Terms Beginning With 'p'

Probable Reserves

Based on the classification scheme prepared by the largest member organization of oil and gas professionals worldwide, SPE (Society of Petroleum Engineers); Probable reserves are those unproved reserves that are calculated to be having at least 50 per cent probability of being recovered as per the estimation made using current geological and engineering data.

Understanding Reserves:

Broadly, reserves are classified into three main categories by SPE based on the certainty of recovery. The first category of reserves is Possible reserves, next is Proved reserves, and the last one is Probable reserves. These categories are used by various stakeholders to evaluate the total assets of a company which is also known as Fair Market Value. It is also used to forecast and plan. Reserve categorisation and determination of recovery volume from reservoirs is carried with the help of statistical modelling technique.

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Quantitative measurement of risk associated with various type of reserve categories is required to understand the amount of risk which is involved in the exploration of the reserve. However, in most of the cases, reserve estimation is not based on the mathematical, probabilistic measurement technique; instead, it is calculated based on the deterministic measurement technique. Ideally, the results of both methods should be the same.

What Probable reserve include:

Probable reserves may include:

  • Reserves which are confirmed by normal drilling technique and the subsurface conditions are not favourable to be categorized under the proved banner.
  • Reserves which are proved to be productive by any of the techniques like well log characteristics but lacks in definitive tests that can show similar results like shown in a proved reservoir within close proximity.
  • Incremental reserves that are accounted to infill drilling that could have been classified as proved if the closer legal arrangement had been made at the time of the estimate.
  • Reserves that are accounted with enhanced recovery techniques due to the advance technology which make it favourable to explore the commercial volumes from the reservoir.
  • Reserves that are left out from a pre-existing proved reservoir due to some geological condition like faulting or any other geological event. But the present situation proves the extent to be on the larger side than predicted earlier.
  • Reserves that are accounted by to an exploration condition like workover, treatment, retreatment, change of equipment, or new process implementation procedures which may increase the probability of recoverable.
  • Reserves which are incremental reserves in proved reservoirs where a second or advance level of interpretation of volumetric data indicates the presence of more reserves than can be classified as proved. They are commonly known as P2 reserves which is the sum of Proved and Probable reserves.

Estimation of Reserves:

Reserve estimate of a reservoir is carried out using various geological and engineering methods which are widely accepted in the oil & gas industry. The technique which is used for estimation is also backed up by the previous similar experience of reservoir conditions found at some other place. Original Oil in Place and Gas in place in the reservoir is estimated based on the results obtained by the analysis of results obtained from various techniques. For example, structure maps can be used to find subsurface reservoirs. Isopach maps can be used to know the volume of reserves. Other methods like coring, logging can be used to estimate the porosity, permeability and saturation of the rocks present in the reservoir.

 

Based on the original reservoir pressure conditions, estimates on recovery factor is determined to OOIP & OGIP. The recovery factor helps to estimate the ultimate recovery volume, commonly known as EUR.

In a producing reservoir whose production rate started declining at a considerable rate, reserves are calculated based on declining curves or performance characteristics. For such specific cases where the reservoir is in producing stage, the estimates are based on the economic feasibility or the level of commercial production of reserves up to which a company can sustain.

The volume of gas estimates is expressed as Sales gas which is a raw natural gas in which further procession & fractionation is required. Typically, it is expressed at a temperature of 60 degrees Fahrenheit (°F) and a pressure base of 14.73 pounds per square inch absolute (psia). Sales gas is the amount of gas which is left out after flaring, shrinkage, fuel usage and field separation.

