What are Proved Reserves

Proved reserves is a metric used in mining that describes the amount of hydrocarbon resources that can be recovered from a deposit with a reasonable level of certainty. Proved reserves is a common metric quoted by companies such as oil, natural gas, coal and other commodity companies. Proved reserves is used in the valuation of a mining company, as the ability of the company to generate future revenue partly depends upon how much of its discovered resources can be reliably extracted. Also known as proven reserves.

Key Takeaways

  • Proved reserves is a metric that describes the amount of hydrocarbon resources that can be recovered from a deposit with a reasonable level of certainty.
  • A company with more proved resources will generally have a higher share price.
  • Proved resources are the opposite of unproven resources, which are discovered assets the company is not certain it will be able to extract.

Understanding Proved Reserves

Proved reserves are the part of the mining company's deposits that can be recovered with a reasonable level of certainty. Proved reserves are usually determined through extensive geologic and engineering studies. It can take mining companies several years to complete a study to determine the amount of proven resources.

When new production wells are drilled, a company's proved reserves level increases and the opposite happens when the number of wells in operation declines. The number of proved reserves increases or shrinks based on market conditions, such as the cost of equipment required for exploration and drilling. A company that increases its level of proven resources over time generally sees a favorable response in the price of its shares.

The other type of reserve is an unproven reserve, which has been discovered but the company cannot be certain to a reasonable degree that it will be able to extract the resources. Unproven reserves are not used by the company as an official part of its valuation.

The Energy and Information Administration (EIA) uses proved and unproved resource estimates to prepare its Annual Energy Outlook.