Oil reserves are estimated quantities of crude oil that have a high degree of certainty, usually 90%, of existence and exploitability. In other words, they are estimated quantities of crude oil that oil companies believe exist in a particular location and can be exploited. According to the Securities Exchange and Commission (SEC), oil companies are required to report these reserves to investors through supplemental information to the financial statements. It is important to note oil still in the ground is not considered an asset until it is extracted/produced. Once the oil is produced, oil companies generally list what isn't sold as products and merchandise inventory.

Oil companies can value their reserves by finding their net present value less extraction costs (also known in the industry as "lifting costs"). Depending on the method of accounting for exploration, full cost versus successful efforts, certain costs of finding reserves are capitalized. Only if the cost is capitalized is that cost considered an asset that is depreciated over time. It is important to note that before the companies can list oil reserves through supplemental information to the financial statements, the SEC requires them to prove their claims and file appropriate documents with the SEC.

To learn more, see our Oil And Gas Industry Primer.

This question was answered by Chizoba Morah.

  1. How does analyzing an oil and gas's financial statements differ from companies in ...

    Oil and Gas Price Volatility Financial statements for companies in the oil and gas sector are different from those of companies ... Read Full Answer >>
  2. Is Norway a developed country?

    Norway is a highly developed country, and typically has a world GDP ranking in the top 30, with a 2014 GDP at $500 million ... Read Full Answer >>
  3. Is Qatar a developed country?

    Qatar is a developing country, according to the United Nations. However, as the country with the highest gross domestic product ... Read Full Answer >>
  4. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  5. Why do some oil refineries get tax exemptions?

    Oil refineries normally receive tax exemptions due to tax loopholes. The extracted fuel exemption, for example, one of the ... Read Full Answer >>
  6. Are UTMA accounts escheatable?

    Like most financial assets held by institutions such as banks and investment firms, UTMA accounts can be escheated by state ... Read Full Answer >>
Related Articles
  1. Stock Analysis

    The Biggest Risks of Investing in ConocoPhillips Stock

    Understand the risks of investing in ConocoPhillips stock. Learn about how there is a risk of a dividend cut due to lower prices for crude oil.
  2. Investing

    What a Family Tradition Taught Me About Investing

    We share some lessons from friends and family on saving money and planning for retirement.
  3. Professionals

    4 Must Watch Films and Documentaries for Accountants

    Learn how these must-watch movies for accountants teach about the importance of ethics in a world driven by greed and financial power.
  4. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  5. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  6. Economics

    The Biggest Oil Towns in Texas

    Learn about the boom of oil production in Texas cities and how the new surge of wealth into these cities is changing local economies.
  7. Stock Analysis

    What Exactly Does Warren Buffett Own?

    Learn about large changes to Berkshire Hathaway's portfolio. See why Warren Buffett has invested in a commodity company even though he does not usually do so.
  8. Financial Advisors

    SEC Audit? How Financial Advisors Can Be Ready

    Your firm may never be audited by the SEC, but you need to be prepared nonetheless. Follow these tips to make sure you're in compliance and organized.
  9. Investing Basics

    What are the fiduciary responsibilities of board members?

    Find out what fiduciary duties a board of directors owes to the company and its shareholders, including the duties of care, good faith and loyalty.
  10. Markets

    Are EM Stocks Finally Emerging?

    Many investors are looking at emerging market (EM) stocks and wonder if it’s time to step back in, while others wonder if we’ll see further declines.
  1. Horizontal Line

    A line that appears to proceed from left to right, or parallel ...
  2. Accountant

    A professional who performs accounting functions such as audits ...
  3. Adjusted Gross Income - AGI

    A measure of income calculated from your gross income and used ...
  4. Personal Finance

    All financial decisions and activities of an individual or household, ...
  5. Crude Oil

    Crude oil is a naturally occurring, unrefined petroleum product ...
  6. Audit

    An unbiased examination and evaluation of the financial statements ...

You May Also Like

Hot Definitions
  1. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  2. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  4. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  5. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  6. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
Trading Center