What is accounts payable? Accounts Payable (AP) is an obligation that an individual or a company has to fulfill for purchasing goods and services bought from their suppliers and vendors. AP refers to the amount that is not paid upfront and can be paid back in a short period of time. Hence, a good or a service purchased on credit to be paid in a short period will fall under AP. For individuals, AP may include the bill paid after availing services such as television network, electricity, internet connection, or telephone. Most of the time, the bill is generated after the designated billing period, depending upon the amount of consumption. The customers have to pay this obligation within a stipulated time to avoid default. What is accounts payable from a Company’s point of View? AP is the amount of money a company is liable to pay to its suppliers or vendors and clear dues for purchases of goods and services purchased from its suppliers or vendors. AP is required to be repaid in a short period, depending on the relationship with suppliers. It is essentially a kind of short-term debt, which is necessary to honour to prevent default. As the current liabilities of the company, AP is required to be settled over the next twelve months. It is presented in the balance sheet as the account payable balance. For example, Entity A buys goods from Entity B for US$400,000.00 on Credit. Entity A has to pay back this amount within 60 days. Entity A will record US$400,000.00 as AP while Entity B will record the same amount as Account receivable. AP is also a part of the cash flow statement. The change in the total AP over a period is shown in the cash flow statement, hence it is part of the company’s working capital. It is widely used in analysing the cash flow of the business and cash flow trends over a period. AP may also depict the bargaining power of the company with its vendor and suppliers. A vendor or supplier may give the customer a longer credit period to settle the cash compared to other customers. The customer here is the company, which will incur AP after buying goods on credit from the vendor. There could be many reasons why the vendor is providing a more extended credit period to the firm such as long-term relationship, bargaining power of the firm, strategic needs of the vendor, the scale of goods or services. By maintaining a more extended repayment period to supplier and shorter cash realisation period from the customer, the company would be able to improve the working capital cycle and need funds to support the business-as-usual. However, prudent working capital management calls for not overtly stretching the payable days as it might lead to dissatisfaction of supplier. Also, investors tend to closely watch the payable days cycle to determine the financial health of the business. When the financial conditions of a firm deteriorate, the management tends to delay the payment to their suppliers. Why accounts payable is an important part of Balance sheet and Cash Flow Statement? As inferred from the previous paragraphs, AP is part of the current liabilities of the balance sheet. This is an obligatory debt that has to be paid back within a time frame so that the company does not default. AP primarily consists of payments to be made to suppliers. If AP keeps on increasing over a period of time, it can be said that the company is purchasing goods or services on credit more, instead of paying up front. If AP decreases, it means the company is reducing its previous debts more than it is buying goods on credit. Managing AP is essential to have a stable cash flow. In a cash flow statement prepared through an indirect method, the net difference in AP is shown under cash flow from operating activities. The business entity can use AP to create the desired variation in the cash flow to some extent. For example, to increase cash reserves, management can increase the duration of paying back the credit taken for a certain period, thus affecting the net difference in AP. What Is the Role of Accounts Payable Department? Every company has an accounts payable department and the size and structure depend upon how big or small the enterprise is. The AP department is formed based on the estimated number of suppliers, vendors, and service providers the company is expected to interact with; the amount of payment volume that would be processed in a given period of time; and the nature of reports that a management will require. For example, a tiny firm with a low volume of purchase transactions may require a simple or a basic accounts payable process.  However, a medium or a large enterprise may have a accounts payable department that may require a set of practices to be followed before paying back the credit. What is the Accounts Payable Process? Guidelines or a process is important as it provides transparency and smoothness in facilitating the volume of transactions in any time period.  