Commonly known as Proved Reserves, P90, or 1P, demonstrated reserves are a measurement of a nation's natural resources with at least a 90% chance of being collected under reasonable engineering and economic circumstances.
Demonstrated Reserves Details
Demonstrated reserves refer to a country's natural resource quantity such as oil, natural gas, gold, and other valuable metals. Governments acquire demonstrated reserve numbers by conducting surveys on possible natural resource deposits. The surveys produce a highly reliable volume estimate of the said natural resource deposit.
The demonstrated reserve number can change. There are two primary factors in determining the change of a country's demonstrated reserves.
Every resource deposit such as gold, oil, or gas deposits presents a unique challenge for the surveyor and collector. The more complex the resource deposit, the harder it is to recover in good condition, which increases the operating price and ultimately leads to lower profit.
Technology and human resources also play a massive role in determining demonstrated reserves. A complex resource deposit calls for more sophisticated equipment and more skilled workers, increasing the capital cost. Furthermore, as the resource gets collected over time, it may get harder to obtain the remaining resources, resulting in a mandatory technological and human resources upgrade to finish the job.
A massive oil deposit located a thousand kilometers offshore is substantially more challenging to excavate than a tiny oil deposit located a thousand kilometers underground. Collecting resources in the offshore oil deposit requires a massive oil rig, several ships to carry it to the sea, and a large workforce to keep it operational. A conventional land oil deposit only requires a drilling machine, which is far cheaper than the oil rig. As a result, oil companies prefer the latter due to lower workforce, capital, and operational cost.
This aspect is the most crucial of all. Market condition changes over time. When a specific resource price goes up, there will be an immense push to provide more supply for high-value resources to achieve profit. Mining and drilling operations will get more intense, trying to get every bit of resource they can.
Eventually, the desire to achieve profit will overpower any other aspects, such as the technological viability we discussed above. Suddenly, the oil deposit a thousand kilometers offshore becomes a juicy prospect, as the high price of that resource will pay back the operational cost multiple times.
Example of Demonstrated Reserves
Experts use various methods, such as seismic surveys, gravitational surveys, and geological mapping, to find and measure the volume of the oil and gas reservoirs. In an offshore seismic survey, engineers beam soundwaves toward the seafloor. These soundwaves penetrate deep into the rocks, eventually reaching the natural resources deposit and bouncing back towards the sea surface. An extensive array of sound sensors records the reflected soundwaves and creates a detailed 3D geographical map of the rock and resource deposits beneath the surface.
The engineers repeat the surveys until they are confident in the final numbers. After that, the engineers began to calculate what kind of technology they will use, how large a workforce they will recruit, and how difficult it will be to collect the resource. The country will take the engineer's numbers into account, examines the market price, then produce the final demonstrated reserves numbers.
For example, after multiple sessions of surveying a potential offshore oil deposit, the engineers estimate that the reservoir has 500 million oil barrels of total capacity. However, because some of the deposits are deep underground, they can only collect 450 million oil barrels. Because oil price is at an all-time high, the government approves the project in total capacity. From this example, we can say that the oil deposit is a demonstrated reserve since it has more than a 90% probability that the country will collect the deposit.
Types of Demonstrated Reserves
There are two types of demonstrated reserves: Developed and undeveloped demonstrated reserves.
Developed demonstrated reserves are natural resource reserves expected recoverable from the existing operational mining or drilling facilities. It can also mean that the expenditure for establishing or developing a facility to acquire the resource is relatively cheap and very viable.
Undeveloped demonstrated reserves are natural resource reserves that need a significant investment in equipment, workforce, and other facilities to be fully operational. It can also mean mining or drilling facilities that are not yet built on a natural resource deposit because it's not financially viable.
Significance of Demonstrated Reserves
Natural resources such as oil and gas are precious. Currently, the entire world is still using oil products as the primary fuel for their cars, ships, airplanes, and generators. Companies refine oil into countless household items such as Liquefied Petroleum Gas (LPG), plastic, kerosene, and rubber. Society's demand for oil is still very high, and the supply follows.
The sum of demonstrated reserves from countries all over the world determines the global supply of oil. The bigger the demonstrated reserve, the more significant influence a government can exert. A country with more enormous demonstrated reserves can stockpile more oil to resist the fluctuation of oil prices and ensure that their citizen gets the oil products they need at a reasonable price. They can also sell the oil to the market to gain profit when the price allows.
Demonstrated reserves can also play as a strong card in geopolitical policies. Because oil is such a vital resource, countries with ample demonstrated reserves can use their demonstrated reserves as leverage on a negotiation. A country can also use the demonstrated reserves to sanction another country that violates a rule by enacting an oil embargo.