DEFINITION of 'Organic Reserve Replacement'

Oil reserves that an oil company acquires by exploration and production rather than by purchasing proved reserves. Investors looking at the financial strength of oil exploration and production companies should consider the company's organic replacement when evaluating its reserve-replacement ratio. A reserve-replacement ratio achieved organically is considered much better than a reserve-replacement ratio achieved through purchasing.

BREAKING DOWN 'Organic Reserve Replacement'

The reserve-replacement ratio measures the amount of proved reserves added to a company's reserve base during the year relative to the amount of oil and gas produced. A company's reserve-replacement ratio should be at least 100% for the company to stay in business long-term; otherwise, it will eventually run out of oil. The reserve-replacement ratio is just one method investors should use to get an accurate picture of how well an oil company is performing.

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