proved Developed Reserve timing can be a problem for Improved Recovery projects where the technique is employed at (or very near) the start of reservoir production (very near means within one year from the start of production). In such cases, there is no positive production response from a before production trend to the after trend there is only one trend. In these situations (pressure maintenance projects are the primary example), Proved Developed Reserves can be recognised at the start of injection (under the North Sea Rule from Ref. 6). 6.6.3. Reservoir Simulation (And Other Interpretative Analysis Methods) The EP industry has developed a variety of interpretative analysis tools and methods to develop conclusions from the evaluation of available data together with assumptions for unavailable data all blended within a framework of basic scientific knowledge. Many of these tools and methods are judged by industry to be sufficiently reliable to be used in critical business decision-making. However, the SEC remains unconvinced, requiring use of historical methods as the primary determinants of Proved Reserve volumes. When the SEC does accept use of such interpretative tools (e.g., reservoir simulation, seismic), the analysis must be fully tied to all actual well/log data, incorporate only measured properties limited to the best value seen in a well (i.e., interpolate only, no extrapolation above a measured value) and, for modelling dynamics, be uniquely history matched against actual production performance. If no single unique model can be shown, then the most conservative of the several history-matched models should be used. Reservoir Simulation: In every possible case, simulation models used to support Proved Reserves should be history-matched to all available performance data. Unmatched reservoir
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simulation models must be used with caution in estimating either expected or Proved Reserves. This potentially idealistic representation of reservoir physics can be quite useful in evaluating combined static and dynamic elements of future production. Clearly, there must be a tie of model results to analogue reservoir performance to ensure grounding in reality. This could include the incorporation of unseen but expected (again from analogues) complexities in the static model or in dynamic performance. Additionally, post-model risk discounting can be done to include any effects recognised in similar fields that cannot be built into the simulation model structure. To apply this to Proved Reserve determination, either separate models limited to proved area (and any other Proved Reserve restrictions) can be used or the recovery per drained area from the Expectation models can be used with the Proved area drainage areas to estimate Proved Reserves. Seismic: Seismic data (preferably 3-D seismic data) can be used to define the structural top and bottom of the gross formation when properly tied to well control. But more interpretative use of seismic data or analysis, such as for projecting pay thickening away from well control or defining a hydrocarbon-water contact, is not allowed. This also includes use of seismic to establish reservoir continuity as needed to define Proved area. On this, the SEC states: seismic data is not an indicator of continuity of production and, therefore, cannot be the sole indicator of additional proved reserves beyond the legal and technically justified drainage areas of wells that were drilled. Continuity of production would have to be demonstrated by something other than seismic data. (Ref. 4; Appendix 2). Even when not accepted as the sole indicator of any key reserve parameter, available seismic can and should still be used in support of a fully integrated interpretation of the reservoir. In this role, it is especially important that the uncertainties in the seismic analysis are described in a consistent manner to convey a full understanding of this information.

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REFERENCES 1. United States Securities and Exchange Commission (SEC) Regulation S-X, Rule 4-10. 2. Petroleum Reserves Definitions, Society of Petroleum Engineers and World Petroleum Congresses, http://www.spe.org/spe/jsp/basic/0,2396,1104_12169_0,00.html; and Petroleum Resources Classification System and Definitions, Society of Petroleum Engineers and World Petroleum Congresses http://www.spe.org/spe/jsp/basic/0,2396,1104_12171_0,00.html 3. Handbook of SEC Accounting and Disclosure 4. Issues in the Extractive Industries, United States Securities and Exchange Commission (SEC): http://www.sec.gov/divisions/corpfin/guidance/cfactfaq.htm#P279_57537 5. Statements of Financial Accounting Standards (FAS) numbers 19, 25 and 69, Financial Accounting Standards Board (FASB). 6. Topic 12 of Accounting Series Release No. 257 of the Staff Accounting Bulletins, SEC, http://www.sec.gov/interps/account/sabcodet12.htm.

