While an oil and gas expiration and

production company makes money by selling the hydrocarbons it finds and produces,
the company's future viability and thus market value as a business also
depends on a company's reserves of oil and gas still in the ground. Like a high
worth individual with
lots of money in the bank, an oil and gas company with large reserves still
to be produced is generally considered to be a high worth enterprise. However, the
precise amount of reserves
a company controls is actually unknown. It ranges between amounts that
are very likely, and very unlikely. Furthermore, a company's reserves
are actually just the economically producible fraction of
the total amount of oil and or gas that may exist under
the company's leases. This greater volume of oil and or gas is referred to as the
total resource
potential or the in-place resource. A good way to think about reserves
versus resources is in terms of inverse cumulative distributions. That's just the
fancy name for
plots in which the amounts of oil and or gas increase along the X axis,
while the probability of exceeding an amount ranges between 0% and
a 100% along the Y axis. The inverse cumulative distribution for in place resources
follows
a backward S-shape curve. The point at the uppermost left side of
the curve is the amount of oil and or gas that expert geologists and petroleum
engineers contracted by the company, agree is almost certainly in place
beneath the company's leases. The point at the lower-most right side
of the curve, on the other hand, is the largest and least feasible amount of
oil, and, or gas estimated to be in place. Between these two points the curve
descends across increasing amounts of oil and or gas that are evermore more
unlikely to exist beneath the leases. Note that the in place resource curve
does not distinguish oil and or gas that can actually be gotten out of
the ground using existing technology from oil and
gas that cannot currently be extracted. If we restrict our analysis to only
that oil and gas that is currently recoverable regardless of the cost
of extraction, then we produce a second inverse cumulative distribution
of technically recoverable resources. And this curve lies to the left
of the in place resource curve. Going a step further and focusing
only on those resources that can be produced at a profit with existing
technology results in a third cumulative distribution that lies
even farther to the left in the plot. This last curve reflects
economically recoverable reserves. When you look at this last
most conservative curve, keep in mind that the economically
recoverable reserves are not all equal. As before, reserves beneath
the left side of this curve have a greater probability of existing then those
beneath the right side of the
economically recoverable reserve curve. In fact, the economically recoverable
reserve curve is often broken into three segments. Economically recoverable
reserves that
have less than 50% probability of existing are referred to as proved, probable and
possible reserves, or 3P reserves. Economically recoverable reserves
that have a 50 to almost 90% probability of existing are referred to
as proved and probable, or 2P reserves. In economically recoverable
reserves that have a 90% or greater probability of existing
are simply proved, or 1P reserves. This last category, proved reserves,
are further subdivided in to developed and undeveloped reserves. Proved developed
reserves, are those that
can be produced from existing wells with up to moderate additional investment.
Proved undeveloped reserves are those that can only be brought online by
drilling new development wells. In order to be listed on a U.S.
Stock Exchange, an oil and gas company with reserves must report
to investors the amount of 1P or proven reserves, which is the most
conservative estimate of their holdings. Reserves reported by companies that
are not listed on a US stock exchange are not subject to this restriction. So their
reserves may include
probable impossible reserves. Or even resource estimates,
rather than just reserve estimates. It is also important to keep in mind that
economically and technically, recoverable resources can change from one year to
the next depending on the cost of using available extraction technologies and the
prices that oil and gas are selling for. For example, the cost of fracking and
horizontal drilling has declined since the 1990s, changing formerly
tactically recoverable oil and gas reserves in shales into
economically recoverable reserves. So companies with mineral
rights to shale oil and shale gas have had their economically
recoverable reserve curve shift to the right, increasing both the amount and
total value of these company's reserves.