Organic Reserve Replacement
Categories: Econ, Financial Theory
Fish and feed a man for a day, or teach the man to fish, and feed him for a lifetime. That’s what oil companies say...but about oil (screw the fish, basically).
When an oil firm gets oil through its own direct exploring and producing, rather than via third-party means, it’s called organic reserve replacement. The oil company is replacing its stock of oil “organically,” meaning that they did it all by themselves. Oil companies also have the option to buy proven oil reserves: areas of land that have been explored and tagged as “oil-rich-n-ready” by other firms.
In order for an oil company to be stable in the long-run, they should have a reserve-replacement ratio of at least 100%. That means investors expect an oil company to have at least as much oil (and/or gas) in the ground, ready to go, as the amount they’re producing and selling. Any oil company with less than that in reserves is on the way to extinction...like the dinosaurs the oil comes from.