Probable Reserves (2P)

Probable Reserves (2P) are a crucial measure used in the Oil and Gas Industry to estimate the quantity of recoverable resources from a known accumulation. Think of them as the next level up in confidence from the most certain category. Specifically, a reserve is classified as “probable” if there is at least a 50% chance that the oil or gas can be commercially recovered under current economic conditions, operating methods, and government regulations. The term '2P' itself is a shorthand that combines the most certain reserves, known as Proved Reserves (1P), with these probable reserves. So, when an analyst talks about a company's 2P reserves, they are referring to the total of Proved plus Probable reserves. This figure provides a more optimistic, yet still reasonably likely, estimate of a company's total recoverable assets compared to looking at proved reserves alone. For investors, it's a key metric for gauging the potential scale and future production capacity of an energy company.

To truly understand 2P, it helps to see where it fits within the broader classification system for oil and gas resources. This system is all about probability and confidence.

• 1P (Proved Reserves): These are the crown jewels. They have a high degree of certainty—at least a 90% probability (P90)—of being recovered. They are the most conservative and reliable estimate, backed by strong geological and engineering data. Think of this as the money that's almost in the bank.
• 2P (Proved + Probable Reserves): This is the sum of 1P reserves and additional “probable” reserves. The total amount has at least a 50% probability (P50) of being recovered. This is often considered the most realistic or “best estimate” scenario for a company's reserves.
• 3P (Proved + Probable + Possible Reserves): This is the most optimistic category. It includes 2P reserves plus Possible Reserves (3P), which have only a low degree of certainty—typically at least a 10% probability (P10)—of being recovered. This is the “what if everything goes perfectly?” scenario.

The key takeaway is that 2P is not just the probable portion; it is the cumulative total of Proved and Probable.

For a Value Investing practitioner, raw numbers are just the start of the story. Understanding the quality and likelihood of those numbers is what separates a savvy investment from a speculative bet.

While the legendary Benjamin Graham would have likely stuck to the most conservative 1P figures to calculate a company's value, relying solely on them can be overly pessimistic. It might cause you to overlook a well-managed company that is excellent at exploring and developing new assets. Probable (2P) reserves often represent the sweet spot between rock-solid certainty and future growth potential. They offer a more complete picture of a company's operational capabilities and asset base. A company consistently converting its probable reserves into proved reserves is a sign of a competent management team and high-quality assets—two things a value investor loves to see.

Because probable reserves are estimates, they demand a healthy dose of skepticism and due diligence. They aren't guaranteed. Here's what to look for when you see 2P figures in an annual report:

• Historical Conversion Rate: How good is the company at turning 'probable' into 'proved'? Dig through past reports. A strong track record of successful conversion adds significant weight to the current 2P numbers. A poor record is a major red flag.
• Economic Assumptions: Recovery is not just about geology; it's about economics. The “probability” is tied to the prevailing Oil and Gas Prices. Reserves that are probable at $100/barrel might become completely uneconomical (and thus, not reserves at all) at $40/barrel. Check the price assumptions the company used in its report.
• Independent Audits: Are the reserve estimates audited by a reputable, independent engineering firm? Self-reported numbers are one thing, but a third-party verification provides a crucial layer of confidence and objectivity.

Imagine you are comparing two junior oil producers:

1. DrillCo A: Reports 100 million barrels of 1P reserves and an additional 80 million barrels of probable reserves. Its total 2P is 180 million barrels (100 + 80).
2. Gusher Inc.: Reports 150 million barrels of 1P reserves and an additional 10 million barrels of probable reserves. Its total 2P is 160 million barrels (150 + 10).

On a 1P basis, Gusher Inc. looks like the safer, more valuable company. However, DrillCo A has massive upside potential if it can successfully develop its probable reserves. The savvy value investor would then dig deeper. Does DrillCo A have a history of converting reserves? Is its management team known for its technical expertise? If so, the market might be undervaluing DrillCo A by focusing too heavily on its 1P number. By analyzing the 2P reserves, you might uncover a hidden opportunity with a greater Margin of Safety than is immediately apparent.