Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ======Petroleum Resources Management System====== Petroleum Resources Management System (also known as 'PRMS') is the global gold standard for classifying oil and gas resources. Think of it as the universal language that oil companies, governments, and savvy investors use to describe what’s actually in the ground. Developed and sponsored by a consortium of industry bodies, including the [[Society of Petroleum Engineers (SPE)]], the PRMS provides a framework for defining and categorizing everything from a surefire oil field to a speculative "wildcat" prospect. Its goal is to bring consistency and clarity to resource reporting, allowing for more reliable comparisons between companies and projects. For an investor, understanding PRMS is like having a pair of X-ray glasses; it helps you see beyond a company's glossy marketing and understand the true quality and certainty of its most critical assets: its hydrocarbon resources. ===== Why Should a Value Investor Care? ===== For a [[value investing]] purist, a company's worth is tied to its tangible assets and predictable future earnings, not to hype. Oil and gas companies are no different. Their primary assets are buried deep underground, and their value is entirely dependent on the quantity of oil and gas they can profitably extract. The PRMS is the key that unlocks this information. By understanding the different classifications, you can distinguish between a company with a portfolio of low-risk, cash-generating fields and one that is betting the farm on high-risk, unproven prospects. A press release might shout about a "potential billion-barrel discovery," but the PRMS framework forces you to ask the critical questions: Is this a proven, commercial [[Reserves|Reserve]] or a highly speculative [[Prospective Resources|Prospective Resource]]? The answer dramatically changes the company's risk profile and intrinsic value. In short, mastering the basics of PRMS helps you separate geological fact from marketing fiction. ===== The PRMS Classification Jigsaw ===== The PRMS classifies resources using two fundamental criteria: the //chance of commerciality// (how likely it is that we can make money from it) and the //project's maturity// (how far along we are in developing it). This creates a matrix that sorts resources into distinct, easy-to-understand buckets. ==== Decoding the Categories ==== The system's three main categories are Reserves, Contingent Resources, and Prospective Resources. Moving from Reserves to Prospective Resources means taking on significantly more risk. === Reserves: The Crown Jewels === **Reserves** are the most valuable category. These are quantities of oil and gas that have been discovered, are commercially recoverable with current technology and under current economic conditions, and are backed by a solid development plan. Think of them as a company's money in the bank. They are typically broken down by their level of certainty: * [[Proved Reserves (1P)]]: This is the good stuff. 1P represents the quantity of oil and gas with at least a 90% probability of being recovered. These are the most certain assets, and banks often use 1P figures to determine how much they are willing to lend to a company. * [[Probable Reserves (2P)]]: This includes both Proved and Probable volumes. "Probable" adds reserves that have at least a 50% probability of being recovered. "2P" (Proved + Probable) is a common metric used by investors to get a more comprehensive, yet still reasonably confident, view of a company’s assets. * [[Possible Reserves (3P)]]: This is the most optimistic of the Reserve categories. "Possible" adds reserves that have at least a 10% chance of recovery. "3P" (Proved + Probable + Possible) gives a full upside view but includes a much higher degree of uncertainty. === Contingent Resources: The Promising Prospects === [[Contingent Resources]] are known accumulations of oil and gas that have been discovered but are //not yet// considered commercially viable to produce. Why not? Perhaps the oil price is too low, the necessary technology doesn't exist yet, or a political or environmental hurdle is in the way. These are not "pie in the sky" dreams; the oil is there. Think of it like a winning lottery ticket you haven't cashed because the prize office is closed for a holiday. There's real potential, but a "contingency" must be resolved before it can be converted into a Reserve. === Prospective Resources: The Wildcat Dreams === **Prospective Resources** are the most speculative of all. These are estimates of undiscovered oil and gas in undrilled prospects. Their existence is inferred from geological and geophysical data, but they have not been confirmed by drilling a well. This is the domain of high-risk, high-reward exploration. For an investor, these figures should be treated with extreme caution. They represent a company's hopes and dreams, not its tangible assets. ===== A Practical Example for the Savvy Investor ===== Imagine you are comparing two small exploration and production companies: * **SureShot Oil:** This company has 10 million barrels of 1P Reserves and very few Prospective Resources. It operates in a mature basin, generates steady cash flow, and pays a dividend. Its growth prospects are limited, but its business is solid and predictable. * **Dreamer Exploration:** This company has only 1 million barrels of 1P Reserves but touts a massive 500 million barrels of Prospective Resources in a frontier deepwater block. Its stock price is volatile, jumping on every drilling update. It burns through cash and has no revenue. A novice investor might be lured by Dreamer's huge "potential." However, a value investor using the PRMS framework would recognize that SureShot's assets are real, bankable, and generate value //today//. Dreamer's assets are largely hypothetical and may very well turn out to be worthless. The PRMS gives you the language and framework to make this crucial distinction and invest accordingly.