Discoveries of proved reserves and the influence of oil price and interest rate

ABSTRACT

Due to the nature of oil as a depleting asset, new discoveries of proved reserves are a critical component in the ongoing operations of exploration and production companies. Economic factors such as commodity price and the cost of capital should play a role in the discovery process; however, this role may vary by type of discovery source. This article examines US annual data over the years 1977–2014 to estimate the influence of oil price and interest rate on the ratio of new reserves by source to total proved reserves, controlling for changes in production. Findings from vector autoregression (VAR) models provide evidence that reserve changes respond to economic factors and these responses differ by source of discovery.

KEYWORDS:

• Discoveries
• economics
• interest rate
• oil price
• reserves

Notes

¹ A decline curve shows how production declines over time (Hyne, 2012). For a given price and current technological and operational conditions, net income also falls over time (Kaiser, 2010).

² The importance of discoveries of new reserves is pointed out in Pickering (2008).

³ Reserve replacement ratios are often reported in annual reports of E&P companies.

⁴ Kok et al. (2006) and Kok and Ulker (2006) provide technical details on estimating reserves.

⁵ Feygin and Satkin (2004) discuss the importance of stage of oil field and reserve life.

⁶ Pre-testing included analysis of unit root tests and lag length selection for each VAR model. Conventional examination of the residuals in each VAR suggested models were well specified.

⁷ Financing is characterized by “large amounts of capital … along with the long time gap between investment of capital and seeing returns from such investments.” (Munoz, 2009 p. 225)