Disaggregating reserve to production ratios: An algorithm for petroleum reserve development

Charles William Williams, Louisiana Tech University


Reserve to production ratios for petroleum development are utilized by petroleum producing nations to monitor petroleum reserve and production dynamics. These ratios are used to determine production levels for the manipulation of petroleum prices while maintaining adequate reserves for future development. These aggregate reserve to production ratios do not provide information concerning development cost and the best time necessary to develop newly discovered reserves.

Petroleum reserves are a semi-finished inventory because development of the reserves must take place in order to implement production. These reserves are considered semi-finished in that they are not counted unless it is economically profitable to produce them. The development of these reserves is encouraged by profit maximization economic variables which must consider the legal, political, and geological aspects of a project. This development is comprised of a myriad of incremental operational decisions, each of which influences profit maximization.

The primary purpose of this study was to provide a model for characterizing a single product multi-period inventory/production optimization problem from an unconstrained quantity of raw material which was produced and stored as inventory reserve. This optimization was determined by evaluating dynamic changes in new additions to reserves and the subsequent depletion of these reserves with the maximization of production. A secondary purpose was to determine an equation for exponential depletion of proved reserves which presented a more comprehensive representation of reserve-to-production ratio values than an inadequate and frequently used aggregate historical method. The final purpose of this study was to determine the most accurate delay time for a proved reserve to achieve maximum production. This calculated time provided a measure of the discounted cost and calculation of net present value for developing new reserves.

This study concluded that the theoretical model developed by this research may be used to provide a predictive equation for each major oil producer so that a net present value to undiscounted net cash flow ratio might be calculated in order to establish an investment signal for profit maximizers.