Possible reserves

What Are Possible Reserves?

Possible reserves represent the least certain category of unproved hydrocarbons that geological and engineering data suggest may be recoverable from known accumulations. Within the broader field of resource classification, these estimates carry a higher degree of uncertainty compared to proved or probable reserves. When probabilistic methods are used for estimation, there should be at least a 10 percent probability that the actual quantities recovered will equal or exceed the sum of estimated proved, probable, and possible reserves. This implies a significant level of technical and commercial uncertainty regarding their future extraction²⁹, ³⁰.

Possible reserves are crucial for long-term strategic planning in the oil and gas and mining industries, even if they are not always included in a company's financial disclosures for public reporting due to their speculative nature²⁸. Their assessment provides a comprehensive view of a company's potential future production capabilities, contributing to overall valuation and investment considerations.

History and Origin

The concept of classifying petroleum and mineral reserves into categories like proved, probable, and possible evolved to provide a standardized framework for estimating subsurface resources. Early guidance on reserve estimation began in the 1930s, primarily focusing on "Proved Reserves." As the industry matured and estimation techniques became more sophisticated, the need for a more granular classification system, reflecting varying degrees of certainty, became apparent. Organizations such as the Society of Petroleum Engineers (SPE) and the World Petroleum Council (WPC) played a pivotal role in developing these standards. In 1997, SPE and WPC jointly released a unified set of definitions, followed by the comprehensive Petroleum Resources Management System (PRMS) in 2007, which codified the definitions for proved, probable, and possible reserves, among other resource classes²⁷. This system is now widely accepted internationally for petroleum resource management²⁶.

Before 2008, the U.S. Securities and Exchange Commission (SEC) generally prohibited public companies from disclosing probable or possible reserves in their financial filings to avoid misleading investors. However, with the "Modernization of Oil and Gas Reporting Requirements" adopted by the SEC in December 2008, companies were permitted, though not required, to disclose these less certain reserve categories, subject to specific criteria and clear disclosure of associated uncertainties²⁴, ²⁵. This shift acknowledged the internal use of such estimates for business planning and portfolio management²³.

Key Takeaways

• Possible reserves are the least certain category of estimated unproved resources.
• They are based on geological and engineering data that suggest potential recoverability but with significant uncertainty.
• Under probabilistic methods, there is typically at least a 10% probability that actual recovery will meet or exceed the total of proved, probable, and possible reserves.
• While not always required for public disclosure, possible reserves are vital for internal long-term planning, risk assessment, and strategic decision-making in resource-based industries.
• Their estimation is subject to numerous uncertainties, including geological complexity, technological advancements, and future commodity prices.

Interpreting Possible Reserves

Interpreting possible reserves requires a clear understanding of the inherent uncertainties and the probabilistic nature of their estimation. Unlike proved reserves, which are characterized by a high degree of certainty (typically 90% probability of recovery), possible reserves are at the speculative end of the spectrum, with a much lower probability of commercial extraction²¹, ²². They represent volumes that "might" be recovered, often from unproven extensions of known accumulations or from formations that appear hydrocarbon-bearing but lack definitive production tests.

Industry professionals and investors use possible reserves as an indicator of potential upside or long-term growth opportunities, but they are not considered a reliable basis for current cash flow projections or short-term capital expenditure decisions. Instead, they inform strategic considerations such as long-range exploration planning, technological development needs, and future asset acquisitions. A high volume of possible reserves might suggest a company's future growth potential, but it also implies significant future investment and successful de-risking through additional drilling and appraisal work to upgrade their classification²⁰.

Hypothetical Example

Imagine "Greenfield Energy Co." is an exploration and production firm that has drilled an exploratory well in a new frontier basin. The well encountered a promising hydrocarbon-bearing formation, but due to limited data and complex subsurface geology, only a portion of the discovered resource can be classified as proved or probable reserves.

Based on detailed seismic interpretations, offsets from similar geological structures in analogous basins, and preliminary rock and fluid analyses, the company's geologists and engineers estimate the following:

• Proved Reserves: 50 million barrels of crude oil
• Probable Reserves: An additional 30 million barrels
• Possible Reserves: An additional 20 million barrels

The 20 million barrels categorized as possible reserves represent hydrocarbons that exist in less defined areas of the discovery, such as potential extensions beyond the currently delineated probable area, or in deeper, riskier zones. The estimation for these possible reserves might be based on extrapolations from existing data with greater geological and reservoir performance uncertainty. For instance, the possible reserves could include volumes from a fault block that appears separated from the main accumulation, where further appraisal drilling would be needed to confirm continuity and commerciality. This classification allows Greenfield Energy Co. to acknowledge the full potential of the discovery while transparently conveying the varying levels of certainty to its internal stakeholders.