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APPENDIX 1. (Redacted due to redundant materials)

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APPENDIX 2.

FURTHER SEC GUIDANCE DOCUMENT (REF. # 4)

US Security and Exchange Commission Division of Corporation Finance: Frequently Requested Accounting and Financial Reporting Interpretations and Guidance March 31, 2001

Issues in the Extractive Industries


3. Definition of Proved Reserves Over the last several years, the estimation and classification of petroleum reserves has been impacted by the development of new technologies such as 3-D seismic interpretation and reservoir simulation. Computer processor improvements have allowed the increased use of probabilistic methods in proved reserve assessments. These have led to issues of consistency and, therefore, some confusion in the reporting of proved oil and gas reserves by public issuers in their filings with the Commission. This section discusses some issues the Division of Corporation Finance's engineering staff has identified in its review of such filings. The definitions for proved oil and gas reserves for the SEC are found in Rule 4-10(a) of Regulation S-X of the Securities Exchange Act of 1934. The SEC definitions are below in bold italics. [Editors Note: In the official online document, no bold italics appears although the prior sentence remains.] Under each section we have tried to explain the SEC staff's position regarding some of the more common issues that arise from each portion of the definitions. As most engineers who deal with the classification of reserves have come to realize, it is difficult, if not impossible, to write reserve definitions that easily cover all possible situations. Each case has to be studied as to its own unique issues. This is true with the Society of Petroleum Engineers' and others' reserve definitions as well as the SEC's definitions. (a) Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided by contractual arrangements, but not on escalations based upon future conditions. The determination of reasonable certainty is generated by supporting geological and engineering data. There must be data available, which indicate that assumptions such as decline rates, recovery factors, reservoir limits, recovery mechanisms and volumetric estimates, gas-oil ratios or liquid yield are valid. If the area in question is new to exploration and there is little supporting data for decline rates, recovery factors, reservoir drive mechanisms etc., a conservative approach is appropriate until there is enough supporting data to justify the use of more liberal parameters for the estimation of proved reserves. The concept of reasonable certainty implies that, as more technical data becomes available, a positive, or upward, revision is much more likely than a negative, or downward, revision. Existing economic and operating conditions are the product prices, operating costs, production methods, recovery techniques, transportation and marketing arrangements, ownership and/or entitlement terms and regulatory requirements that are extant on the effective date of the estimate. An anticipated change in conditions must have reasonable certainty of occurrence; the corresponding investment and operating
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(b)

(c)

(d)

expense to make that change must be included in the economic feasibility at the appropriate time. These conditions include estimated net abandonment costs to be incurred and duration of current licenses and permits. If oil and gas prices are so low that production is actually shut-in because of uneconomic conditions, the reserves attributed to the shut-in properties can no longer be classified as proved and must be subtracted from the proved reserve data base as a negative revision. Those volumes may be included as positive revisions to a subsequent year's proved reserves only upon their return to economic status. Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes that portion delineated by drilling and defined by gas-oil and/or oilwater contacts, if any, and the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limits of the reservoir. Proved reserves may be attributed to a prospective zone if a conclusive formation test has been performed or if there is production from the zone at economic rates. It is clear to the SEC staff that wireline recovery of small volumes (e.g., 100 cc) or production of a few hundred barrels per day in remote locations is not necessarily conclusive. Analyses of open-hole well logs, which imply that an interval is productive, are not sufficient for attribution of proved reserves. If there is an indication of economic producibility by either formation test or production, the reserves in the legal and technically justified drainage area around the well projected down to a known fluid contact or the lowest known hydrocarbons, or LKH may be considered to be proved. In order to attribute proved reserves to legal locations adjacent to such a well (i.e. offsets), there must be conclusive, unambiguous technical data which supports reasonable certainty of production of such volumes and sufficient legal acreage to economically justify the development without going below the shallower of the fluid contact or the LKH. In the absence of a fluid contact, no offsetting reservoir volume below the LKH from a well penetration shall be classified as proved. Upon obtaining performance history sufficient to reasonably conclude that more reserves will be recovered than those estimated volumetrically down to LKH, positive reserve revisions should be made. Reserves which can be produced economically through applications of improved recovery techniques (such as fluid injection) are included in the "proved" classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. If an improved recovery technique which has not been verified by routine commercial use in the area is to be applied, the hydrocarbon volumes estimated to be recoverable cannot be classified as proved reserves unless the technique has been demonstrated to be technically and economically successful by a pilot project or installed program in that specific rock volume. Such demonstration should validate the feasibility study leading to the project. Estimates of proved reserves do not include the following: Oil that may become available from known reservoirs but is classified separately as indicated additional reserves;

