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Potential Reserves

Possible Reserves

What Are Possible Reserves?

Potential reserves is one of three characterizations set by the Society of Petroleum Engineers (SPE) for evaluating the probability that a known accumulation of oil can be monetarily separated. Potential reserves alludes to unproved reserves for which the probability of fruitful extraction is something like 10% — accepting existing equipment is utilized and the extraction is carried out under regular conditions.

The SPE is a professional organization that was made so that oil and natural gas exploration and production professionals could exchange technical information and best practices.

How Possible Reserves Work

To assist companies and investors with evaluating the probability of effectively extricating oil from a specific deposit, engineers recognize proven and unproven reserves. Proved reserves are the most important and pursued deposits, as the chances of effective extraction are 90% or greater. Probable reserves fall into the category of unproven reserves and offer basically a half chance of fruitful extraction. Similarly, potential reserves are likewise unproven reserves, since they offer just a 10% chance of fruitful extraction.

While choosing how to characterize a given oil reserve, engineers will consider factors, for example, the size of the reserve, the equipment accessible for extraction, the operational break-even price of the project, and any regulatory or contractual considerations that could influence the possibilities of the reserve being completely taken advantage of.

The price of oil and natural gas is another major consideration influencing the probability that a reserve will be completely used, as falling commodity prices would make the project become uneconomical. This is especially true once the cheap primary recovery methods have been used and the company has changed into more expensive enhanced oil recovery strategies. Under these conditions, even a moderately small decline in commodity prices could force the company to abandon the project.

Given the heap of land, environmental, political, and economic factors influencing the reasonability of oil and gas extraction projects, investors and analysts comprehend that the orders assigned to oil reserves by engineers are, best case scenario, a close guess instead of a careful science. Different factors —, for example, the continuous development of new innovations utilized in the extraction cycle — can likewise considerably affect the suitability of a given oil reserve.

Illustration of Possible Reserves

Sally possesses an oil extraction company that is as of now auditing engineering reports portraying her proven, probable, and conceivable oil reserves. The company holds 100 wells. Of these, the reports demonstrate 20 are proven reserves with no less than 90% likelihood of effective extraction; 40 are probable reserves with basically a half likelihood of fruitful extraction; and 40 are potential reserves with essentially a 10% likelihood of fruitful extraction.

Sally comprehends that one of the principal factors influencing the economic feasibility of these 100 wells is the future development in the price of oil. She hence carefully audits reports by different financial analysts that try to forecast the possible direction of oil prices throughout the next 12 months.

Sadly, the reports demonstrate a high probability at oil costs to decline substantially throughout this time period. Assuming this price decline really does as a matter of fact happen, Sally gauges that a large number of her potential reserves might be delivered unrewarding to operate. Hence, she chooses to spend her limited capital expenditure budget on guaranteeing the ideal extraction of her proven and probable reserves while deferring the development of her potential reserves until there are indications of additional good possibilities as to the price of oil.

Highlights

  • The Society of Petroleum Engineers sets these characterizations.
  • Conversely, proved reserves offer a 90% likelihood of effective extraction, while for probable reserves the likelihood is no less than half.
  • Potential reserves are unproved oil deposits where the likelihood of effective extraction is somewhere around 10%.