Reserves, Entitlement

Understanding Reserves and Entitlement in Oil & Gas: A Guide to Key Terms

The oil and gas industry uses specialized terminology that can be confusing to outsiders. Two crucial concepts, Reserves and Entitlement, are key to understanding how hydrocarbons are discovered, extracted, and ultimately distributed.

Reserves represent the estimated quantity of hydrocarbons that are recoverable from a specific reservoir under current economic and technological conditions. They are not just the total volume of oil or gas present, but rather the portion that can be profitably extracted.

Key Points on Reserves:

• Proven Reserves: The most certain category, backed by sufficient geological and engineering data, with a high degree of confidence in their recovery.
• Probable Reserves: Estimates based on geological and engineering data, but with more uncertainty than proven reserves. Their recovery is less certain but still considered feasible.
• Possible Reserves: The least certain category, based on limited data and technical uncertainty. Their recovery is less likely, requiring more exploration and development before confirmation.
• Reported by Upstream Contractors: Typically, the upstream contractor, often a multinational oil company (SPE) responsible for exploration and production, reports the reserves for their respective projects.

Entitlement, on the other hand, refers to the share of hydrocarbons that a specific party is entitled to receive. This entitlement is determined by contractual arrangements, such as production sharing agreements or leases.

Key Points on Entitlement:

• Contractual Basis: Entitlement is a direct outcome of contractual agreements between different stakeholders involved in an oil and gas project.
• Cost Recovery: In many arrangements, the upstream contractor is allowed to recover their exploration and development costs before sharing profits with other stakeholders.
• Profit Split: After cost recovery, profits are distributed based on the agreed-upon profit sharing percentages in the contract.
• Government Participation: Governments often hold an entitlement stake in oil and gas projects, reflecting their ownership of natural resources.

The Relationship between Reserves and Entitlement:

The interplay between reserves and entitlement is crucial for determining the profitability and economic viability of any oil and gas project.

• Reserves impact Entitlement: The size of the proven reserves dictates the potential for profit sharing, and the higher the reserves, the greater the potential revenue.
• Entitlement affects Investment Decisions: The profit sharing arrangement established by the entitlement agreement significantly influences investment decisions for upstream contractors.

In Summary:

Understanding Reserves and Entitlement is fundamental for comprehending the dynamics of the oil and gas industry. While reserves represent the recoverable hydrocarbons, entitlement dictates the distribution of those resources among different stakeholders. The interplay between these two concepts drives investment decisions, profitability, and ultimately, the success of oil and gas projects.