Oil Stocks Terminology: Proved plus Probable Reserves

Today we continue our terminology series by taking a look at how reserves are classified. A typical oil and gas company will declare its reserves under the following format:

Proved plus Probable Reserves: 3.3 MMBoe (Million Barrels of Oil Equivalent)

2P or P+P are also used to denote the same information.

Proved Reserves are reserves that can be estimated with a high degree of certainty to be recoverable. NI 51-101 further identifies the certainty level for proved reserves as “at least a 90 per cent probability that the quantities actually recovered will equal or exceed the estimated proved reserves”.

Probable Reserves are those additional reserves that are less certain to be recovered than proved reserves. NI 51-101 defines the certainty level as “at least a 50 per cent probability that the quantities actually recovered will equal or exceed the sum of the estimated proved plus probable reserves”. Therefore, under NI 51-101, the proved plus probable reserves represent a “best estimate”.

Possible Reserves are mentioned sometimes but the probability of recovery is 10% at most. It’s more like a wild guess since the numbers are based on geological data in undrilled and untested areas.

NI 51-101: National Instrument 51-101 Standards for Disclosure for Oil and Gas Activities sets out requirements and standards for disclosure by reporting issuers engaged in oil and gas activities.

Proved plus Probable RLI: 6.0 years

RLI (Reserve Life Index) is calculated by dividing a producer’s total reserves at a particular date by its total production over the previous year, or its forecast production for the coming year, resulting in a numerical figure in years. This gives us a snapshot view of the longevity of the company’s reserves base.

The actual economic life of reserves is almost always longer than its RLI, because no reservoir produces at the exact same rate until its complete depletion. Instead, production follows a decline curve.

The keys to a company’s success is not based on the RLI of its reserves but the quality of its asset base, the opportunities the assets hold for adding new production and reserves.

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