Reserve Replacement Ratio
Executive Summary
Key Takeaways
- ✓ Reserve replacement ratio is reserves added, through discovery, extension or acquisition, divided by reserves produced in a given period.
- ✓ A ratio above 100% indicates a company is adding reserves faster than it depletes them; a ratio below 100% indicates its reserve base is shrinking over the period measured.
- ✓ The ratio should always be read alongside finding and development cost, since a high ratio achieved at disproportionately expensive cost is not equivalent to sustainable, economic reserve growth.
- ✓ Reserve replacement ratio can vary significantly year to year based on the timing of large acquisitions or discoveries, so a multi-year trend is typically more informative than any single year's figure.
Definition¶
Reserve replacement ratio is the ratio of reserves added, through discovery, extension or acquisition, to reserves produced in a given period.
Interpreting the Ratio¶
A ratio above 100% indicates a company added reserves faster than it produced them, growing its reserve base over the period measured; a ratio below 100% indicates the reserve base shrank. The ratio should always be read alongside finding and development cost, addressed together in Oil & Gas Financial KPIs, since a high ratio achieved at disproportionately high cost is not equivalent to sustainable, economic reserve growth.
Why a Multi-Year Trend Matters More Than a Single Year¶
The timing of large acquisitions or discoveries can cause significant year-to-year variation in the ratio unrelated to a company's underlying, ongoing reserve replacement performance, making a multi-year trend a more reliable basis for assessment than any single year's figure, particularly when read alongside proved and probable reserves category detail.
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Frequently Asked Questions
What is reserve replacement ratio?
The ratio of reserves added, through discovery, extension or acquisition, to reserves produced in a given period, indicating whether a company's production base is being sustained, growing, or depleted over that period.
What does a reserve replacement ratio above or below 100% mean?
Above 100% indicates a company added reserves faster than it produced them in the period, growing its reserve base; below 100% indicates the reserve base shrank, since production outpaced additions.
Why should reserve replacement ratio be read alongside finding and development cost?
Because a high reserve replacement ratio achieved through disproportionately expensive finding and development cost is not equivalent to sustainable, economic reserve growth, addressed together in Oil & Gas Financial KPIs.
Why is a multi-year trend more informative than a single year's ratio?
Because the timing of large acquisitions or discoveries can cause significant year-to-year variation in the ratio unrelated to a company's underlying, ongoing reserve replacement performance.
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