Estimated ultimate recovery (EUR) is a key production term in the oil and gas industry. It represents an approximation of the amount of oil or gas that could potentially be recovered or has already been recovered from a reserve or well.
Key Takeaways
- Estimated Ultimate Recovery (EUR): Refers to the potential production expected from an oil well or deposit.
- Three Confidence Levels: EUR consists of three levels of confidence in the amount of oil yet to be recovered: proven reserves, probable reserves, and possible reserves.
- Importance for Value Calculation: Oil companies, analysts, and investors use EUR to compute the net present value (NPV) for oil exploration and drilling projects and to estimate expected corporate profits.
Delving into Estimated Ultimate Recovery
Estimated ultimate recovery can be calculated using a variety of methods and units, depending on the specific project or study. In the oil and gas industry, it is critical that drilling projects meet an acceptable EUR threshold to be considered viable and profitable.
A more precise definition of EUR is “discovered oil reserves,” which falls into three categories based on the likelihood of recovery using current technology:
- Proven Reserves: There is a greater than 90% chance that the oil will be recovered.
- Probable Reserves: There is a greater than 50% chance that the oil can be extracted.
- Possible Reserves: There is a significant likelihood of recovery, though less than 50%.
Keep in mind that part of an oil field’s probable and possible reserves can be converted into proven reserves over time. Changes in technology, market demand, and oil prices can all prompt reclassification of these reserves. For instance, as oil prices increase, the quantity of proven reserves also tends to rise because reserves that were previously too costly to produce can become economically viable. Conversely, if oil prices drop, some proven reserves may be downgraded to probable or possible due to the high costs of recovery.
The Role of EUR in Valuing Oil Reserves
Without an estimated ultimate recovery, oil companies would struggle to make informed investment decisions. Accurate estimation of the net present value (NPV) of an oil drilling project necessitates several inputs, including the cost of bringing the first barrel to production, the cost of capital, the long-term price of oil, and the EUR. Without EUR estimates, an accurate valuation of potential oil reserves would be unattainable.
Related Terms: Proven Reserves, Probable Reserves, Possible Reserves, Net Present Value, Breakeven Price.
References
- Society of Petroleum Engineers. [“Petroleum Reserves Definitions [“1997 Archive"]”](https://www.spe.org/en/industry/petroleum-reserves-definitions/).
