Goal of the analysis:
To determine the quantity, quality, and economic viability of a company’s recoverable oil and gas resources for forecasting future production, capital planning, and overall valuation.
Data required:
- Historical reserves data by field or asset
- Resource classification (Proved, Probable, Possible)
- Production history and decline rates
- Geological and geophysical studies
- Well test results and recovery factors
- Cost and price assumptions for economic cutoffs
Detailed step-by-step instruction on how to conduct the analysis:
1. Gather reserves classification data: Obtain official reserves statements (e.g., Proved, Probable, Possible) from internal reports, external filings, and recognized reporting standards (e.g., SPE-PRMS).
2. Verify reserve definitions: Ensure the reserves are categorized correctly according to the relevant classification system (e.g., SPE-PRMS or SEC guidelines).
3. Analyze production history and decline trends: Determine historical production volumes and apply decline curve analysis to estimate future production profiles.
4. Estimate future recoverable volumes: Use geological and geophysical data to forecast the ultimate recovery. For each field, calculate metrics such as Reserves Replacement Ratio = (Reserve Additions / Annual Production) x 100.
5. Assess economic thresholds: Incorporate cost structures and price scenarios to identify which portions of the resources are commercially viable.
6. Consolidate resource base: Aggregate the reserves at the corporate or portfolio level to provide a holistic view of the company’s oil and gas endowment.
7. Document assumptions and uncertainties: Note any assumptions on recovery factors, commodity prices, and technology that may affect reserve estimations.
Format of the output of analysis:
- A consolidated reserves and resource report by asset or field
- Key performance indicators such as total Proved Reserves, total 2P Reserves (Proved + Probable), Reserves Replacement Ratio, and Reserve Life Index
- Graphical presentations of production forecasts and decline curves
How to interpret results:
- A higher Reserve Replacement Ratio (>100 percent) suggests the company is adding reserves faster than it is producing them, indicating strong exploration or acquisition performance.
- Large probable and possible categories may signal future upside but also higher risk or uncertainty.
- Reserve Life Index highlights how many years of production remain at current levels, providing insight into long-term sustainability.
Steps a company can take to improve on this measure:
1. Enhance exploration efforts to discover new reserves or acquire promising assets.
2. Apply advanced recovery techniques or new technologies to increase recoverable volumes.
3. Optimize reservoir management and field development planning to extend field life.
4. Continuously review and update geological models using the latest seismic and well data to minimize reserve estimation uncertainties.