What are Proved Reserves?

Proved reserves are those quantities of oil and gas that can be estimated with reasonable certainty to be economically producible. The amount of proved reserves is important, since it is used to derive a valuation for oil and gas production firms. This is because the future revenue-generating ability of an oil and gas firm is dependent on how much of its proved reserves it can extract from the ground.

Calculation of Proved Reserves

The calculation of the reserve only applies when the following criteria are present:

The oil and gas is from known reservoirs
Production can proceed under existing economic conditions
Existing operating methods can be used
Production is feasible under existing government regulation
Production can be completed before the expiration date of the contracts providing the right to operate, unless it is reasonably certain that the contracts will be renewed
Extraction efforts must have commenced or it is reasonably certain that these efforts will commence within a reasonable period of time

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The known reservoir that is subject to this analysis has the following characteristics:

The area has been identified by drilling and limited by any fluid contacts
The area can include adjacent undrilled portions of the reservoir when it is reasonably certain to be continuous with the reservoir and to contain economically producible oil or gas, based on the use of reliable technology

If there is no data about fluid contacts, then proved reserves are limited by the lowest known hydrocarbons as noted in a well penetration, unless engineering, geoscience, or performance data provide a reasonably certain lower contact.

The proved classification of reserves can be bolstered by reserves that can be produced economically via the application of improved recovery techniques (such as fluid injection) when the following two conditions are present:

A successful test by a pilot project, the operation of an installed program within the reservoir or in an analogous reservoir, or other evidence that establishes the reasonable certainty of the underlying engineering analysis; and
Development of the project has been approved by all parties.

Reporting of Proved Reserves

Reserve information should be revised at least annually, or when there is an indication that a revision is needed. The following situations could all trigger the review of reserve information:

There has been a change in the ownership of a property.
There has been a significant decrease in cash flows.
There is a significant difference in actual production versus earlier estimates.

There is an inherent limitation on the precision of reserve information, since there are inherent uncertainties in the information from which it is derived.

Disclosure of Proved Reserves

The disclosure of proved reserves that a public company reports in its public filings will vary depending on the situation, but the basic format of this disclosure is as follows:

As of December 31, 202X, the estimated net proved reserves of [Company Name] were as follows:

Note: MMBOE = Million Barrels of Oil Equivalent, MMBbls = Million Barrels, Bcf = Billion Cubic Feet

Preparation of Reserve Estimates

The reserve estimates presented above have been prepared in accordance with the definitions and guidelines set forth by the U.S. Securities and Exchange Commission (SEC) under Rule 4-10(a) of Regulation S-X. The estimates were prepared by [Company Name]’s internal reserves evaluation team and audited by [Independent Petroleum Engineering Firm, if applicable].

Reserves are based on deterministic methods and reflect production, technical, and economic data as of December 31, 202X. The estimated future net revenues from these reserves were determined using an average price based on the first-day-of-the-month prices for each month in 202X, as required by SEC regulations.

Changes in Proved Reserves

The following table summarizes the changes in proved reserves during the year ended December 31, 202X:

Proved Undeveloped Reserves (PUDs)

As of December 31, 202X, [Company Name] reported total proved undeveloped reserves of XXX MMBOE, representing approximately X% of total proved reserves.

During 202X, the company converted XX MMBOE of PUDs to proved developed reserves through successful drilling and completion activities. The remaining PUDs are expected to be developed within the next five years, in accordance with SEC guidelines.

Internal Controls and Third-Party Verification

[Company Name] maintains a rigorous internal process for estimating reserves, which includes technical reviews by qualified petroleum engineers and geoscientists. Additionally, [Independent Engineering Firm, if applicable] has audited our reserve estimates and provided an independent evaluation report, which is included as Exhibit [XX] in our annual report.

Risk Factors and Uncertainties

The estimation of proved reserves involves inherent uncertainties. Actual production, commodity prices, and operating costs may differ from the assumptions used to estimate reserves, which could impact future financial results and operational plans.