Contingent resources

What Are Contingent Resources?

Contingent resources refer to those quantities of hydrocarbon (oil, natural gas, and associated substances) estimated to be potentially recoverable from known accumulations, but which are not yet considered commercially viable due to one or more contingencies. These resources belong to the broader category of energy finance and petroleum economics, representing a crucial component in the long-term planning and resource classification of energy companies. Unlike proved reserves, which have a high degree of certainty of being economically and legally extractable, contingent resources carry a level of uncertainty regarding their development and ultimate recovery. They are quantities that might be developed in the future if specific technical, commercial, or regulatory hurdles can be overcome.

History and Origin

The concept of classifying petroleum resources, including contingent resources, gained significant standardization through international efforts. Early attempts to define and categorize petroleum quantities began in the 1930s, initially focusing on proved reserves. However, as the oil and gas industry evolved and exploration expanded, a more comprehensive system was needed to account for various stages of resource maturity and associated uncertainties. In 1987, the Society of Petroleum Engineers (SPE) published definitions for all reserve categories, followed by a joint release with the World Petroleum Council (WPC) in 1997 for worldwide use.¹²

A major milestone in standardizing petroleum resource definitions, including contingent resources, was the development of the Petroleum Resources Management System (PRMS). This system, issued in 2007 by the SPE, WPC, American Association of Petroleum Geologists (AAPG), and Society of Petroleum Evaluation Engineers (SPEE), and later endorsed by the Society of Exploration Geophysicists (SEG), provides a consistent framework for estimating and classifying petroleum quantities.¹¹ The PRMS defines contingent resources as distinct from reserves and prospective resources, offering a common language for stakeholders involved in project management and capital allocation within the industry.¹⁰

Key Takeaways

• Contingent resources are potentially recoverable hydrocarbons from known accumulations that are not yet commercial.
• Their commerciality is dependent on overcoming specific contingencies (e.g., technical, economic, regulatory).
• They are classified under the Petroleum Resources Management System (PRMS), a global industry standard.
• Contingent resources carry a chance of development, but a project investment decision has not yet been made.
• They represent future growth potential for oil and gas companies, influencing long-term investment decisions.

Interpreting Contingent Resources

Interpreting contingent resources involves understanding the conditions and uncertainties preventing their immediate commercial development. These resources are typically categorized into subclasses such as "development pending," "development unclarified," or "development on hold," indicating the nature of the remaining contingencies.⁹ For instance, a contingent resource might exist in a known reservoir, but its extraction could depend on new drilling technology, the construction of export infrastructure, or an improvement in market prices to ensure economic viability.

Evaluators use geological data, engineering studies, and economic models to assess the likelihood of these contingencies being resolved and the probability of the contingent resources transitioning into reserves. This assessment often involves quantifying the chance of development, which reflects the likelihood of a project moving forward to achieve commerciality. Understanding the underlying reasons for the contingent classification is vital for investors and analysts to gauge the potential future value and risks associated with a company's resource portfolio.

Hypothetical Example

Consider "Alpha Energy Corp.," an exploration and production company that discovers a significant natural gas accumulation in an offshore block. Initial drilling and testing confirm the presence of substantial gas volumes. However, a major pipeline infrastructure currently does not exist to transport the gas to market, and constructing such a pipeline would require a multi-billion dollar capital expenditure.

In this scenario, Alpha Energy Corp. would classify these gas volumes as contingent resources. They are "known accumulations" because their existence has been confirmed. However, they are "not currently commercial" because the absence of transportation infrastructure and the large upfront cost of building it represent significant contingencies. The company might further classify these as "development pending" once a comprehensive plan for financing and constructing the pipeline is underway, even if the final investment decision has not yet been made. The ability to eventually realize these contingent resources depends on factors like securing financing, obtaining regulatory approvals, and ensuring a favorable long-term gas price.

Practical Applications

Contingent resources play a significant role in several areas within the energy sector. For oil and gas companies, they represent the pipeline of future projects and potential growth. While not immediately adding to proved reserves, these resources inform strategic planning, long-term capital budgeting, and exploration strategies. Companies assess contingent resources to understand their overall asset base and potential for future production, even if development is contingent on market conditions or technological advancements.

