Reserve Additions, Over a Barrel

Published in Business Line on July 21, 2007

It is well accepted that 1985 was the last year in which we discovered more barrels than what we consumed. For each of the subsequent 20 years this trend of discovery being lower than consumption has continued. That should imply that our Net remianing reserves should be going down over the period since we are consumming from previously discovered reserves.

However, the BP Annual Statistical Review shows the opposite trend in which Reserves have been going up over the last two decade period. That is explained by the analysts through a phenomenon known as "Reserve Additions" i.e. our ability to extract more from existing oilfields than what was originally estimated. These analysts further extrapolate and state that this trend of Reserve Additions would continue into the future as well and so the fact that we are discovering less and less new oilfields every year is not a major cause of concern.

This paper explains why such thinking is misplaced and that this "Reserve Additions" is mainly the result of a one-time historical event... and that the pendulum of this event has swung the other way today which would cause Reserve Subtractions in the future.