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Energy Terms: Reserves Vs. Resources

I’m starting a new running service on my blog, beginning today. From time to time, I will define different terms used in both the oil and gas and financial industries. Just consider me a humble public servant.

For the first entry, let’s discuss the differences between oil and gas reserves and resources. If you’re like me (smart, debonair and a connoisseur of fine pizza) you have probably come across these terms in energy companies’ press releases. At first glance, they seem pretty interchangeable, so just what at the differences?

Reserves According to the Society of Petroleum Engineers, reserves are “those quantities of petroleum claimed to be commercially recoverable by application of development projects to known accumulations under defined conditions.”

Well, that clears things up, right? No? Well, to clarify, the SPE says petroleum quantities must fit four criteria to be classified as reserves. They must be (1) discovered through one or more exploratory wells, (2) recoverable using existing technology, (3) commercially viable, and finally (4) remaining in the ground.

Sound okay? Good, because it gets more tricky from there. There are currently three classifications for reserves: proved, probably and possible. Here’s how they break down:

Proved reserves are those with a “reasonable certainty” (a minimum 90% confidence) of being recoverable under existing economic and political conditions. We can discussed the differences between proved developed, proved undeveloped, etc. with a later post. However, it should be pointed out that proved reserves are the only reserves recognized by the U.S. SEC. This is why energy companies strive to get the latest technology and recovery methods recognized by the government, therefore increasing the chance of “reasonably” recovering oil and gas assets and therefore raising their reserves as well.

Probable reserves are petroleum and gas quantities with a 50% confidence level of recovery. Basically, you may be able to get some, you may not.

Possible reserves are quantities with a minimum 10% certainty of being produced. Basically, your long shot discoveries.  Only gamble on these types of assets if your Magic 8-Ball tells you to.

All right! That takes care of reserves! But what about resources?

Resources

For those of you who have looked at on the market ads, you’ll spot this term a lot in the literature. So what is resources? Again, we turn to the SPE.

There are two categories of resources: contingent and prospective.

Contingent resources are quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations, but the projects are not yet considered mature enough for commercial development due to one or more contingencies.

In other words, there’s a good idea of how much oil and gas is in the reservoir, but issues such as political and social events or even a lack of market prevent production. There can be a major oil discovery in the Congo right now. You want to risk getting shot to get to it?

Prospective resources are quantities of petroleum estimated to be potentially recoverable from undiscovered accumulations by application of future development projects.

These sorts of resources basically exist in the minds of marketing people. That’s not to say that they don’t exist in the real world as well, it just means that E&Ps are thinking of future oil and gas discoveries in new areas, based on upcoming technology and the discoveries made in similar formations worldwide.

Okay! I hope that helps! Until next time, may the resource be with you. Live long and prospect.

-Stephen Payne, Editor, Oil and Gas Investor This Week; www.OilandGasInvestor.com; spayne@hartenergy.com


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