Title: 3P Oil Reserves — what they are, how to read them, and a simple worked example
Definition
– 3P oil reserves = proven + probable + possible reserves. It is an aggregate, optimistic inventory that sums the oil volumes a company estimates it could ultimately recover.
– Proven reserves (also written P90) are the quantities with a high confidence of recovery — industry shorthand implies about a 90% probability of being produced.
– Probable reserves (P50) are less certain — roughly a 50% chance of being produced.
– Possible reserves (P10) are the most uncertain — commonly interpreted as around a 10% chance of being produced.
Why 3P matters (short)
– 3P shows a fuller picture of a company’s resource base than proven reserves alone. It can reveal upside potential from fields not yet fully appraised or developed.
– It is an optimistic metric: possible reserves can materially inflate headline reserve numbers because they include volumes that are not yet proven economically or technically recoverable.
How reserve categories differ (plain language)
– Proven = like a fish already landed. Very likely you have it.
– Probable = like a fish hooked but not yet on deck. Good chance, but not certain.
– Possible = like knowing fish are in the river somewhere. You may get them — or you may not.
How companies report 3P
– Many oil and gas firms publish an annual reserve statement (an inventory-style update) that may include proven, probable, and possible reserves. However, reporting 3P is not legally required in many jurisdictions.
– Smaller exploration firms sometimes highlight 3P to show upside and attract buyers or capital; the inclusion of possible reserves can make totals appear much larger than proven-only figures.
– Independent reservoir consultants (for example, DeGolyer and MacNaughton; Miller and Lents) frequently produce third-party assessments to add credibility.
Reclassification can move numbers quickly
– Reserve totals can change not only from new discoveries but also from movements between categories. For example, improved extraction technology or higher commodity prices can convert probable reserves into proven reserves, producing sudden increases in the proven line without a new well.
– Conversely, downgrades (e.g., poorer-than-expected production or lower prices) can shift volumes out of proven status.
Simple numeric example (worked)
Assume a company reports:
– Proven = 100 million barrels (P90)
– Probable = 50 million barrels (P50)
– Possible = 30 million barrels (P10)
Step 1 — 3P total:
3P = proven + probable + possible = 100 + 50 + 30 = 180 million barrels.
Step 2 — a simple risk-weighted expected recovery (assumes P90 ≈ 90%, P50 ≈ 50%, P10 ≈ 10%; this is a simplification for illustration):
Expected = 0.90×100 + 0.50×50 + 0.10×30
Expected = 90 + 25 + 3 = 118 million barrels.
Interpretation: The 3P headline is 180 million bbl (optimistic inventory). A naive probability-weighted expectation under these assumptions is 118 million bbl. Both numbers can be useful — the first for upside potential, the second for a more conservative expected outcome. Note: real-world probabilistic modeling is more complex and uses full probability distributions and economic scenarios.
Checklist for evaluating reported 3P reserves
– Classification breakdown: confirm volumes for proven, probable, possible separately (don’t rely on 3P headline alone).
– Independent verification: check whether a reputable independent auditor (name and report) assessed the numbers.
– Date and assumptions: note the reporting date and commodity price, cost, and technology assumptions used.
– Economic vs. technical recoverability: are reported volumes constrained by current economics or only geological/engineering factors?
– Trend drivers: identify whether changes since prior reports came from new drilling, reclassification, price/technology shifts, or revisions to estimates.
– Disclosure completeness: look for maps, well logs, and sensitivity analyses when available.
Practical notes and assumptions
– The P90/P50/P10 labels are shorthand for probabilistic confidence levels: P90 represents a volume expected to be exceeded with 90% probability, P50 with 50% probability, and P10 with 10% probability. These are commonly used industry conventions but the exact meaning can vary by report.
– Economic recoverability depends on oil prices, fiscal terms, and technology. A reserve classified as possible today could remain unrecoverable if prices or costs change.
– Independent consultant reports improve reliability but don’t eliminate uncertainty.
Further reading (reputable sources)
– Investopedia — 3P (Proven, Probable, Possible) Reserves: https://www.investopedia.com/terms/1/3p.asp
– U.S. Energy Information Administration (EIA) — U.S. Crude Oil, Natural Gas Proved Reserves: https://www.eia.gov/naturalgas/crudeoilreserves/
– DeGolyer and MacNaughton — company overview (consulting firm referenced for independent reserve assessments): https://www.demac.com
– Miller and Lents — company overview (reservoir evaluation services): https://www.millerandlents.com
Educational disclaimer
This explainer is for educational purposes only. It is not personalized investment advice or a recommendation to buy or sell securities. Always conduct your own due diligence and, where appropriate, consult a qualified professional before making investment decisions.