The process involves: Bill receipt: when goods were bought, a bill records the quantity of goods received and the amount that needs to be paid to the vendors. Assessing the bill details: to ensure that the bill or invoice copy includes the name of the vendor, authorization, date of the purchase made and to verify the requirements regarding the purchase order. Updating book of records after the bill is collected: Ledger accounts need to be revised on the basis of bills received. The department makes an expense entry after taking approval from management. Timely payment processing: the department takes care of all payments that need to be processed on or before their due date as mentioned on a bill. The department prepares and verifies all the required documents. All details entered on the cheque along with bank account details of the vendor, payment vouchers, the purchase order, and the original bill and purchase order are scrutinized. The department also takes care of the safety of the company’s cash and assets and prevents: reimbursing a fake invoice reimbursing an incorrect invoice making double payment of the same vendor invoice Apart from making supplier payments, AP departments also takes care of travel expenses, making internal payments, maintaining records of vendor payments, and reducing costs Business Travel Expenses: Bigger entities or firms whose business nature requires all personnel to travel, have their AP department manage their travel costs. The AP department manages the personnel’s travel by making advance payments to travel companies including airlines and car rentals and making hotel reservations. An account payable department may also deals with requests and fund distribution to cover travel costs. After business travel, AP may also be responsible for settling funds supplied versus actual funds spent. Internal Payments: The Accounts Payable department takes care of internal reimbursement payments distribution, controlling and petty cash controlling and administering, and controlling sales tax exemption certificates distribution. Internal reimbursement payments include receipts or both substantiate reimbursement requests. Petty cash controlling and administering includes petty expenses such as out-of-pocket office supplies or miscellaneous postage, company meeting lunch. Sales tax exemption certificates comprise AP department handling sales tax exemption certificates supply to managers to make sure qualifying business purchases excludes sales tax expense. Maintaining Records of Vendor Payments: Accounts Payable maintains information of vendor contact, terms of payment and information of Internal Revenue Service W-9 either manually or on a computer database. The AP department lets management know through reports on how much the business owes at present. Other Functions: The accounts payable department is also responsible to lessen costs by identifying cost structures and creating strategies to reduce the spending of business money. For example, minimising cost by making payment of the invoice within a discount period. The AP department also acts as a direct point of contact between an entity and the vendor. How to Calculate Accounts Payable in Financial Modelling Financial modelling enables calculating the average number of days a company takes to make bill payments. AP days can be calculated using the following formula: AP value can be calculated using the following formula: What is accounts payable turnover ratio? AP turnover ratio shows the capability of a firm to pay cash to its customer after credit purchases. It is counted as an essential ratio to analyse the cash management attribute of the firm and its relationship with vendors or suppliers. It is calculated by dividing purchases by average AP. Purchases by the company are calculated as the sum of the cost of sales and net inventory in a given period: Now let’s understand this with the help of an example. Let us suppose, Cost of sales of Company XYZ for the period was $60,000, and XYZ began with inventories worth $21000 and ended at $15000. AP at the beginning was $20000, and $15000 at the end. Now the purchases will be $66000 (60000+21000-15000). The average AP will be $17500. Therefore, the AP turnover ratio will be 3.77x. Dividing the number of weeks in a year by the AP turnover ratio will give the number of weeks the company takes on average to settle its payables. In this case, it will be around 13.8 weeks (52/3.77). What is the difference between Accounts Payable vs. Trade Payables? Though the phrases "accounts payable" and "trade payables" are used interchangeably, the phrases have slight differences. Trade payables is the cash that a company is obligated to pay to its vendors for goods and supplies which are part of the inventory. Accounts payable include all of the short-term debts or obligations of a company.

