What it means
Think of a reservoir as a sponge of rock soaked in oil and water. The total oil in the sponge is the oil initially in place, but only part of it will ever flow out into a well.
The usual shorthand is OIIP, and when the figure is measured at surface conditions in a stock tank it is often called STOIIP. Geologists and reservoir engineers estimate the number from several inputs: the area of the reservoir, its thickness, the share of the rock that is empty space, and how much of that space holds oil rather than water.
Because these inputs are measured indirectly from seismic surveys and a handful of wells, the answer is an estimate with a range, not an exact count. The estimate matters to finance because every later number is built on it.
Recoverable volumes come from multiplying the oil in place by a recovery factor, and reserves are the part of those volumes that can be produced economically under current conditions. If the starting figure is wrong, the revenue forecast, the borrowing capacity and the company valuation will all be wrong too.
A common nuance is that oil initially in place is much larger than what is finally produced. Recovery factors for conventional fields commonly fall somewhere between 20% and 50%, and technology such as water injection can push the number up at a cost.
This is why two fields with the same oil in place can be worth very different amounts. Companies usually report low, best and high estimates rather than a single figure.
Finance teams should ask which case a valuation uses, because the high case is the one that tends to appear in presentations and the low case is the one that tends to protect lenders.
In practice
Real-world examples.
Example
A small exploration company drills a discovery well and publishes a best-case estimate of oil in place for the field. An investor asks what recovery factor was assumed, because the headline figure is far larger than the oil that can be sold. The company explains that only about a third is expected to be recovered.
Example
A bank lending against a producing field hires an independent engineer to re-estimate oil in place after two years of production data. The new number is 10% lower than the original, so the bank reduces the amount it is willing to lend. The borrower's covenants (loan conditions) are reset to match.
Example
A state energy company compares three offshore blocks before a licensing round. It ranks them by oil in place per square kilometre and then adjusts for water depth and distance from shore. The block with the largest volume is not the one ranked first once development cost is added.
Formula
Calculation
STOIIP (barrels) = 7,758 x area (acres) x thickness (feet) x porosity x (1 - water saturation) / formation volume factor
The number 7,758 converts acre-feet into barrels. Porosity is the share of the rock that is pore space, water saturation is the share of that space holding water, and the formation volume factor shows how much the oil shrinks between the reservoir and the surface.
Suppose a reservoir covers 1,000 acres, is 50 feet thick, has porosity of 20% and water saturation of 30%, and the formation volume factor is 1.2.
7,758 x 1,000 x 50 = 387,900,000
387,900,000 x 0.20 = 77,580,000
77,580,000 x (1 - 0.30) = 77,580,000 x 0.70 = 54,306,000
54,306,000 / 1.2 = 45,255,000 barrels of oil initially in place.
With a recovery factor of 30%, recoverable oil = 45,255,000 x 0.30 = 13,576,500 barrels. At a gross price of $60 a barrel, that is 13,576,500 x 60 = $814,590,000 of revenue over the life of the field.Case study
Seen in the real world.
Meridian Basin Energy is an illustrative, fictional company that announced a new discovery with an estimated 90 million barrels of oil initially in place. Its share price jumped, and a number of commentators treated the figure as if it were the value of the find.
The chief financial officer wrote to shareholders to explain the difference. Only about 25% of the oil was expected to be recoverable with current technology, which meant roughly 22.5 million barrels, and development would need $600 million of spending before any revenue arrived.
After a year of appraisal drilling the estimate was trimmed to 80 million barrels, and the share price fell back. The illustrative lesson is that oil in place is a geological starting point, and the value of a project depends on recovery, cost and price.
Watch out
Common mistakes.
- Treating oil initially in place as if it were reserves, when most of the oil in the ground is never produced.
- Using a single number without a range, when the estimate depends on rock data that is uncertain and changes as drilling continues.
- Comparing barrels in place across fields without comparing recovery factors, which can differ widely between reservoirs.
Questions
People also ask.
What is the difference between OIIP and STOIIP?
OIIP is the general term for oil in place, while STOIIP states the volume measured at surface conditions in a stock tank, after the oil has cooled and shrunk from its reservoir state.
How is a recovery factor applied?
The recovery factor is the share of oil in place that is expected to be produced, so multiplying the two gives recoverable volume.
Does oil in place change over time?
The physical amount only falls as oil is produced, but the estimate often changes as new wells, seismic data and production history improve the engineers' understanding.
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