The relationship between oil reserves and production is a topic of vital importance in the energy and economic industry worldwide. Oil, as a non-renewable resource, plays a crucial role in the stability of the economies of many countries and in meeting the growing global demand for energy. In this article, we will further explore the complex and often intriguing relationship between proven oil reserves and effective production of this resource.
What is the relationship between reserves and production?
The reserves/production ratio is an estimate of the number of years that a natural resource deposit will remain productive based on current production rates. The ratio is used to forecast many business factors, such as the total revenue that can be expected from the source and the number of employees required over its lifetime. It is also a key factor in determining whether it is necessary to continue exploring to identify new sources of the natural resource. The reserves/production ratio is usually abbreviated as RPR or R/P.
Oil and gas reserves/production ratio of each region from 1987 to 2017.
Source: ResearchGate.
Understand the relationship between reserves and production
The relationship between reserves and production is used to estimate the productive life of a specific reservoir, such as an oil field. It can also be used to project the national or global availability of a natural resource. The reserves/production ratio can be relevant for any company that depends on natural resources, whether gravel or gold. However, it is mainly used in the oil and gas industry. The ratio is obtained from two figures:
- The amount of a resource that is known to exist and that can be recovered in the reservoir being measured.
- The amount of annual production of the deposit.
Countries with the most oil production in the world. Source: Statista.
How to interpret the relationship between reserves and production
If a company dedicated to the production of resources has a low reserves/production ratio, it usually indicates that it is about to run out of the material on which it depends to make money. Unless you find more resources, you will be out of business. Economists and investors alike calculate the ratio between reserves and production of entire countries. If Botswana were considered to have a low reserves-to-production ratio for its diamond industry, it would mean that the nation is falling short in one of the natural resources that contributes the most to its national economy.
Countries with the largest oil reserves in the world. Source: Statista.
Example of relationship between reserves and production
The relationship between reserves and production is commonly used to calculate how many years of oil a company or country has. If a country has 10 million barrels of proven oil reserves, for example, and is producing 250.000 barrels a year, then the RPR, or life of reserves, is 10.000.000 / 250.000 = 40 years. The relationship between reserves and production can be erroneous, since it requires estimates that may not be true. For example, suppose an estimate from 40 years ago indicated that the world had 30 years of proven oil reserves left (which means we should have run out of them by now). Then, 20 years later, a revised ratio might conclude that we had 40 years of this critical energy resource left to extract. Since the estimated number of barrels is nothing more than a guess, the relationship between reserves and production is subject to large fluctuations.