What is the estimated final recovery?
Estimated Final Recovery (EUR) is a production term commonly used in the oil and gas industry. Estimated final recovery is an approximation of the amount of oil or gas that is potentially recoverable or has already been recovered from a reservoir or well.
EUR is similar in concept to recoverable reserves.
- Estimated Final Recovery (EUR) refers to the expected potential production of an oil well or reservoir.
- EUR is made up of three confidence levels, it is the amount of oil that remains to be recovered: proven reserves; probable reserves; and possible reservations.
- The EUR is used by oil companies, as well as analysts and investors, to calculate the NPV of oil exploration and drilling projects and the expected corporate profits associated with that.
Understanding the Estimated Final Recovery
Estimated final recovery can be calculated using many different methods and units depending on the project or study being carried out. In the oil and gas industry, it is of the utmost importance that drilling projects reach an acceptable threshold in euros for a project to be considered viable and profitable.
A more precise definition of EUR is “discovered oil reserves” and there are three categories, each based on the degree of probability that the oil can be recovered using current technology.
- Proven Reserves: There is a greater than 90% probability that oil will recover.
- Probable reserves: the probability of extracting the oil is greater than 50%.
- Possible reserves: the probability of recovering the oil is significant, but less than 50%.
Keep in mind that some of the probable and possible reserves of an oil field become proven reserves over time. These reserves can be re-categorized for a number of reasons ranging from improvements in oil recovery methods and techniques to changes in oil prices. For example, as oil prices increase, the amount of proven reserves also increases because the equilibrium price of the recovery can be reached. Reserves that were too expensive to produce at lower oil prices become viable as oil prices rise. This allows to reclassify these more expensive reserves as shown. The opposite happens when oil prices fall. If oil reserves become too expensive to recover at current market prices, the likelihood of their occurrence also decreases. This results in the reserves being reclassified from proven to probable or even possible.
Using the EUR to value oil reserves
Without an estimated final recovery, oil companies would not be able to make rational investment decisions. Like all projects, management must be able to accurately estimate the net present value (NPV) of an oil drilling project. This valuation exercise requires several inputs, such as the cost of bringing the first barrel to production, the cost of capital, the long-term price of oil, and the final amount of oil to be produced, or EUR. Without a EUR, it would not be possible to reach an accurate valuation of potential oil reserves.