What are Proven Reserves?

Proven reserves, also known as “proved reserves,” represent the quantity of natural resources a company is reasonably confident it can extract from a formation. These reserves are determined through geological and engineering data obtained from seismic surveys and exploratory drilling.

In oil and gas extraction, the shape of the formation is evaluated, and the reservoir is estimated by analysing fluid contacts, which refer to the natural stratification of gas, oil, and water within the formation.

A detailed understanding of the formation’s structure and fluid contact levels enables a high-confidence volume estimate. Proven reserves are typically classified as having a 90 per cent or higher probability of being present and economically viable under current conditions. In the oil industry, they are also called P1 or P90 reserves.

Key points:

• Proven reserves refer to natural resource quantities with a 90 per cent or greater probability of profitable extraction.
• Also referred to as P90 reserves, they significantly influence a company’s valuation and are used alongside probable and possible reserves to project profitability.
• Proven reserves can change due to factors such as regulations, technology, and economic conditions.

Understanding Proven Reserves

In the exploration and production process, companies use seismic surveys to assess the amount of oil beneath a specific area of land. Based on this data, they categorise the oil reserves according to the estimated difficulty or ease of extraction.

Proven reserves also consider factors such as current extraction technology, regional regulations, and market conditions. As a result, the quantity of proven reserves can fluctuate unexpectedly. Depending on regional disclosure regulations, companies might only report proven reserves, even though they also have estimates for probable and possible reserves.

Possible reserves are oil reserves with an estimated likelihood of successful extraction ranging from 10 per cent to 50 per cent under standard conditions and using existing equipment. Probable reserves represent oil with chances of recovery between 50 per cent to 90 per cent.

Reserve Classifications for Investors

Navigating the natural resource extraction industry can be complex due to the different classifications of reserves. While many assume that proven oil and gas reserves should only increase with the discovery of new reservoirs from exploratory drilling, the reality is that fluctuations between reserve classifications often cause more significant changes than new discoveries alone. Therefore, it is beneficial for investors to be aware of a company’s proven, probable, and possible reserves, rather than just focusing on proven reserves.

Without data on probable reserves, investors may see sudden changes in proven reserves due to various factors. For instance, if a company holds a substantial amount of probable reserves and a relevant extraction technology improves, these reserves can be reclassified as proven.

Similarly, if oil prices rise, companies may adopt more expensive extraction methods that become profitable at higher prices, thus converting probable reserves into proven ones. Regulations also play a role; for example, the approval of a new technology can lead to an increase in proven reserves for an entire industry, as seen with hydraulic fracturing.

Conversely, proven reserves can decline as reservoirs are depleted through production. They can also experience sharp drops if regulations restrict certain extraction or operational methods. Even with disclosure of probable and possible reserves, predicting changes in proven reserves remains challenging.

Australia’s Proven Reserves

Australia is endowed with a diverse range of energy resources, making it one of the world’s leading energy exporters. The country’s proven reserves are significant and span various forms of energy resources:

Coal

Australia is known to be among countries with the largest coal reserves. The US Energy Information Administration reported in 2022 that the country had 166 billion tonnes (Bt) of proven coal reserves, primarily located in Queensland, New South Wales, and Victoria. Those are primarily used for coal-fired plants although their number has been winding down for the past several years. In a strategy paper presented to Parliament, Dr Alex St John stated that Australian deposits constitute ten per cent of the global fuel supply, enough for 125 years.

Natural Gas

Australia’s proven natural gas reserves are substantial, particularly in offshore basins. The country is one of the top exporters of liquefied natural gas (LNG) globally, with significant reserves located in the Carnarvon, Browse, and Bonaparte basins.

Proven reserves of natural gas in Australia are estimated to be around 2.4 trillion cubic metres, ensuring a stable supply for both domestic consumption and export. Writing for GIS Reports in August 2023, Cristol Energy founder-CEO Carole Nakhle said the amount constitutes the 13th-largest proven natural gas reserves in the world – but heavy production over the past few years pitted Australia against Qatar for a global lead in LNG exports.  

Oil

While Australia’s oil reserves are not as extensive as its coal and gas reserves, they are still significant. Geoscience Australia data tallied in 2022 estimated the country’s combined proven and probable oil reserves at 9,300 petajoules or 1.632 billion barrels.

These reserves are primarily found in the offshore basins of Western Australia, Victoria, and NT. Ground deposits also exist in four major basins spread out over WA, NT, SA, Victoria, and Queensland. Although Australia remains a net importer of oil, its proven reserves play a crucial role in mitigating supply disruptions and ensuring energy security.

Renewable Energy

In addition to fossil fuels, Australia is rich in renewable energy resources. While not classified under traditional proven reserves, the country’s potential for renewable energy generation is immense. Australia has vast solar, wind, and hydroelectric potential, which is increasingly being harnessed to diversify the energy mix and reduce reliance on fossil fuels.

The Importance of Proven Reserves for Energy Security

Energy security is a critical concern for any nation, ensuring a stable and reliable supply of energy to meet current and future demands. Proven reserves play a pivotal role in this context for several reasons:

Stability and Reliability

Proven reserves provide a stable and reliable source of energy. Knowing the quantity and location of these reserves allows for better planning and management of energy resources, ensuring that supply can meet demand even during periods of geopolitical instability or market fluctuations.

Economic Benefits

Exploiting proven reserves generates significant economic benefits, including job creation, investment opportunities, and export revenues. Australia’s energy sector is a major contributor to the national economy, and the development of proven reserves helps sustain economic growth.

Energy Independence

Having substantial proven reserves reduces dependence on foreign energy imports. This enhances national energy security by mitigating the risks associated with supply disruptions and price volatility in the global energy market.

Strategic Planning

Proven reserves enable strategic planning for the energy sector. Policymakers can make informed decisions about energy infrastructure investments, regulatory frameworks, and long-term energy policies based on the knowledge of available resources.

Challenges and Opportunities

While Australia’s proven reserves provide a strong foundation for energy security, several challenges and opportunities must be considered.

Challenges

Environmental Impact

The extraction and use of fossil fuels have significant environmental implications, including greenhouse gas emissions and habitat disruption. Balancing energy security with environmental sustainability is a key challenge.

Market Volatility

Global energy markets are subject to price volatility and geopolitical risks. Relying heavily on fossil fuel exports exposes Australia to market fluctuations that can impact the economy.

Transition to Renewables

As the world moves towards cleaner energy sources, there is a need to transition from fossil fuels to renewable energy. This transition requires significant investment and technological advancements.

Opportunities

Renewable Energy Development

Australia’s vast renewable energy potential presents an opportunity to diversify the energy mix and reduce reliance on fossil fuels. Investments in solar, wind, and hydroelectric projects can enhance energy security and reduce carbon emissions.

Technological Innovation

Advancements in extraction and production technologies can improve the efficiency and environmental impact of exploiting proven reserves. Innovations such as carbon capture and storage (CCS) can mitigate the environmental footprint of fossil fuel use.

Export Markets

Expanding export markets for LNG and other energy resources can boost economic growth and strengthen trade relationships. Diversifying export destinations reduces dependence on a single market and spreads economic risk.

Conclusion

Australia’s proven reserves of coal, natural gas, and oil play a crucial role in ensuring energy security and driving economic growth. While the country faces challenges related to environmental sustainability and market volatility, there are significant opportunities to leverage renewable energy potential and technological innovations.

DISCLAIMER: This article is for informational purposes only. BARTERCARD does not have business relationships with any stakeholder in Australia’s energy sector.