Oil Reserves Growth

The more oil we burn the more that oil reserves grow. This unituitive phenomenon occurs for three reasons - geology, prices and technology.

Before we look at each of these in detail, let’s define some key terminology.

Oil reserves are the amount of oil that can be technically recovered at the current price of oil.

Oil resources are all the oil that can be technically recovered at any price.

Oil in place is all the oil in a reservoir (both technically recoverable & unrecoverable oil).

Figure 1 – Proved oil reserves and Brent crude oil price. BP Statistical Review 2016

One – Geological estimates

Initial estimates of the oil resource are often low. It’s very difficult to estimate the amount of oil in a reservoir as it can’t be directly measured. Often a lot of computing power is thrown at trying to figure out how much oil is underground.

It’s also good engineering practice to stay on the low side when estimating for any project - many geologists intentionally do the same for geological estimates.

Two – Oil prices

Oil reserves are defined as the amount of oil that can be recovered at the current price of oil. Reserves are therefore a direct function of the current price of oil. Increasing oil prices means that more of the oil resource can be classed as an oil reserve.

Historically we have seen oil prices increase – leading to growth in oil reserves (even with the oil resource being depleted at the same time). Increasing prices can also have secondary effects. A higher price might incentivise an oil company to invest more into an existing field – leading to an increase in oil recovery.

The reserves growth of existing fields can actually be responsible for the majority of additions to reserves. Between 1977 to 1995 approximately 89% of the additions to US proved reserves of crude oil were due to oil reserves growth rather than the discovery of new fields.

Three – Technology

Improvements in technology have two effects. The first is to make more of the oil in place technically recoverable at any price (ie to increase the oil resource). Hydraulic fracturing (fracking) and horizontal drilling now allow access to oil that was previously technically unrecoverable.

The second is that as technology improves it also gets cheaper. This improvement in economics means that more of the oil resource can be classed as an oil reserve (even at constant or falling prices).

Thanks for reading!