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(e)

Crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; Crude oil, natural gas, and natural gas liquids, that may occur in undrilled prospects; Crude oil, natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite and other sources. Geologic and reservoir characteristic uncertainties such as those relating to permeability, reservoir continuity, sealing nature of faults, structure and other unknown characteristics may prevent reserves from being classified as proved. Economic uncertainties such as the lack of a market (e.g., stranded hydrocarbons), uneconomic prices and marginal reserves that do not show a positive cash flow can also prevent reserves from being classified as proved. Hydrocarbons "manufactured" through extensive treatment of gilsonite, coal and oil shales are mining activities reportable under Industry Guide 7. They cannot be called proved oil and gas reserves. However, coal bed methane gas can be classified as proved reserves if the recovery of such is shown to be economically feasible. In developing frontier areas, the existence of wells with a formation test or limited production may not be enough to classify those estimated hydrocarbon volumes as proved reserves. Issuers must demonstrate that there is reasonable certainty that a market exists for the hydrocarbons and that an economic method of extracting, treating, and transporting them to market exists or is feasible and is likely to exist in the near future. A commitment by the company to develop the necessary production, treatment and transportation infrastructure is essential to the attribution of proved undeveloped reserves. Significant lack of progress on the development of such reserves may be evidence of a lack of such commitment. Affirmation of this commitment may take the form of signed sales contracts for the products; request for proposals to build facilities; signed acceptance of bid proposals; memos of understanding between the appropriate organizations and governments; firm plans and timetables established; approved authorization for expenditures to build facilities; approved loan documents to finance the required infrastructure; initiation of construction of facilities; approved environmental permits etc. Reasonable certainty of procurement of project financing by the company is a requirement for the attribution of proved reserves. An inordinately long delay in the schedule of development may introduce doubt sufficient to preclude the attribution of proved reserves. The history of issuance and continued recognition of permits, concessions and commerciality agreements by regulatory bodies and governments should be considered when determining whether hydrocarbon accumulations can be classified as proved reserves. Automatic renewal of such agreements cannot be expected if the regulatory body has the authority to end the agreement unless there is a long and clear track record, which supports the conclusion that such approvals and renewal are a matter of course. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as proved developed reserves only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.

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(f)

