| What are reserves and what are they not? Proven (same as proved) reserves are the amount of a natural resource that can be economically extracted at current prices with existing technology Aside from the accuracy of the estimate there are three other variables in the definition that allow for future changes in the estimate of the reserves: “known”, “existing technology” and “current prices”. Usually proved reserves are an underestimate but sometimes what is considered to be a proved reserve turns out not to be as the extraction process proceeds. Estimates are usually also made for probable reserves, possible reserves, yet-to-be-discovered reserves, and total recoverable reserves. Based on my experience, proven reserves are important in investment decisions. But the other categories are also considered. What you like to see is the gross addition to proved reserves each year being equal to or larger than the withdrawals for that year. If that stops happening, it is concerning. On the other hand, If prices increase or if there is an important advancement in technology that allows more of the technically recoverable to be moved into one of the reserve categories. Sophisticated investors pay attention to the changes in the reserves. Those in the industry are mostly concerned about prices as a decline in prices caused a write-down in reserves. HERE is a good resource for mining accounting. Oil and gas should be fairly similar. My opinion is that this falls into the category of Buyer Beware. |
