What Is Estimated Ultimate Recovery?
Let me explain what estimated ultimate recovery, or EUR, really means in the oil and gas industry. It's a production term we use to approximate the quantity of oil or gas that could potentially be recovered—or has already been recovered—from a reserve or well.
You should know that EUR is conceptually similar to recoverable reserves.
Key Takeaways on EUR
EUR refers to the potential production you can expect from an oil well or deposit. It breaks down into three levels of confidence for the oil yet to be recovered: proven reserves, probable reserves, and possible reserves.
Oil companies, analysts, and investors rely on EUR to compute the net present value (NPV) for oil exploration and drilling projects, along with the expected corporate profits tied to them.
Understanding Estimated Ultimate Recovery
You can calculate EUR using various methods and units, depending on the specific project or study. In the oil and gas sector, it's critical that drilling projects hit an acceptable EUR threshold to be seen as viable and profitable.
A more precise way to define EUR is as 'discovered oil reserves,' divided into three categories based on how likely it is that the oil can be recovered with current technology.
Categories of Reserves
- Proven Reserves — There's a greater than 90% chance that the oil will be recovered.
- Probable Reserves — The chance of actually getting the oil out is greater than 50%.
- Possible Reserves — The likelihood of recovering the oil is significant, but less than 50%.
How Reserves Change Over Time
Remember, part of an oil field's probable and possible reserves get converted into proven reserves as time goes on. This re-categorization happens for reasons like improvements in oil recovery methods and techniques, or shifts in oil prices.
For instance, when oil prices rise, the quantity of proven reserves increases because the breakeven price for recovery becomes achievable. Reserves that were too costly to produce at lower prices become viable, allowing us to reclassify them as proven. The reverse occurs when oil prices drop—if reserves become too expensive to recover at market prices, their production probability decreases, leading to reclassification from proven back to probable or possible.
EUR's Use to Value Oil Reserves
Without an estimated ultimate recovery, oil companies couldn't make rational investment decisions. Management has to accurately estimate the net present value (NPV) of an oil drilling project, just like with any other project.
This valuation requires inputs such as the cost of producing the first barrel, the cost of capital, the long-term oil price, and the ultimate amount of oil to be produced—which is the EUR. If you don't have an EUR, you can't arrive at an accurate valuation of the potential oil reserves.
