What Are Possible Reserves?
Possible reserves is one of three classifications set by the Society of Petroleum Engineers (SPE) for assessing the likelihood that a known accumulation of oil can be commercially extracted. Possible reserves refers to unproved reserves for which the likelihood of successful extraction is at least 10%—assuming existing equipment is used and the extraction is carried out under typical conditions.
The SPE is a professional organization that was created so that oil and natural gas exploration and production professionals could exchange technical knowledge and best practices.
- Possible reserves are unproved oil deposits where the probability of successful extraction is at least 10%.
- By contrast, proved reserves offer a 90% probability of successful extraction, while for probable reserves the probability is at least 50%.
- The Society of Petroleum Engineers sets these classifications.
How Possible Reserves Work
To help companies and investors assess the likelihood of successfully extracting oil from a particular deposit, engineers distinguish between proven and unproven reserves. Proved reserves are the most valuable and sought-after deposits, as the odds of successful extraction are 90% or greater. Probable reserves fall into the category of unproven reserves and offer at least a 50% chance of successful extraction. Likewise, possible reserves are also unproven reserves, because they offer just a 10% chance of successful extraction.
When deciding how to classify a given oil reserve, engineers will take into account factors such as the size of the reserve, the equipment available for extraction, the operational break-even price of the project, and any regulatory or contractual considerations that might affect the prospects of the reserve being fully exploited.
The price of oil and natural gas is another major consideration impacting the likelihood that a reserve will be fully utilized, as falling commodity prices might cause the project to become uneconomical. This is particularly true once the inexpensive primary recovery methods have been utilized and the company has transitioned into more costly enhanced oil recovery techniques. Under these circumstances, even a relatively small decline in commodity prices might force the company to abandon the project.
Given the myriad of geological, environmental, political, and economic factors affecting the viability of oil and gas extraction projects, investors and analysts understand that the classifications assigned to oil reserves by engineers are at best a close approximation rather than an exact science. Other factors—such as the ongoing development of new technologies used in the extraction process—can also have a substantial effect on the viability of a given oil reserve.
Example of Possible Reserves
Sally owns an oil extraction company that is currently reviewing engineering reports describing her proven, probable, and possible oil reserves. The company holds 100 wells. Of these, the reports indicate 20 are proven reserves with at least 90% probability of successful extraction; 40 are probable reserves with at least a 50% probability of successful extraction; and 40 are possible reserves with at least a 10% probability of successful extraction.
Sally understands that one of the principal factors affecting the economic viability of these 100 wells is the future development in the price of oil. She therefore carefully reviews reports by various economists that seek to forecast the likely trajectory of oil prices over the next 12 months.
Unfortunately, the reports indicate a high likelihood for oil prices to decline substantially over this timeframe. If this price decline does in fact occur, Sally estimates that many of her possible reserves may be rendered unprofitable to operate. For this reason, she decides to spend her limited capital expenditure budget on ensuring the timely extraction of her proven and probable reserves while delaying the development of her possible reserves until there are signs of more favorable prospects in regard to the price of oil.