Reserve evaluation
Reserve evaluation is the process of forecasting the production of existing and planned wells and using these forecasts in combination with economic data to estimate monetary value. This value can be used for determining whether to develop a reservoir, buy or sell a field, or to try and attract investment in a company. In order to provide consistent comparisons between projects, properties, and total companies, evaluation of current and future production values use a classification system. This classification system is used to categorize the uncertainty of production forecasts. Generally, the desired result of the evaluation is to obtain the net present value (NPV) of the project, property, or company.
The process of conducting a reserve evaluation entails the application of a consistent set of rules across several disciplines. Key elements of a reserve evaluation include:
 Estimation of remaining reserves
 Generation of production forecasts
 Categorization of risk and designation of current production status
 Summary of interests and burdens
 Estimation of future capital costs
 Fixed and variable operating costs
 Generation of cash flow analysis to evaluate for net present value and other key economic parameters, such as payout and rate of return on investment.
Purpose
Two useful products of a reserve evaluation are the net present value and the production forecasts used to generate net present value. These two estimates can be used in different ways depending on the purpose and required information. The table below shows examples of typical parties who have an interest in reserves evaluations.
Party 
Reserves and Production Forecasts 
Reserves and Net Present Value 

Accountants 
 
Creation of financial reports, ceiling tests and depletion calculations 
Banks / lending institutions 
 
Act as a basis for securing loans 
Financial institutions and investors 
 
Evaluate the performance of a company 
Gas Marketers 
Contracts for how much can be produced and pipeline transportation services 
 
Governments 
Resource development policy decision making 
 
Investors and others 
Rely on producer information to determine supply and demand 
 
Lawyers 
 
Used to settle disputes over reserves and values, estates 
Pipeline companies 
Planning for pipeline capacity 
 
Producers 
Development decisions, allocation of future capital Equipment sizing calculations 
Determining the market value of a company Making investment decisions 
Securities Commissions (SEC, ASC, etc.) 
 
Require reserves and cashflow statements of publicly traded companies 
Reserve Classifications
The oil / gas in a reservoir can be divided into two categories: reserves and resources. Reserves refer to oil / gas in a reservoir that has been confirmed to exist and is economically recoverable with current technology. Resources refer to oil/gas in a reservoir that is believed to exist but part or all of this volume has not been demonstrated to be productive or commercially recoverable. The volume classified as reserves can be contained within the resource volume.
Further classifications divide these volumes based on their certainty. The classifications from most to least certain are:
 Proved (1P) — “Those quantities of petroleum, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods, and government regulations. If deterministic methods are used, the term reasonable certainty is intended to express a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate.”
 Probable (2P) — "Those additional Reserves which analysis of geoscience and engineering data indicate are less likely to be recovered than Proved Reserves but more certain to be recovered than Possible Reserves. It is equally likely that actual remaining quantities recovered will be greater than or less than the sum of the estimated Proved plus Probable Reserves (2P or PP). In this context, when probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the 2P estimate.”
 Possible (3P) — “Those additional reserves which analysis of geoscience and engineering data suggest are less likely to be recoverable than Probable Reserves. The total quantities ultimately recovered from the project have a low probability to exceed the sum of Proved plus Probable plus Possible (3P or PPP) Reserves, which is equivalent to the high estimate scenario. In this context, when probabilistic methods are used, there should be at least a 10% probability that the actual quantities recovered will equal or exceed the 3P estimate.”
The certainty can also be referred to in a probabilistic form as well. P90, P50, P10 are often used in place of 1P, 2P, 3P, even in situations where deterministic methods are used to estimate reserves volumes. P50 represents the quantity for which there is a 50% probability the quantities actually recovered will match or exceed the estimated recovery value. The same definition applies to P90 (90%) and P10 (10%).
The status of reserves is another classification type used. It describes the current ability of a well to produce. There are three status types used:
 Developed / Producing — The wells and facilities required for production are in place. Expected to be recovered from completion intervals that are open and producing at the time of the estimate.
 Developed / Nonproducing — The wells and facilities required for production are in place. The well or zone is not currently producing, but requires little or no capital expenditure to be brought on production.
 Undeveloped — Significant capital expenditure is required for the well to come on production.
The following acronyms are typically used to define reserve classifications:
Acronym  Definition 

Proved Developed Producing 

Proved plus Probable Developed Producing 

PPPDP 
Proved plus Probable plus Possible Developed Producing 
PNP 
Proved Developed, NonProducing 
PPNP 
Proved plus Probable Developed, NonProducing 
PPPNP 
Proved plus Probable plus Possible Developed, NonProducing 
PUD 
Proved Undeveloped 
PPUD 
Proved plus Probable Undeveloped 
PPPUD 
Proved plus Probable plus Possible Undeveloped 
TP 
Total Proved 
TPP 
Total Proved plus Probable 
TPPP 
Total Proved plus Probable plus Possible 