Proven oil reserves

Proven oil reserves are those that are known to exist and be exploitable to a high degree of certainty.

In the UK the DTI defines probable reserves as those with a 90% probability of being technically and commercially producible.

The exact definition of proven reserves varies from company to company and from country to country. The numbers disclosed by national governments of a country's reserves are also often manipulated.

Oil reserves and valuation

From the point of view of an investors, oil reserves are the most important element in valuing an oil company. The NPV of an oil company are the value of the oil it has, plus the value of the oil it will discover, less the cost of discovering and extracting that oil.

The value of an oil company (e.g. market cap or enterprise value) compared to the value of its reserves is an important metric.

The proven oil reserves are important because they are (almost!) certain — the proven oil reserves are the element of the value of an oil company that investors can rely on: but this is only part of the total value.

One obvious problem with all this (or with valuing oil companies by any method) is that the oil price is very volatile, and what oil prices will be in the long term is highly unpredictable.

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