What are the Factors of Production? Production of anything requires inputs to produce an output, and the inputs used in the production are known as factors of production. Alternatively, these are resources used in the production of goods and services.  Factors of production are also critical to economic growth given the economic growth requires expansion in output/national income or total production. Factors are a class of productive elements, which individually are known as units.  Units are interchangeable and homogenous, moreover, they are perfect substitutes for each other. Factors, which constitute a group of units, are not a perfect substitute for each other. Modern economists prefer using ‘inputs’ instead of conventional factors of production: land, labour, capital and entrepreneurship.  Classification of Factors of production Land Land includes all the natural resources available such as water and air. It constitutes a natural resource that yields income and is exchangeable for a consideration. In the absence of land, water and sun, a farmer cannot produce crops.  Every commodity traded in the world can be traced back to land directly or indirectly. Such as gold is extracted from mines, crude oil is explored and extracted from oil fields, grains are produced in agricultural land. Moreover, the land is arguably the ultimate origination of commodities.  Meanwhile, the quantity and quality of land are vital to yield an acceptable utility for the user. But the availability of land does not guarantee economic growth because the ability to use resource determines the optimal use of the resource.  Land can be further classified as renewable and non-renewable. Renewable resources can be used again and again in the production like an agricultural land used year after year for the cultivation of food, grains etc.  Non-renewable land is not usable again and again and is exhausted as the consumption increases. A gold mine may not yield additional income for a business when ore reserves are exhausted. And a new discovery would provide additional resource.    Land, as a blessing of nature, is fixed in supply. Whether the demand increases or decreases, the supply of land will remain the same. As a result, it is not dependent on the price, therefore supply of land is perfectly inelastic.  Labour Labour does include not only physical but also mental abilities that are done by humans for a monetary benefit. The contribution of labour depends on the size and quality of labour.  For instance, Japan has been successful in the production of small and compact cars, while the US producers were efficient in slightly heavy cars.  Higher productivity of labour will likely deliver favourable benefits. As a human factor, labour cannot be exchanged for value, unlike land and capital. Labour is used with land and capital and cannot be separated. Labour is available in return of wages and is not a saleable commodity. While one cannot store labour for future use, the supply of labour is dependent on the need for production. Labour supply is elastic, and it takes time to develop overall supply. Division of labour emphasises on the speciality of labour in a particular work. Every labour group in an organisation is further classified into various divisions, depending on the quality, skills, knowledge and demand.  Capital  Capital is a critical factor of production and largely means wealth, which includes stock of raw material, machinery, tools, building etc. It is also the money available for productive and investment purposes.  Capital also extends to physical assets such as machinery, raw material that are directly used in the production. Securities such as shares and bonds are not classified because they are not used in production, thus not the factor of production.  It is largely classified into fixed capital and working capital. Fixed capital is used in the production continuously and incur wear and tear. Fixed capital does not mean it is immovable, but the essence of fixed is the cost incurred, which largely remains fixed over the period of production.  The cost incurred in working capital is, however, recovered when the product is sold. Such as the cost of raw material, along with other inputs, is a component of the total cost of the good. Capital also includes human capital.  Human capital is also a vital unit of production and means the education, skills, and health of people. It is essential for the improvement in productivity. It is now understood that investments in human capital provide favourable growth.   Entrepreneurship Entrepreneurship is vital to confluence the factors of production and manages risk & uncertainty associated with the production. Now it is understood that production is a function of land, labour, capital, and entrepreneurship.  Entrepreneurship is more concerned with the incorporation of production, rather business affairs, which are managed by other people working on wages. Therefore, an entrepreneur takes the risk and uncertainty associated with production.  An entrepreneur is responsible for initiating a business enterprise and is engaged in assembling the factors of production, including land, labour, capital and entrepreneurship. Innovation and development are also associated with entrepreneurship.  Entrepreneurs undertake crucial decision of capital allocation, which may include setting up new factors, purchasing machinery, upgrading skills of human capital, innovating units of production etc.  Elon Musk is an entrepreneur aspiring to reach mars, produce e-vehicles, launch space travel. He is effectively managing and bringing about the factor of production to achieve results.  

