What is 'Probable Reserves'

Probable reserves are oil reserves calculated to be at least 50 percent likely to be recovered by drilling. Recovery probabilities help estimate the present and future value of assets owned or operated by firms in the oil and gas sector.

BREAKING DOWN 'Probable Reserves'

Probable reserves make up a portion of the oil present in an area surveyed by an oil and gas exploration firm. Firms use the results of a seismic survey of a piece of land to determine the amount of oil available beneath that land. The companies then categorize the amount of oil based upon an estimate of the relative ease or difficulty of getting the oil or gas out of the ground.

Any combination of regulatory, economic and technological challenges could reduce the likelihood that a firm can profitably extract the reserve. When firms decide that those factors combine to give them between a 50-percent and an 89-percent chance of successfully removing the oil or gas, they categorize the reserves as probable.

For example, reserves may appear to be a good fit with an established commercial recovery method that a firm does not currently have in use on the site, or had not initially planned to use. In that case, the firm would classify the reserves as probable, since their recovery would depend on the planning and execution of a new project, which may or may not be economically viable. In this case, even though the reserves would almost certainly be available to the company, the economics involved in extracting them might reasonably lead the firm to decide not to bother with the extraction.

Probable, Proven, and Possible Reserves

The Society of Petroleum Engineers recognizes three main categories of oil reserves based upon how likely an exploration and drilling company believes they are to be extracted.

  1. Possible reserves lie at the low end of the scale, with odds of commercial extraction under 50-percent, but higher than 10 percent.
  2. Proved reserves sit at the top of the scale, at a 90-percent or above likelihood of commercial extraction.
  3. Probable reserves are those with the likelihood of recovery for between possible and proved reserves, or over 50-percent but under 90-percent.

These categories help experts determine the fair market value (FMV) of a company’s reserves. FMV is the price that an item would sell for on the open market. The process involves the application of a discount rate to expected cash flow from reserves based on the category into which they fall.

Fair market valuations can help a company for planning and accounting purposes, but rules about what metrics oil companies must disclose to their investors vary by country. Most major oil and gas firms report proven reserves to help investors and analysts model future returns. Not all public companies necessarily communicate probable reserves, however.

Among companies that do report probable reserves, the most common formulation uses a 2P valuation, which includes both proved and probable reserves. This 2P value is typically understood to be a best-case scenario for recovered liquids from the firm’s portfolio. Some companies also use a 3P equation, which uses the sum of proved, probable and possible reserves. Because of the low likelihood that some portion of a 3P estimate will get recovered, investors can generally consider it a high-end estimate of likely recoveries.

  1. Recoverable Reserves

    Recoverable reserves are oil and gas reserves that are economically ...
  2. Oil Reserves

    Oil reserves are an estimate of the amount of crude oil located ...
  3. Proved Reserves

    Proved reserves is a classification that denotes hydrocarbon ...
  4. Lagged Reserves

    Lagged Reserves is a method of bank reserve calculation whereby ...
  5. Global Strategic Petroleum Reserves ...

    Global Strategic Petroleum Reserves (GSPR) are stocks of crude ...
  6. Primary Reserves

    Primary reserves are the minimum amount of cash under U.S. federal ...
Related Articles
  1. Investing

    5 biggest risks faced by oil and gas companies

    Learn about factors to consider, such as political and geological risks, before investing in gas and oil stocks.
  2. Investing

    The Strategic Oil Reserves Explained

    Strategic oil reserves are one of the least known and least understood national security measures in the United States.
  3. Investing

    Natural Gas Industry: An Investment Guide

    Investors looking into this industry are faced with a confusing amount of information. We explain the important concepts and terms.
  4. Investing

    Want To Start Trading Oil? Understand The Basics First

    The overall economics of oil extraction is that there is money in it - both for extraction companies and their investors.
  5. Investing

    Top 5 Oil-Producing Countries In 2011

    The recent spike in the price of oil has once again drawn our attention to the importance of a ready supply of oil to our modern economy.
  6. Tech

    Tech Startups Eye the Oil Industry

    Although the oil and gas industries have plummeted, high tech companies and investors see promise.
  7. Investing

    Peak Oil: What To Do When The Wells Run Dry

    Find out how to invest and protect your investments in this slippery sector.
  8. Investing

    Investing in Oil Stocks vs. Oil Companies: What's the Difference? (USO)

    Learn about the major advantages, disadvantages and risks of investing in oil companies and investing in oil and gas exploration companies.
  9. Investing

    How Oil Prices Impact the U.S. Economy

    Now that the United States has increased oil production through shale oil and fracking, low oil prices can harm the U.S. oil industry and its workers.
  1. What is the difference between proven and probable reserves in the oil and gas sector?

    Learn how those in the oil and gas sector classify oil reserves and the specific differences between proven and probable ... Read Answer >>
  2. What happens if the Federal Reserve lowers the reserve ratio?

    Learn about the Federal Reserve's monetary policy and the tools it uses to control it. Understand what happens if the Federal ... Read Answer >>
  3. What percentage of the global economy is comprised of the oil & gas drilling sector?

    Read about a rising industry that already composes as much as one-twentieth of total global economic output: the oil & gas ... Read Answer >>
  4. Why did oil prices drop so much in 2014?

    Learn the roles that decreased global demand, new supply sources in North America, and actions taken by Saudi Arabia played ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center