Currently producing wells and wells awaiting minor sales connection expenditure, recompletion, additional perforations or bore hole stimulation treatment would be examples of properties with proved developed reserves since the majority of the expenditures to develop the reserves has already been spent. Proved developed reserves from improved recovery techniques can be assigned after either the operation of an installed pilot program shows a positive production response to the technique or the project is fully installed and operational and has shown the production response anticipated by earlier feasibility studies. In the case with a pilot, proved developed reserves can be assigned only to that volume attributable to the pilots influence. In the case of the fully installed project, response must be seen from the full project before all the proved developed reserves estimated can be assigned. If a project is not following original forecasts, proved developed reserves can only be assigned to the extent actually supported by the current performance. An important point here is that attribution of incremental proved developed reserves from the application of improved recovery techniques requires the installation of facilities and a production increase. Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates of proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir. (Emphasis added) The SEC staff points out that this definition contains no mitigating modifier for the word certainty. Also, continuity of production requires more than the technical indication of favorable structure alone (e.g., seismic data) to meet the test for proved undeveloped reserves. Generally, proved undeveloped reserves can be claimed only for legal and technically justified drainage areas offsetting an existing productive well (but structurally no lower than LKH). If there are at least two wells in the same reservoir which are separated by more than one legal location and which show communication (reservoir continuity), proved undeveloped reserves could be claimed between the two wells, even though the location in question might be more than an offset well location away from any of the wells. In this illustration, seismic data could be used to help support this claim by showing reservoir continuity between the wells, but the required data would be the conclusive evidence of communication from production or pressure tests. The SEC staff emphasizes that proved reserves cannot be claimed more than one offset location away from a productive well if there are no other wells in the reservoir, even though seismic data may exist. The use of high-quality, well-calibrated seismic data can improve reservoir description for performing volumetrics (e.g., fluid contacts). However, seismic data is not an indicator of continuity of production and, therefore, cannot be the sole indicator of additional proved reserves beyond the legal and technically justified drainage areas of wells that were drilled. Continuity of production would have to be demonstrated by something other than seismic data. In a new reservoir with only a few wells, reservoir simulation or application of generalized hydrocarbon recovery correlations would not be considered a reliable method to show increased proved undeveloped reserves. With only a few wells as data

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(g)

points from which to build a geologic model and little performance history to validate the results with an acceptable history match, the results of a simulation or material balance model would be speculative in nature. The results of such a simulation or material balance model would not be considered to be reasonably certain to occur in the field to the extent that additional proved undeveloped reserves could be recognized. The application of recovery correlations which are not specific to the field under consideration is not reliable enough to be the sole source for proved reserve calculations. Reserves cannot be classified as proved undeveloped reserves based on improved recovery techniques until such time that they have been proved effective in that reservoir or an analogous reservoir in the same geologic formation in the immediate area. An analogous reservoir is one having at least the same values or better for porosity, permeability, permeability distribution, thickness, continuity and hydrocarbon saturations. Topic 12 of Accounting Series Release No. 257 of the Staff Accounting Bulletins states:
In certain instances, proved reserves may be assigned to reservoirs on the basis of a combination of electrical and other type logs and core analyses which indicate the reservoirs are analogous to similar reservoirs in the same field which are producing or have demonstrated the ability to produce on a formation test.

(h)

(i)

If the combination of data from open-hole logs and core analyses is overwhelmingly in support of economic producibility and the indicated reservoir properties are analogous to similar reservoirs in the same field that have produced or demonstrated the ability to produce on a conclusive formation test, the reserves may be classified as proved. This would probably be a rare event especially in an exploratory situation. The essence of the SEC definition is that in most cases there must at least be a conclusive formation test in a new reservoir before any reserves can be considered to be proved. Statement of Financial Accounting Standards 69, paragraph 30.a. requires that Future cash inflows . . . be computed by applying year-end prices of oil and gas relating to the enterprises proved reserves to the year-end quantities of those reserves. This requires the use of physical pricing determined by the market on the last day of the (fiscal) year. For instance, a west Texas oil producer should determine the posted price of crude (hub spot price for gas) on the last day of the year, apply historical adjustments (transportation, gravity, BS&W, purchaser bonuses, etc.) and use this oil or gas price on an individual property basis for proved reserve estimation and future cash flow calculation (this price is also used in the application of the full cost ceiling test). A monthly average is not the price on the last day of the year, even though that may be the price received for production on the last day of the year. Paragraph 30b) states that future production costs are to be based on year-end figures with the assumption of the continuation of existing economic conditions. Probabilistic methods of reserve estimating have become more useful due to improved computing and more important because of its acceptance by professional organizations such as the SPE. The SEC staff feels that it would be premature to issue any confidence criteria at this time. The SPE has specified a 90% confidence level for the determination of proved reserves by probabilistic methods. Yet, many instances of past and current practice in deterministic methodology utilize a median or best estimate for proved reserves. Since the likelihood of a subsequent increase or positive revision to proved reserve estimates should be much greater than the likelihood of a decrease, we see an inconsistency that should be resolved. If probabilistic methods are used, the