What is meant by Balance of Payments or BOP? Balance of Payments refers to the record of transactions maintained by a country with the rest of the world. It is a detailed list of international transactions that a country has with its trading partners. These transactions can be made by the residents, domestic businesses or by the government. In an ideal situation, the sum of all the elements of BOP should be zero. However, this is rarely witnessed as most countries do not have the exact same amount of inflow as that of outflow. The inflow and outflow from the rest of the world, can be with respect to goods, services, assets, investments, etc. Notably, a deflection from the ideal zero BOP state may not always be harmful. A surplus (positive BOP) might indicate a strong economy as it means exports are greater than imports. While, a deficit (negative BOP) might point to an increased debt on the home country. The Balance of Payments is highly reflective of the economic strength of a country. Most of the impacts of BOP are indirectly observed on various macroeconomic indicators. What are the Components of BOP? BOP comprises of two broad components, namely, Current Account and Capital Account. Sometimes the Capital Account is referred to as the Financial Account, along with a separate capital account. The Financial Account includes transactions in financial instruments and central bank reserves. While the capital account includes transactions in capital assets. A balance in inflow and outflow of all these accounts makes for a BOP equal to 0. CURRENT ACCOUNT: In technical terms, Current Account is the sum of Balance of Trade, Factor Income (net income from foreign investments) and unilateral transfers (net gifts and grants received). Put simply, current account records the transactions done in goods and services, investments and the net transfer payments or unilateral payments. Exports are maintained as credits, while imports are maintained as debits in the balance of payments. A positive current account balance means that the domestic country is a net lender, while a negative current account balance indicates that the home country is a net debtor. According to the double-entry accounting method, any entry on the export side would be adjusted with an appropriate entry on the import side. For example, for a good exported by the home country to a foreign country, the corresponding import transaction would be the inflow of foreign currency received in exchange for the good exported. CAPITAL ACCOUNT: The capital account involves all transactions relating to international asset It involves transactions made in the reserve account as well as loan payments and investment made across nations. These loans, however, do not include the future stream of interest or dividend payments as they are a part of current account. This is so because they form a part of nation’s spending or income, depending on the type of flow. A capital account is said to be in deficit when a country purchases more assets than the assets it sells to the rest of the world. An increase in assets is followed by a corresponding decrease in cash and vice versa. In some countries, the capital account is known as the financial account and has separate component called the capital account. This capital account records the transactions that do not affect the income, production or savings like international transfer of trademarks and rights, etc. What do BOP deficit and surplus mean for the home country? In layman’s language, BOP tells us whether the country is earning enough to meet its expenditure. If there is a deficit, then it can point towards the country’s growing expenses which are not sufficed by the income generated. Thus, there is a need to generate debt in order to fund the current requirements. Many a times the need to repay current debt gives rise to more debt. Therefore, an endless cycle of financing previous debt with current period loans takes place. The credit received from the rest of the world is generated either by taking a loan, which adds as a liability in the accounts or by selling off the assets currently possessed by the country. These assets can be natural resources, land, commodities, etc. A surplus on the other hand means that a country is exporting more than it is importing in all its existing BOP accounts. This can be a positive sign in most instances as it points towards stronger economic movements. A surplus can encourage the home country to invest in production of goods and services and in turn promote GDP growth. However, an export-driven growth in the long run could point to lack of sufficient demand in the home country. In such a case, the government should boost consumer spending in home country in order to become more self- reliant.   What are the factors affecting BOP? BOP depends on various factors. These include: The domestic exchange rate: Exchange rate is a measure of foreign currency with respect to the domestic currency. Governments can revalue or devalue the exchange rate with the help of appropriate policies. This affects the BOP by making exports cheaper as the exchange rate falls and making imports cheaper when the exchange rate rises. The spending capacity of domestic consumers: As businesses and households are left with greater disposable income, they can spend more on imports and this can affect the BOP. Price competitiveness offered by domestic goods: For a country that is going through higher rates of inflation than its trading partner, the goods and services offered by it would be relatively more expensive. Thus, the country becomes less competitive in terms of price competitiveness. The country with lower inflation would thus have cheaper exports. In such a case, domestic consumers would prefer foreign goods and services causing increased imports and eventually a BOP deficit. Domestic policies: Trade based taxes and tariffs are a huge influencer on the BOP. Policies boosting exports are always beneficial to a country. It is important to pay attention to imports by imposing restrictions using tariffs or quotas. Apart from trade centric policies, domestic policies aimed at economic growth may cause changes in BOP. For instance, increased interest rates can promote FDI in the home country, which would affect the Current Account in BOP.

