What Are Possible Reserves?
Possible reserves is one of the three classifications set out by the Society of Petroleum Engineers (SPE) for assessing the quality of a given oil reserve. SPE is a professional organization that was created so that oil and natural gas exploration and production (E&P) professionals could exchange technical knowledge and best practices.
Possible reserves refers to oil reserves for which the estimated likelihood of successful extraction is between 10% and 50%—assuming that existing equipment is used and the extraction is carried out under typical conditions.
- Possible reserves are oil and gas reserves whose probability of successful extraction is between 10% and 50%.
- Possible reserves is one of three main classifications put forward by the Society of Petroleum Engineers; these classifications are widely used by oil industry professionals and investors.
- Because of their relatively low quality, possible reserves are especially vulnerable to changes in the price of oil and may be rendered uneconomical if oil prices decline sufficiently.
How Possible Reserves Work
In order to help companies and investors assess the likelihood of successfully extracting oil from a particular region, engineers distinguish between proven and unproven reserves of petroleum. Unproven reserves are those with a high degree of uncertainty—where chances of success are less than 90%. Proven reserves, on the other hand, are the most valuable and sought-after, offering odds of 90% or more.
When deciding how to classify a given oil reserve, engineers will also take into account a variety of factors, including the size of the reserve, the equipment available to the company for its 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 in affecting 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 (EOR) 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
Max is the owner of an oil extraction company that is currently reviewing the engineering reports describing his company’s proven, probable, and possible oil reserves. In the company’s current portfolio of 100 wells, the reports indicate that 20 are proven reserves with at least 90% probability of successful extraction; 40 are probable reserves with a 50% to 90% probability; 40 are possible reserves with probability ranging between 10% and 50%.
Max understands that one of the principal factors affecting the economic viability of these 100 wells is the future development in the price of oil. He 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, Max estimates that many of his possible reserves may be rendered unprofitable to operate. For this reason, he decides to spend his limited capital expenditures (CapEx) budget on ensuring the timely extraction of his proven and probable reserves while delaying the development of his possible reserves until there are signs of more favorable prospects in regard to the price of oil.