From an industry perspective, the total volume of global contingent resources provides insights into future energy security and potential supply sources, particularly as readily accessible reserves decline.⁸ International bodies like the International Energy Agency (IEA) analyze these resource categories to project future energy supply scenarios and inform policy discussions around global energy transitions.⁷ The management and eventual commercialization of contingent resources are critical for meeting future energy demand and navigating the complexities of the global energy landscape.

Limitations and Criticisms

Despite their importance for long-term planning, contingent resources come with inherent limitations and criticisms. A primary challenge is the significant uncertainty surrounding their eventual commercialization. Unlike proved reserves, there is no guarantee that contingencies will be resolved, meaning that some contingent resources may never be developed. This uncertainty makes precise valuation difficult and can lead to variations in estimates.⁶ Geological complexity, technical challenges, and fluctuating commodity prices are major factors that can prevent contingent resources from becoming economically viable.⁵

Regulatory bodies also approach the disclosure of contingent resources with caution. In the United States, the Securities and Exchange Commission (SEC) generally prohibits the disclosure of oil and gas resources, including contingent resources, in public filings unless such information is specifically required by foreign or state law.⁴,³ The SEC's stance, outlined in its "Modernization of Oil and Gas Reporting" rules, aims to prevent investors from drawing incorrect conclusions based on less certain resource categories, emphasizing the importance of focusing on legally defined reserves for financial reporting.² This regulatory distinction highlights the speculative nature of contingent resources compared to the more certain classification of reserves.

Contingent Resources vs. Reserves

The distinction between contingent resources and reserves is fundamental in petroleum economics. Reserves are quantities of petroleum anticipated to be commercially recoverable from known accumulations as of a given date, under defined conditions. They meet strict criteria for commerciality, including existing markets, available infrastructure, and positive cash flow under current economic and regulatory conditions. Reserves are further classified into proved, probable, and possible, reflecting increasing levels of technical and commercial uncertainty.

Contingent resources, in contrast, are also from known accumulations but lack one or more of the commercial prerequisites to be classified as reserves. While their existence is established, the factors preventing their development—such as technological hurdles, insufficient infrastructure readiness, or unfavorable market economics—have not yet been overcome. The key difference lies in the "commerciality" criterion: reserves are commercial, whereas contingent resources are not yet commercial, awaiting the resolution of specific contingencies. This distinction is critical for investors and companies to differentiate between immediately available, commercially viable quantities and those requiring further development and risk assessment to become productive assets.

FAQs

What makes a resource "contingent"?

A resource is classified as contingent when its existence in a known accumulation has been confirmed, but its commercial recovery is dependent on the resolution of one or more specific factors, or "contingencies." These contingencies can be technical (e.g., need for new drilling technology), economic (e.g., insufficient market prices, high development costs), or regulatory (e.g., permits, environmental regulations).

Are contingent resources included in a company's proved reserves?

No, contingent resources are distinct from proved reserves. Proved reserves are quantities that can be recovered with a high degree of certainty under existing economic and operating conditions. Contingent resources, while discovered, are not yet considered commercial due to unresolved issues. They have a chance of becoming reserves in the future if those contingencies are successfully addressed.

Why do companies disclose contingent resources if they're not yet commercial?

While certain regulatory bodies, like the SEC in the U.S., restrict the public disclosure of contingent resources in formal filings, companies often assess and track them internally for strategic planning. The¹y represent a company's potential future inventory of projects and can influence long-term business strategy, exploration budgets, and capital allocation decisions. Understanding these resources helps companies manage their portfolios and communicate their future growth potential to analysts and internal stakeholders.

How is the likelihood of developing contingent resources assessed?

The likelihood of developing contingent resources is assessed through a process that often includes detailed engineering studies, economic analysis, and risk management evaluations. Companies use various methods, including deterministic and probabilistic approaches, to estimate the quantities and assign a "chance of development" to the project. This chance of development reflects the probability that the identified contingencies will be resolved, allowing the resources to transition to a reserves category.