A year ago, Rystad Energy unveiled a shocking estimate of recoverable oil resources. The energy analysis company revealed that the United States had passed Saudi Arabia as the world leader in oil resources. According to Rystad's estimates, the U.S. had 264 billion barrels of oil remaining when factoring in estimates from undiscovered fields that the industry believed existed, compared to just 212 billion barrels for the Saudis. Fueling that first-place finish were the vast shale resources in places like the Permian Basin, where drillers had unlocked billions of barrels of new oil resources in recent years.

However, a new estimate from Rystad released a few weeks ago puts Saudi Arabia back in the top spot. The Middle Eastern nation now has 276 billion barrels, while the U.S. has 263 billion barrels. That said, the 73-billion-barrel upward revision in Saudi Arabia's oil reserves (after factoring in production) wasn't from the discovery of a monster new oil field. Instead, it was due to a change in the country's tax regime to help its national oil company, Saudi Aramco, which is prepping for an IPO.

Oil pump and pipeline in desert.

Image source: Getty Images.

A regime change

Earlier this year the Saudi Arabian government issued a royal decree that lowered the income tax burden on Saudi Aramco from 85% to 50%. It did so as part of its plan to sell shares of the oil giant in a public offering to raise cash so it can diversify its oil-focused economy. That tax cut will be crucial in helping establish a higher valuation for the company since the market values oil producers on profitability and not just the oil controlled underground.

That said, an additional benefit of the tax cut is that it will give Saudi Aramco more cash to invest in bringing untapped oil supplies to market. Rystad anticipates that "the revised fiscal regime should incentivize more aggressive exploration and development drilling in the country." The oil was there all along, but the company was unlikely to extract, because it lacked the cash resources under the previous tax regime.

Drilling down into the reserve numbers

To understand how a change in taxes can lead to a dramatic revision in estimated reserves, it's important to know how the oil industry defines the different categories of reserves. The industry has four categories for its estimate of oil resources still underground, which it classifies by the level of certainty that those resources can be recovered:

A representation of resource categories.

Image source: U.S. Energy Information Administration.

Proved reserves, according to the Society of Petroleum Engineers, are

those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under current economic conditions, operating methods, and government regulations. 

In other words, this is oil that the industry is highly confident not only exists but can be produced in the near term using existing technology and current pricing. Using this designation, the U.S. has just 28 billion barrels of oil reserves, which is enough to last the country about four years at our current consumption rate. For comparison's sake, Saudi Arabia leads the world in proved reserves with 88 billion barrels.

The next designation, economically recoverable resources (sometimes called probable oil resources), encompasses oil from existing fields that the industry believes it can recover at current oil prices but isn't likely to drill in the near term, due to capital constraints and market need. Many shale producers add this number to their investor presentations to give the market an idea of how much oil they believe they control on their acreage positions. For example, Permian Basin driller Concho Resources (NYSE:CXO) had 720 million barrels of oil equivalent (BOE) of proved reserves at the end of last year. However, Concho Resources estimated that it could produce as much as 8 billion BOE in the future by drilling more than 19,000 wells on its 600,000-net-acre position in the basin. In fact, according to leading Permian Basin driller Pioneer Natural Resources (NYSE:PXD), there could be as much as 120 billion BOE of total recoverable resources remaining in the Permian.

A drilling rig at sunset.

Image source: Getty Images.

The next category is technically recoverable resources (sometimes called contingent recoverable resources), which is oil from unsanctioned projects and discoveries that the industry has the technology to recover but it needs higher oil prices to incentivize investment. For example, in 2004 Chevron (NYSE:CVX) discovered the Rosebank Field in the U.K. sector of the North Sea. The field holds an estimated 240 million BOE of resources, making it one of the largest untapped oil fields in the region. After years of delays, Chevron expected to start developing Rosebank in 2013, but surging costs put that plan on hold, and crashing oil prices in 2014 put it on ice for the time being. Chevron is still working to revive the project with a lower-cost development option but can't book any proved reserves from the field until after it moves forward with the project.

The last two categories drove the bulk of Saudi Arabia's reserve additions. The reasoning is that the reduction in taxes will give Saudi Aramco the capital it needs to speed up development of existing fields, sanction new projects, and explore for additional supplies in the kingdom. For example, while known for its massive onshore oil fields, the country had been conducting deepwater drilling in the Red Sea in recent years and discovered the Al-Haryd oil field there a few years ago. However, it put those efforts on hold in 2015 due to rising costs and lower oil prices. But with more cash to spend on oil development due to the tax break, the company could increase its drilling pace, which would likely lead to additional field extensions and discoveries in the future.

Offshore oil and rig platform on frozen sea at sunrise.

Image source: Getty Images.

Finally, Rystad calculates oil resources that the industry hasn't actually discovered but that it believes exist and that oil companies can produce in the future given the right economics and technical advances. For example, according to the U.S. Geological Survey, 22% of the Earth's undiscovered energy resources lie underneath the Arctic, including an estimated 27 billion barrels of oil in American waters. That's part of the roughly 140 billion barrels of undiscovered oil that Rystad estimates are in the U.S., compared to just 35 billion barrels in Saudi Arabia. It's important to note that there's relatively little certainty that these barrels even exist, let alone are recoverable at future prices and technological advances.

Investor takeaway

While Saudi Arabia reclaimed its crown as the largest holder of the world's estimated oil resources, it did so on a technicality and not due to new discoveries. That's because there's now more certainty that the country will invest the capital needed to find and extract the oil that the industry already had a relatively high confidence exists. These revisions are a reminder to investors that oil estimates can be fluid; they are more art than science as no one knows for sure how much oil is underground until a drilling rig proves its existence.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Chevron. The Motley Fool has a disclosure policy.