Possible Reserves

Possible reserves are additional quantities of petroleum that analysis indicates are less likely to be recovered than probable reserves. They are the lowest-confidence reserve category and form the upper, cumulative 3P estimate when added to proved and probable reserves. They are not simply all oil or gas that might exist underground.

Key Takeaways

• Possible reserves are a petroleum-reserve category tied to discovered accumulations and projects that meet the applicable framework’s commercial criteria.
• The category is incremental: possible reserves are added to proved and probable reserves to produce the cumulative 3P estimate.
• Under the SEC’s probabilistic definition, there must be at least a 10% probability that actual recovery will equal or exceed the entire 3P estimate, not a 10% recovery probability assigned independently to each possible barrel.
• Possible reserves carry more estimation and development uncertainty than probable or proved reserves.
• Companies may use different reporting frameworks, price assumptions, project scopes, and estimation methods, so headline volumes are not automatically comparable.
• A 3P volume is not a forecast of production, cash flow, or value and should not be valued at the same amount per unit as proved developed production without further analysis.

Where Possible Reserves Fit

Reserve reporting separates commerciality from technical uncertainty. Under petroleum frameworks such as the Society of Petroleum Engineers’ Petroleum Resources Management System (PRMS), resources first need to qualify as reserves rather than prospective or contingent resources. The reserves are then categorized by the uncertainty in recoverable quantities.

The cumulative notation is:

These thresholds apply when probabilistic methods are used. Deterministic methods classify quantities using discrete estimates and qualitative standards such as reasonable certainty, as likely as not, or possible but unlikely. Analysts should identify the method rather than force every disclosure into a probability table.

Why the 10% Threshold Is Often Misstated

It is common to see possible reserves described as quantities with a 10% chance of recovery. That shortcut can be misleading. The SEC’s probabilistic test addresses the cumulative 3P estimate:

Suppose an evaluation reports:

• proved reserves: 40 million BOE
• probable reserves: 25 million BOE of additional quantities
• possible reserves: 20 million BOE of additional quantities

Then:

The 20 million BOE possible category is the increment between 2P and 3P. It should not be read as 20 million barrels each carrying an independent 10% probability. Nor does the 3P total mean management expects to produce 85 million BOE.

Worked Example: Effect on a Valuation Multiple

Assume a hypothetical producer has enterprise value of $1.7 billion and reports the reserve estimates above. A simple enterprise-value-to-reserves calculation produces very different results depending on the denominator:

The falling multiple does not make the company cheaper merely because less-certain volumes were added to the denominator. Possible reserves may require more drilling, infrastructure, permits, time, and capital, and some may never be developed. Production profile, commodity mix, operating cost, royalties, taxes, decline rates, ownership, and development timing can matter more than an unadjusted volume multiple.

An EV/2P ratio should therefore be compared with another EV/2P ratio calculated using compatible definitions. Substituting 3P for 2P without changing the label creates a false comparison.

What Can Move Quantities Into or Out of Possible Reserves?

Reserve estimates change as evidence, plans, economics, and project maturity change. Relevant developments can include:

• new wells, seismic data, pressure history, production performance, or reservoir studies;
• improved recovery methods supported by reliable technology;
• changes in development design, well count, timing, infrastructure, or market access;
• revised capital and operating costs;
• commodity-price assumptions required by the reporting framework;
• permits, financing, contractual rights, or final investment approval;
• changes in ownership interests, royalties, production-sharing terms, or license duration; and
• production that removes quantities from the remaining reserve balance.

More favorable prices or better technology do not automatically upgrade a category. The project still has to satisfy all technical, economic, legal, and commercial criteria under the governing framework. Conversely, deterioration in economics, project delay, new reservoir evidence, or loss of development commitment can reduce or reclassify reserves.

Possible Reserves vs. Contingent and Prospective Resources

Calling every uncertain resource a possible reserve overstates project maturity. A volume can have attractive geology yet remain contingent because financing, market access, approvals, technology, or a development decision is missing.

Disclosure and Comparability

The SEC permits, but does not require, U.S. reporting companies to disclose probable and possible oil and gas reserves. When a company voluntarily discloses those categories, the disclosure should be read with the relative risks, estimation method, price assumptions, effective date, geographic concentration, and preparer or auditor information.

Other jurisdictions may require or permit different disclosures. PRMS is an industry classification system, while securities regulators and stock exchanges impose their own rules. Terms that look similar can differ in scope, pricing, commerciality, entitlement, aggregation, and disclosure requirements.

Before comparing two reserve statements, verify:

1. the reporting framework and effective date;
2. whether estimates are deterministic or probabilistic;
3. whether volumes are gross, net, working-interest, royalty-interest, or entitlement quantities;
4. whether the figures are 1P, 2P, 3P, or incremental categories;
5. commodity type and BOE conversion basis;
6. price and cost assumptions;
7. developed versus undeveloped status;
8. project approvals, infrastructure, permits, and financing;
9. geographic, political, contractual, and environmental risks; and
10. reconciliation with production, acquisitions, divestitures, discoveries, extensions, and revisions.

Common Mistakes and Risks

• Treating possible reserves as a synonym for undiscovered resources.
• Saying each possible barrel has exactly a 10% chance of recovery.
• Adding proved, probable, and possible estimates that were already presented cumulatively.
• Comparing a company’s 3P estimate with another company’s 1P or 2P estimate.
• Valuing all categories at one price per BOE despite different development costs, timing, and risk.
• Assuming a reserve estimate guarantees production or profitability.
• Ignoring the difference between proved developed and proved undeveloped reserves.
• Mixing petroleum definitions with mining, geothermal, or other resource codes without checking the applicable framework.
• Reading reserve growth without separating discoveries, revisions, acquisitions, price effects, and production.

Authoritative Sources

• SEC: Modernization of Oil and Gas Reporting provides the final rule and supporting materials for proved, probable, and possible reserve definitions.
• SEC: Oil and Gas Reporting Modernization Compliance Guide summarizes disclosure requirements and explains that probable and possible reserve disclosure is permitted but not required.
• SEC: Oil and Gas Rules Compliance and Disclosure Interpretations addresses practical classification and disclosure questions.
• Society of Petroleum Engineers: 2018 PRMS update explains the industry framework and its treatment of commerciality and uncertainty.

Related Terms

• Proven Reserves: Higher-confidence reserve quantities, commonly called proved reserves in SEC and PRMS terminology.
• Natural Resources: Broader physical-resource category that includes quantities not classified as commercial reserves.
• Organic Reserve Replacement: Reserve additions through exploration, development, extensions, revisions, or improved recovery rather than acquisitions.
• Reserve Replacement Ratio: Compares reserve additions with production using a stated reserve definition.
• EV/2P Ratio: Enterprise-value multiple based on cumulative proved plus probable reserves.
• Production Sharing Agreement: Contract that can affect a company’s entitlement to reported production and reserves.

FAQs

This article provides financial education, not investment, geological, engineering, reserves-audit, accounting, securities-law, or valuation advice. Use the reporting framework and qualified professional evidence applicable to the company, project, jurisdiction, and effective date.