Why don’t we run out of oil reserves?

Understand why oil reserves change each year

Last year, Uncle Sam read in a newspaper article that Oil and Gas reserves will last for 56.33 years. Today, he read that Oil and Gas reserves will last for 61 years. He was confused about this and reached out to his nephew, who is a Petroleum Engineer at a large Oil and Gas company.

So, why does the figure keep on changing each year?

E & P activity

The Upstream Sector of Oil and Gas industry includes searching for hydrocarbons i.e, Exploration¬†and extraction of hydrocarbons i.e,¬†Production. In the year 2016, E&P companies around the world extracted 33.47 billion barrels of oil and at the same time spent billions of dollars in exploration activities. Exploration for oil is a very risky business. A company may spend hundreds of millions of dollars and may not find oil in that particular region, while it can witness exploration success in other regions. In these regions, the E&P operator drills additional wells to assess the extent of deposits of hydrocarbons in that particular region and estimates the total quantities in known and yet-to-be discovered accumulations. The operator now estimates the amount of resources that can be recovered with a reasonable degree of certainty, called “PROVEN RESERVES”,¬†which change with time and depend upon a lot of other factors such as oil price, technological advancement etc. So, each year proven reserves around the world change with exploration and production activities and we divide these reserves by demand for oil per day to estimate the number of years these reserves will last.

Screen Shot 2017-06-23 at 12.31.45 AMSource: BP Statistical review of World Energy 2017

The above doughnut chart clearly shows that in the past two decades,Proved Oil Reserves around the world increased from 123.5 trillion cubic meters in 1996 to 186.6 trillion cubic meters in 2016.Reserve-Replacement-Ratio(RRR) measures the amount of proved reserves added to a company’s reserve base during the year relative to the amount of hydrocarbons produced.This metric is used by investors to judge the operating performance of an oil and gas company. Hence, each year E&P companies add reserves to their reserve base while producing hydrocarbons.

Now, Uncle Sam got his confusion cleared!