Practical Applications

Possible reserves, while highly uncertain, serve several practical applications in the natural resource sector:

• Long-Term Strategic Planning: Companies use possible reserves to assess their long-term growth prospects and future portfolio potential. This informs decisions about future capital allocation for exploration and development programs beyond the immediate five-year outlook.
• Exploration Budgeting: The presence of significant possible reserves can justify continued exploration efforts and further appraisal drilling in a given area, as they represent the ultimate upside if conditions improve or new data emerges.
• Mergers and Acquisitions (M&A): During due diligence for asset acquisitions or corporate takeovers, potential buyers consider all categories of reserves, including possible, to gauge the full resource base and future potential of the target company or asset. While proved reserves drive immediate value, possible reserves can influence the strategic rationale and long-term valuation of a deal.
• Technological Advancement Justification: The existence of possible reserves can spur investment in new technologies for enhanced recovery or unconventional resource extraction. For instance, if significant possible reserves exist in tight formations, it might incentivize the development of advanced drilling and completion techniques like hydraulic fracturing to convert them into commercial reserves.
• Government Resource Inventories: National and international bodies, such as the U.S. Department of the Interior, track all categories of resources, including possible, to inform national energy policy and assess overall resource endowment¹⁹. These broad estimates contribute to understanding a nation's energy security and resource availability over extended periods.

Limitations and Criticisms

The classification and reliance on possible reserves come with significant limitations and have been subject to various criticisms:

• High Uncertainty: By definition, possible reserves are associated with the lowest level of certainty regarding their economic recoverability¹⁸. This high degree of uncertainty makes them inherently speculative and can lead to significant discrepancies between estimates and actual recovery¹⁷. Factors such as geological complexity, limited geological data, and future price volatility contribute to this uncertainty¹⁵, ¹⁶.
• Lack of Commerciality: Possible reserves often lack demonstrated economic viability under current conditions. Their commerciality may hinge on significant improvements in technology, substantial increases in petroleum prices, or favorable changes in regulatory environments, none of which are guaranteed¹⁴.
• Potential for Misinterpretation: Despite industry standards and regulatory guidance, the term "possible" can be misinterpreted by less informed stakeholders, who might attribute a higher probability of recovery to these volumes than is warranted. This can lead to inflated expectations regarding a company's asset base or future earnings potential.
• Non-Standardized Reporting (Historically/Optional): While the SEC now permits their disclosure, it is not mandatory¹³. This optionality means that public reporting of possible reserves can vary widely among companies, making direct comparisons difficult and potentially creating a "credibility gap" where reported figures may not be uniformly understood or comparable across the industry¹².
• Subjectivity in Estimation: The estimation of possible reserves often involves a greater degree of subjective judgment from evaluators due to sparser data and greater reliance on geological analogies or theoretical models¹¹. This subjectivity can introduce bias and further increase the variability of estimates. The challenge of incorporating and communicating these uncertainties effectively remains a significant hurdle for the industry¹⁰.

Possible Reserves vs. Probable Reserves

The distinction between possible reserves and probable reserves lies in their respective levels of certainty of recovery, forming a spectrum of unproved resources. Both are categories of "unproved reserves," meaning they are less certain to be recovered than proved reserves⁹.

Essentially, probable reserves are considered "more likely than not" to be recoverable, while possible reserves are deemed "less likely to be recoverable" than probable reserves⁴. This tiered approach allows companies to assess their resource base with varying degrees of confidence, from the highly certain proved reserves, through the moderately certain probable, to the most speculative possible reserves.

FAQs

Q1: Are possible reserves reported in a company's financial statements?

No, public companies in the U.S. are generally permitted but not required to disclose possible reserves in their financial statements filed with the SEC. If disclosed, they must clearly articulate the uncertainties involved and cannot include a monetary value³. The SEC’s focus for mandatory disclosure remains on proved reserves due to their higher certainty.

Q2: How are possible reserves estimated?

Possible reserves are estimated using geological data (e.g., seismic surveys, core samples) and engineering data (e.g., well logs, pressure data). These data are analyzed to extrapolate the potential presence and recoverability of hydrocarbons beyond areas classified as proved or probable. Probabilistic methods are frequently employed, where the estimate implies a low statistical probability of being realized.
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Q3: Why are possible reserves important if they are so uncertain?

Despite their uncertainty, possible reserves are vital for long-term strategic planning, particularly in the oil and gas and mining industries. They help companies understand their full resource potential, inform future exploration strategies, justify investment in new technologies, and provide context for potential future growth that could be realized with further appraisal or improved economic conditions.¹