DEFINITION of Proven Reserves
Proven reserves is the quantity of natural resources that a company reasonably expects to extract from a given formation. Proven reserves are established using geological and engineering data gathered through seismic testing and exploratory drilling. In oil and gas extraction, once the physical shape of a formation is understood, the reservoir is estimated by fluid contacts. Fluid contacts refer to the natural layering of gas, oil and water in a formation. An accurate picture of the formation shape and known levels of fluid contact provide the data for a volume estimate with a high degree of confidence. Proven reserves are classified as having a 90% or greater likelihood of being present and economically viable for extraction in current conditions. Proven reserves are also referred to as proved reserves. Within the oil industry, proven reserves are also referred to as P1 or P90.
BREAKING DOWN Proven Reserves
Proven reserves also take into account the current technology being used for extraction, regional regulations and market conditions as part of the estimation process. For this reason, proven reserves can seemingly take unexpected leaps and drops. Depending on the regional disclosure regulations, extraction companies might only disclose proven reserves even though they will have estimates for probable and possible reserves.
Rapid Changes in Proven Reserves
Understanding the natural resource extraction industry can be challenging because proven reserves are just one of three classifications. Most people assume proven oil and gas reserves should only go up when new exploratory wells are drilled, resulting in new reservoirs being discovered. In reality, there is often more significant gains and losses resulting from shifts between classifications than there are increases in proven reserves from truly new discoveries. For this reason, it is useful for investors to know a company’s proven, probable and possible reserves rather than just the proven reserves.
If an investor doesn't have the data on probable reserves, proven reserves can suddenly change in a number of different situations. For example, if a company has a large amount of probable reserves and a relevant extraction technology improves, then those probable reserves are added to the proven reserves. Additionally, if the price of oil goes up, oil and gas companies have a wider range of more expensive extraction methods that can be deployed while still turning a profit, again moving probable reserves into proven. Sometimes it is a matter of regulations, where a technology cannot be deployed until approved. In this case, the approval can positively impact the proven reserves for the entire industry operating in the region, as has occurred with hydraulic fracturing. Of course, proven reserves can also decline. They do so naturally as reservoirs are depleted through production, but they can also see sharp drops when regulations take a particular extraction or operational method off the table.
So even when the probable and possible reserves are disclosed, it can still be difficult to predict changes in proven reserves.
Proven Reserves in Oil, Gas and Mining
For the oil and gas sector, the Society of Petroleum Engineers has set the international standards for petroleum reserve definitions. In the mineral and mining sector, the Committee for Mineral Reserves International Reporting Standards (CRIRSCO) works to standardize reserve definitions. The mining industry prefers inferred, indicated and measured to represent the growing knowledge and confidence in a formation, but analysts still apply probable and proven to the mining industry. Proven reserves in mining are the economically viable and minable portion of the measured mineral resource. Loosely speaking, the mining industry definition of proven reserves has been adopted from, and adheres to, the oil and gas sector definition. In the U.S. both industries are ultimately answerable to the Securities and Exchange Commission for their definitions, as these public disclosure have a material impact of extraction companies’ stock.