What Is Estimated Ultimate Recovery?
Estimated ultimate recovery (EUR) is a production term commonly used in the oil and gas industry. Estimated ultimate recovery is an approximation of the quantity of oil or gas that is potentially recoverable or has already been recovered from a reserve or well.
EUR is similar in concept to recoverable reserves.
- Estimated ultimate recovery (EUR) refers to potential production expected from an oil well or deposit.
- EUR is made up of three levels of confidence is the amount of oil yet to be recovered: proven reserves; probable reserves; and possible reserves.
- EUR is used by oil companies, as well as analysts and investors, to compute the NPV for oil exploration and drilling projects and the expected corporate profits associated with that.
Understanding Estimated Ultimate Recovery
Estimated ultimate recovery can be calculated using many differing methods and units depending on the project or study being conducted. In the oil and gas industry, it is of the utmost importance that drilling projects meet an acceptable EUR threshold for a project to be considered viable and profitable.
A more precise definition of EUR is "discovered oil reserves" and there are three categories, each based on the degree of likelihood that the oil can be recovered using current technology.
- Proven Reserves — There is a greater than 90 percent chance that the oil will be recovered.
- Probable Reserves — The chance of actually getting the oil out is greater than 50 percent.
- Possible Reserves — The likelihood of recovering the oil is significant, but less than 50 percent.
Keep in mind that part of an oil field's probable and possible reserves are converted into proven reserves over time. These reserves can be re-categorized for a number of reasons ranging from improvements in oil recovery methods and techniques to changing oil prices. For example, as oil prices rise, the quantity of proven reserves also rises because the breakeven price of recovery can be met. Reserves that were too expensive to produce at lower oil prices become viable as oil prices rise. This makes it possible to reclassify these more costly reserves as proven. The opposite happens as oil prices fall. If oil reserves become too expensive to recover at current market prices, the probability of them being produced also falls. This results in reserves being reclassified from proven back to probable or even possible.
EUR's Use to Value Oil Reserves
Without an estimated ultimate recovery, oil companies would not be able to make rational investment decisions. Like all projects, management needs to be able to estimate accurately the net present value (NPV) of an oil drilling project. This valuation exercise requires several inputs, like the cost of bringing the first barrel to production, the cost of capital, the long-term price of oil and the ultimate amount of oil that will be produced, or EUR. Without an EUR, it would not be possible to reach an accurate valuation of the potential oil reserves.