What is meant by Balance of Trade? Balance of Trade (BOT) refers to the difference between the value of exports and imports of a country for a given period. Balance of Trade is a component under the Balance of Payments, which is a balance sheet maintained by a country for all types of international transactions related to assets, goods, loans and others. Balance of Trade is added to Factor Income and Unilateral Income under the current account in BOP.  If the exports of a country exceed its imports, then there exists a BOT surplus. And if the imports of a country exceed its exports, then the country is said to have a BOT deficit. A Balance of trade surplus is favourable while a deficit is unfavourable for a country. However, a deficit in the balance of trade might not always have adverse implications. Many countries continue to function with a BOT deficit. For them, a deficit simply means that they have a large dependency on imports. Larger imports are an important factor in determining any economy’s strength; however, they may not always indicate an alarming situation in the domestic economy. Are Balance of Trade and Balance of Payments same? Balance of Trade hugely impacts the Balance of Payments. However, a deficit or surplus in one does not always mean the same for the other. For instance, countries having a BOP surplus might also be observing a BOT deficit at the same time. Notably, implications of a BOP deficit/surplus and a BOT deficit/surplus are different for an economy. What are the factors affecting a country’s Balance of Trade? Domestic competitiveness: Abundance of factors of production, a good amount of resource endowment, and technological advancement in production are some of the factors that affect the competitiveness of a country. For a country that has abundant endowment of labour, the exports would be greater of those goods that are labour-intensive. Thus, the endowment of factors of production, namely, labour, capital, and land, affect the ability of a firm to compete in the international market. This follows from the Hecksher-Ohlin theory of trade. On the other hand, Ricardian model of international trade suggests that a country would export the good in which it enjoys a ‘comparative advantage’. This means that any country that has better productivity levels due to increased technology and better equipment would have more exports in that good, even if other countries are also producing that good. Inflation Rate: If a country has a higher level of prices than its trade partner, then domestic consumers would prefer imports. This could hurt the domestic producers and in turn put pressure on the Balance of Trade. Exchange Rate: If the domestic currency appreciates then foreign goods start to appear cheaper as compared to domestic goods. Thus, it could lead to exports falling and imports increasing. Demand-Supply: The demand of a good impacts the price level of that good. In case of insufficient domestic supply, the prices of a good might rise in the home country, thus making them more expensive as compared to foreign alternatives. On the contrary, in case of insufficient domestic demand, prices would decrease thus making domestic goods cheaper as compared to foreign alternatives. Foreign Exchange Reserves: Foreign exchange reserves enable the countries to increase their competitiveness so that they are at par with foreign producers, in terms of equipment, machinery and production methods. What does a deficit or a surplus in BOT mean for a country? A surplus in BOT simply indicates that the value of goods exported exceeds the value of goods imported. Thus, a surplus in BOT might indicate that an economy is going in a positive direction. However, there is no absolute conclusion that can be drawn from a positive or negative BOT.    A positive BOT might provide sufficient aid to domestic operations and could provide fiscal assistance. However, it could also mean underutilisation of resources. Also, if a prolonged surplus is spent by an economy suddenly then it might be the cause of disruptions in the economy. On the other hand, a deficit can also be the consequence of a changing business cycle. It could also mean that a country has an increased demand, even if the demand is for imports. Increased demand means that consumer spending is on the rise and the economy is expanding. This is one of the most important pushes needed by growing economies to enhance their economic growth. It is not right to oversimplify the surplus as ‘good’ and deficit as ‘bad’ for the economy, as it is important to note the cause of either of those circumstances. Moreover, domestic policies, productivity levels, trade laws and various other factors are important determinants of how strong the economy of a country is compared to that of its trading partners.

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