Possible Reserves (3P)

Possible Reserves (also known as 3P Reserves) represent the most speculative category of an oil and gas company's potential resources. According to the industry-standard `Petroleum Resources Management System (PRMS)`, these are quantities of oil and gas that, based on available geological and engineering data, are thought to have at least a 10% probability of being commercially recoverable. Think of it as the outer frontier of what a company might be sitting on. While Proved Reserves (1P) are the assets you can practically take to the bank, and Probable Reserves (2P) are highly likely additions, Possible Reserves are the long shots. They are identified from less conclusive data and often depend on significant future technological advancements or favorable price changes to become economically viable. For investors, they are a double-edged sword: a potential source of massive future growth, but also a category filled with uncertainty that may never materialize into actual production.

To understand Possible Reserves, you need to see where they fit in the grand scheme of resource classification. This system helps investors gauge the level of certainty behind a company's claimed assets.

• Proved Reserves (1P): This is the gold standard. These reserves have a high degree of certainty (typically a 90% or greater probability) of being recovered under existing economic and operating conditions. When the `SEC` (U.S. Securities and Exchange Commission) requires companies to report their reserves, this is the number they focus on. It’s the oil you know is in the barrel.
• Probable Reserves (2P): This is the next level down. These reserves are not yet “proved” but are more likely than not to be recoverable, with a probability of 50% or more. Combined with Proved reserves, they form the 2P figure (Proved + Probable). It’s the oil you’re pretty sure you can get into the barrel.
• Possible Reserves (3P): This is the most speculative tier. As we've seen, there's only a “possible” chance (10% or greater probability) they can be recovered. The full 3P figure is the sum of Proved + Probable + Possible reserves, representing the most optimistic estimate of a company's holdings. It's the oil you think might exist in the field, but you'll need a lot of luck and hard work to ever get it out.

Imagine you're baking a cake.

• 1P (Proved): The flour you've already measured and have in the mixing bowl.
• 2P (Probable): The extra bag of flour you know is in your pantry.
• 3P (Possible): The flour your neighbor might have and be willing to lend you if you ask nicely. You can't count on it for your recipe, but it's a potential upside!

From a `Value Investing` perspective, focusing on what is certain and paying a fair price for it is paramount. So, how do these speculative “possible” assets fit in?

Because official filings and most analyst valuations heavily emphasize 1P reserves, a company's 3P reserves can sometimes fly under the radar. A savvy investor might find a company trading at a price that reflects only its Proved reserves but which also possesses a vast amount of Possible reserves in a politically stable region. If that company has a stellar track record of converting its “possible” finds into “probable” and “proved” assets, its 3P number could be a hint of enormous, unappreciated long-term potential. However, the reverse is also true. Companies can use large 3P figures to paint an overly optimistic picture of their future. Without a clear and plausible path to production, these reserves are just numbers on a page. Relying on them for your investment thesis is a recipe for disaster, as it completely erodes your `** Does this management team have a history of successfully upgrading reserves` over several years.

• Technology & Economics: What specific technological breakthroughs or price increases are needed to make these reserves `commercial`? Are they realistic?
• Location: Are the reserves in a stable country with a clear rule of law, or are they located somewhere with significant geopolitical risk?

Possible Reserves (3P) are the “what-ifs” of the `Oil and Gas Industry`. They represent the highest-risk, highest-potential-reward slice of a company's asset base. For the prudent value investor, they should never be the primary reason to buy a stock. Instead, view them as a free lottery ticket that comes with an otherwise solid investment built on a foundation of strong Proved (1P) and Probable (2P) reserves. If a company looks cheap based on its 1P assets alone and also happens to have a promising 3P portfolio, you might just have found a hidden gem.