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(j)

(k)

limiting criteria in the SEC definitions, such as LKH, are still in effect and shall be honored. Probabilistic aggregation of proved reserves can result in larger reserve estimates (due to the decrease in uncertainty of recovery) than simple addition would yield. We require a straightforward reconciliation of this for financial reporting purposes. The calculation of the standardized measure of discounted future net cash flows relating to oil and gas properties must comply with paragraph 30 of SFAS 69. The effects of income taxes, like all other elements of the measure, must be discounted at the standard rate of 10% pursuant to paragraph 30(e). The short-cut method for determining the tax effect on the ceiling test for companies using the full-cost method of accounting, as described in SAB Topic 12:D:1, Question 2, may not be used for purposes of the paragraph 30 calculation of the standardized measure. We have seen in press releases and web sites disclosure language by oil and gas companies which would not be allowed in a document filed with the SEC. We will request that any such disclosures be accompanied by the following cautionary language:
Cautionary Note to U.S. Investors -- The United States Securities and Exchange Commission permits oil and gas companies, in their filings with the SEC, to disclose only proved reserves that a company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. We use certain terms {in this press release/on this web site}, such as [identify the terms], that the SEC's guidelines strictly prohibit us from including in filings with the SEC. U.S. Investors are urged to consider closely the disclosure in our Form XX, File No. X-XXXX, available from us at [registrant address at which investors can request the filing]. You can also obtain this form from the SEC by calling 1-800-SEC-0330.

Examples of such disclosures would be statements regarding probable, possible, or recoverable reserves among others. (l) Under Production Sharing Agreements, a host government typically retains the title to the hydrocarbons in place, although the contracting company usually assumes all the costs for exploration and carries all risks. When a discovery is made, the contract provides for the contracting company to recover all its exploration and development expenditures and receive a share of profits, subject to certain limits. The amounts due to the contracting company are typically taken in kind. In general, two methods of determining oil and gas reserves under production sharing arrangements have been proposed by registrants: (a) the working interest method and (b) the economic interest method. Under the working interest method, the estimate for total proved reserves is multiplied by the respective working interest held by the contracting company, net of any royalty. Under the economic interest method, the companys share of the cost recovery oil revenue and the profit oil revenue is divided by the year-end oil price, which represents the volume entitlement. The lower the oil price, the higher the barrel entitlement, and vice versa. Reserve volumes determined by various owners should add up to 100% of the total field reserves, but that is not always the case using the working interest method. If the working interest is different from the profit entitlement, the economic interest method is the method acceptable to the staff because it is a closer representation of the actual reserve volume entitlement that can be monetized by a company. Also, use of the economic interest method avoids violating the prohibition in paragraph 10 of SFAS 69 against reporting reserves owned by others. (m) The SEC staff reminds professionals engaged in the practice of reserve estimating and evaluation that the Securities Act of 1933 subjects to potential civil liability every expert
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who, with his or her consent, has been named as having prepared or certified any part of the registration statement, or as having prepared or certified any report or valuation used in connection with the registration statement. These experts include accountants, attorneys, engineers, or appraisers.

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APPENDIX 3.

