What are Proved Reserves?

Proved reserves are those quantities of oil and gas that can be estimated with reasonable certainty to be economically producible. The amount of proved reserves is important, since it is used to derive a valuation for oil and gas production firms. This is because the future revenue-generating ability of an oil and gas firm is dependent on how much of its proved reserves it can extract from the ground.

Calculation of Proved Reserves

The calculation of the reserve only applies when the following criteria are present:

The oil and gas is from known reservoirs
Production can proceed under existing economic conditions
Existing operating methods can be used
Production is feasible under existing government regulation
Production can be completed before the expiration date of the contracts providing the right to operate, unless it is reasonably certain that the contracts will be renewed
Extraction efforts must have commenced or it is reasonably certain that these efforts will commence within a reasonable period of time

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The known reservoir that is subject to this analysis has the following characteristics:

The area has been identified by drilling and limited by any fluid contacts
The area can include adjacent undrilled portions of the reservoir when it is reasonably certain to be continuous with the reservoir and to contain economically producible oil or gas, based on the use of reliable technology

If there is no data about fluid contacts, then proved reserves are limited by the lowest known hydrocarbons as noted in a well penetration, unless engineering, geoscience, or performance data provide a reasonably certain lower contact.

The proved classification of reserves can be bolstered by reserves that can be produced economically via the application of improved recovery techniques (such as fluid injection) when the following two conditions are present:

A successful test by a pilot project, the operation of an installed program within the reservoir or in an analogous reservoir, or other evidence that establishes the reasonable certainty of the underlying engineering analysis; and
Development of the project has been approved by all parties.

Reporting of Proved Reserves

Reserve information should be revised at least annually, or when there is an indication that a revision is needed. The following situations could all trigger the review of reserve information:

There has been a change in the ownership of a property.
There has been a significant decrease in cash flows.
There is a significant difference in actual production versus earlier estimates.

There is an inherent limitation on the precision of reserve information, since there are inherent uncertainties in the information from which it is derived.