What are Proved Reserves?

Oil reserves are significant accumulations of oil in the ground that an oil company has already discovered and can extract and produce using existing technology. Specialty experts further break these oil reserves into two broad subdivisions, unproved and proved reserves, based on the degree of certainty the experts have with respect to the ultimate production of the reserve. Proved reserves are those reservoirs of oil for which petroleum experts have an extremely high amount of confidence that they can and will produce the field, usually around 90 percent. For this reason, oil industry workers refer to proved reserves as P90 or 1P, meaning a first priority reserve for drilling with a high probability of extracting significant oil from the ground. Further subdivisions of proved reserves include proved developed oil reserves and proved undeveloped oil reserves, which are distinguished by the degree of capital investment required to produce the field.

The United States Securities and Exchange Commission only allows oil companies to report proved reserves to investors. If one of the United States stock exchanges lists a company, then the company must substantiate its oil reserve claims by supplying corroborative data. Proved oil reserves that are developed attract investors, because they can be produced with existing oil wells, for which minimal additional operating cost is anticipated. Proved undeveloped reserves require additional investments in drilling to extract the oil from the reserve, increasing the cost to produce the field.

Unlike proved reserves, unproved reserves are known oil sites where petroleum geologists think oil is recoverable based on their interpretation of engineering and geological details. Known oil accumulations may fall in this category if regulatory, political, or technical issues make the possibility of production uncertain. Often referred to as P50 or 2P, probable reserves have about a 50 percent confidence level for production. Possible reserves, termed P10 or 3P, have a 10 percent confidence level of recovery. Reasons for the lack of confidence may include a lack of commercial, economic viability, seepage into the reserve, or discrepant geological interpretations.

Proved reserves contain a certain amount of oil in place (OIP). Not all of the OIP can be removed from the ground, due to limitations in extraction technologies. The recovery factor of a reserve is the ratio of recoverable oil to the total volume of oil in place. Recovery factors for global oil fields range from 10 to 80 percent, depending on a variety of reservoir and fluid characteristics. Methods for the estimation of volume of oil in proved oil reserves include the volumetric method, the decline curve method, and the materials balance method.