TERMINOLOGY

A3.1. Petroleum Resources Terminology Reservoir A reservoir is a porous and permeable underground formation containing a natural accumulation of producible oil or gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs. In the absence of definitive data, reservoirs are restricted to fault blocks or sedimentary units that have been proved to be productive until production performance proves communication to exist across faults or other barriers. PVT properties can vary within a reservoir. Field A field is an area consisting of a single reservoir or multiple reservoirs within a closed areal boundary that belong to the same confining geological structure. Field boundaries must be defined upon discovery and should encompass the unpenetrated petroleum resources in adjacent fault blocks and stratigraphic traps, if they are considered to be part of the same overall confining structure. Field boundaries may be re-defined on the basis of new geological information. Ultimate Recovery The sum of cumulative production and the estimated reserves. Natural Gas Liquids Natural Gas Liquids (NGLs) are hydrocarbons existing in the liquid phase at standard conditions of temperature and pressure (stock tank conditions), but which formed a part of the gas phase at original reservoir conditions, and which are recovered from the production facilities. In some cases, NGLs are spiked into oil for export and sales purposes: in these cases it is recommended that the NGLs are still accounted for separately. Liquefied Petroleum Gas (LPG) products, which exist in the liquid phase at the point of sale but which would evaporate if flashed to standard conditions of temperature and pressure, should be accounted for as gas. Economic Producibility Economic producibility should normally be supported by a conclusive test in a drilled reservoir, but may be based on overwhelming support from log, core, pressure tests, and fluid property evaluation in a field where analogous reservoirs have been conclusively tested. Production Facilities Production facilities consist of all hardware installed to recover petroleum from the subsurface resources and to deliver a quality controlled end product for sale. These comprise the production and injection wells and the surface facilities for treatment, conversion, compression/ pumping, transport, and delivery. Surface Facilities That part of the production facilities accessible at surface, connecting the wellheads ultimately to the delivery points. Sales Quantities The quantities sold after fiscal metering and delivered at the locations where the upstream company ceases to have an interest in the end products. These can be expressed in terms
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of the general end-products oil, (dry) gas and natural gas liquids (NGL) or in terms of the actual product. Field products and the subsequent sales products may be different and will be affected by own use and losses. The properties and volumes of end products may be influenced by mixing and the petroleum type itself may be altered during surface processing. Since surface-processing conditions may change during a project life, sales products may vary in specification and in relation to field products. To avoid ambiguity and double counting, a clear distinction must be made between recoveries in the field and the quantities estimated to be available for sale. For general sales products, oil, gas and NGL, only the quantities sold by the upstream E&P company can contribute to Group reserves. Condensates mixed with crude oil in the same stream and sold as such can be reported under oil. Separator condensate from gas wells and light hydrocarbon liquid products, derived from surface processing, if collected in a separate stream and sold as such are reported under NGL. In principle all non-oil hydrocarbons that are sold as separate streams in liquid state (pressurized or not) should be accounted as NGL. Bitumen may be reported under oil in summary reports (with an appropriate footnote). In line with SEC requirements, sales volumes for gas should be those committed or committable to a gas contract. Committed Gas is covered by a gas contract. Committable gas is reasonably expected to be assigned to a contract in the future. It is necessary to maintain a more detailed internal administration of the actually sold products by stream in two cases: (1) If the upstream E&P company has separate contracts for delivery of special converted sales products such as LNG, methanol, ethane, LPG, C5+ etc., or (2) If there are special sales products like helium, sulphur or generated electricity. Reconciliation A monthly reconciliation is made between the fiscalized sales quantities and the quantities produced in the field. This is reported in the Monthly Report of Producing Wells (MRPW). The reconciliation process corrects for own use, flaring, losses and product conversion, and provides the end-product yield. For reserves estimating purposes an average future yield factor is to be estimated (e.g., LPG/ wet gas yield, dry gas/ wet gas yield). A3.2. Probabilistic Terminology Mean The statistical mean of a random variable is the probability-weighted average of the variable over its entire range. A3.3. Commercial Terminology FID Final investment decision, the decision to proceed with a project. NFA forecast No further (CAPEX) activity forecast, i.e., a forecast based on existing wells and facilities only. A3.4. Exploration And Development Wells The classification of a well as either an exploration well or as a development well is determined (in line with SEC rules) based on the Proved Area as follows:
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Proved Area The Proved Area is the part of a property (field/reservoir) to which Proved Reserves have been specifically attributed. It is delineated by the fluid levels seen in drilled wells and by the area around those wells, which geological / engineering data indicate to be producible, consistent with applicable SEC requirements. Development Well A development well is a well drilled within the Proved Area of an oil or gas reservoir to a depth of a stratigraphic horizon known to be productive. Service Well A service well is either an injection well, a disposal well or a water supply well. Appraisal Well An appraisal well, or stratigraphic test well is a well drilled for geological information (not to test a prospect), either 'development-type' drilled in a Proved Area or 'exploratory-type' if not drilled in a Proved Area. Exploration Well An exploration well is a well that is not a development well, a service well, or a stratigraphic test well.

