Proven reserves, also known as proved reserves, are a classification used in the mining, oil and gas industry to describe the quantity of resources that can be economically and legally extracted with a high degree of certainty, given current prices, technologies, and laws. This high degree of certainty is typically quantified as having a 90% probability of being equal or exceeded.
These reserves are further classified as “proven developed” (PD) or “proven undeveloped” (PUD).
- Proven Developed Reserves (PD): These reserves are recoverable from existing wells with existing equipment and operating methods.
- Proven Undeveloped Reserves (PUD): These reserves are anticipated to be recovered from future wells. These are reserves that are believed to be recoverable, but drilling has not yet taken place.
To estimate proven reserves, companies use a combination of geological data, reservoir engineering, and production data. The calculation also depends on various factors including commodity prices, extraction technology, and legal and regulatory constraints. These estimates often change as new information comes to light or as technology and economic conditions evolve.
The amount of proven reserves is a critical factor in assessing the health and potential profitability of a resource extraction company. Companies often disclose their proven reserves in their annual reports and financial statements, and these figures are closely watched by investors and analysts.
Example of Proven Reserves
Let’s take an example of a hypothetical oil company, “PetroFuture Inc.”
- Proven Developed Reserves (PD): PetroFuture Inc. owns an oil field, “OilField A,” where they have been extracting oil for the past 10 years. Through their years of drilling experience and using established technologies, they know that they can recover 100 million barrels of oil from their current wells. This quantity forms part of their Proven Developed Reserves.
- Proven Undeveloped Reserves (PUD): In another location, “OilField B,” PetroFuture Inc. has conducted detailed geological surveys and exploratory drilling. The data confirms the existence of an oil reservoir, and based on their technical and economic evaluation, they are 90% confident they can economically extract 150 million barrels of oil once the necessary infrastructure is in place. These reserves are termed as Proven Undeveloped Reserves.
So, PetroFuture Inc. would report having a total of 250 million barrels of proven reserves (100 million barrels of Proven Developed Reserves + 150 million barrels of Proven Undeveloped Reserves). This is a key determinant of PetroFuture Inc.’s assets and potential future earnings and is a vital factor for investors and analysts when assessing the company’s financial health and future prospects.
It’s important to note that the estimation of reserves involves a degree of uncertainty and complexity, and the actual volumes recovered may ultimately be different due to changes in technology, market conditions, and legal and regulatory factors. The estimates are often revised as these conditions change and as more data becomes available.