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APPENDIX 4.

TEMPLATE FOR IMPROVED RECOVERY ANALOGUES

IMPROVED RECOVERY ANALOGY DOCUMENTATION (IF NO PILOT) Field Field Name Reservoir Segment/FB DISTANCE TO ANALOGY FIELD Same correlative interval/stratum Yes?
Additional Comments

SEC Analogy Parameters 1 2 Porosity (%) Permeability (md)

Subject Field Name

Analogy Field Name

the following 6 parameters for the Subject field must be equal to or greater than the Analogy field

3 4

Permeability Distribution Thickness (Ft)

For Example: DykstraParsons Coefficient or Vertical Heterogeneity Illustrated through CrossSection

5 6

Continuity Hydrocarbon Saturation (1-Sw)

Additional analogy parameters


these additional parameters need to be in the same range for both fields

Oil Gravity Initial Solution GOR Oil Viscosity Mobility Ratio Average Well Spacing (Acres)

PRIMARY Recovery Factor (%) SECONDARY RECOVERY FACTOR (%) TOTAL RECOVERY FACTOR (%) Methodology determining RF (Performance-Y/N)

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APPENDIX 5. SEC COMPLIANCE ASSURANCE

WBC/E1356.01/1562/ltc John Darley, Director Technology and Technical Services, EP, Shell Exploration and Production International Centre, Rijswijk, The Netherlands.

1st June 2005

Dear Mr. Darley,

The undersigned on behalf of Gaffney, Cline & Associates (GCA) has reviewed the EP 2004-1100 pblc document entitled "Petroleum Resource Volume Requirements for Resource Classification and Value Realisation (including Proved Reserve Requirements)" for explicit compliance with the regulatory definitions and guidelines of the United States Securities and Exchange Commission (SEC) and Financial Accounting Standards Board (FASB) as they pertain to the recognition and external reporting of Proved Oil & Gas reserves. As a result of the aforesaid review GCA is pleased to be able to formally report that this document, which is scheduled for issue during June 2005, is in compliance with the relevant SEC and FASB requirements. Sincerely, Gaffney, Cline & Associates

William B. Cline - Senior Partner

UNITED KINGDOM

UNITED STATES

SINGAPORE

AUSTRALIA

ARGENTINA

VENEZUELA

BRAZIL

MOSCOW

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EP 2004-1100 pblc

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ATTACHMENT 1. CHANGE TO ORIGINAL TEXT The original text of this document was changed subsequent to publication but before yearend reporting. The document section noted has been revised as shown below. Changes to Section 6.4.1 Oil and Gas Price This Section was revised to read as follows: For Proved Reserves, entitlement share and project economics including economic limit calculations should be done using actual year-end price of the reporting year. (Note: the Groups disclosure of the Standardized Measure of Discounted Cash Flows is calculated at the actual year-end price.) In certain unusual cases, use of actual year-end price may cause the calculated Proved Reserves to exceed the Expectation Reserves. This can happen with PSC assets if the yearend price is lower than the Shell premise (such that entitlement share is greater for the Proved Reserves case) or with tax/royalty situations with actual price greater than Shell premise where reserves are defined by the economic limit. In either case, the Proved Reserves should be reported as calculated regardless of the relationship to Expectation Reserves. This is proper since each calculation is an independent method of reserves determination that is not constrained by the other.

Petroleum Resource Volume Requirements for Resource Classification and Value Realisation