What are 3P Oil & Gas Reserves and Why Are They

Important?
Posted by Hannah Mumby

Dec 6, 2013 5:42:00 AM

What Are 3P Reserves?

Understanding a companys recoverable oil & gas reserves is important when trying to establish
their present and future value, but to do this you first need to understand the reserve information
that is being provided.

There are 3 main reserve categories under the Society of Petroleum Engineers (SPE) definition:
proved; probable and possible reserves.

For an oil or gas deposit to be classified as reserves, you first need to establish technical and
commercial certainty of extraction using existing technology. Once this has been established, the
degree of this certainty is then decided, breaking reserves down into 3 distinct categories:

Proved Reserves, 90% Certainty of Commercial Extraction

Probable Reserves, 50% Certainty of Commercial Extraction

Possible Reserves, 10% Certainty of Commercial Extraction

3P reserves refers to the combination of all three of these totals, i.e. Proved plus Probable plus
Possible.

Anything below possible, i.e. less than a 10% certainty of being able to commercially extract
the oil or gas with currently available technology, will fall into 'contingent resources' or
'recoverable resources' categories. See the below diagram of the SPE definitions for further
detail.

Why Do Only Some Companies Report 3P Reserves?

Proved (1P) and Proved plus Probable (2P) reserves are commonly used throughout the oil and
gas world, but 3P reserve information, Proved plus Probable plus Possible, is relatively scarce.
This is due to basic reporting requirements set by governing bodies. In Canada, for example,
companies have to report proved (1P) and proved plus probable (2P) reserves under NI-51-101
regulations, but 3P will only be reported if the company chooses to do so, as there is no legal
obligation. This means that the cost of having oil and gas deposits evaluated by reserves
engineers for 3P reserves can be weighed up against the overall benefit/potential investment a
company will get from publishing the findings, to see if it is worth carrying out at all.
Therefore, many companies will not report their full spectrum of reserves under all
classifications to the investment community unless they see a benefit of doing so. This balance
between cost and benefits is also a reason why many companies will only give 3P reserves for
certain fields, focus areas, or prized assets paying for assessments of deposits you arent going
to develop any time soon is not required.

Why are they important?

Despite this lack of legal obligation and the extra costs involved causing many companies to opt
out of 3P reserves disclosure, and the fact that reserves engineers are only between 10%-49%
certain of being able to extract them, Evaluate Energy and CanOils still feel that it is important
information for our clients to see.

We are now seeing more and more companies beginning to report 3P reserves, especially from
the junior end of the company spectrum. Junior companies will typically buy into prospective
fields, spend their first few years in existence trying to prove commerciality, and then either get
acquired by or merge with a bigger player, or are joined in their commercially viable oil or gas
project by a bigger player who typically takes on most of the operating costs known as a farm-
in partner.

In the junior companies early days of evaluating an asset, there isnt a lot of money going
around to pay for extensive exploration work. So typically, only a high level overview is
possible, which results in little or no proved or probable reserves being booked, but maybe a high
amount of possible reserves. 3P reserves are therefore a great barometer, despite their 10%
certainty rating, to assess the potential of certain assets or entire companies if they are at these
early stages of development.

The TSX-V exchange in Canada and the AIM exchange in London have many companies that fit
this description, and 3P reserves and the hundreds of metrics Evaluate Energy and CanOils
provide alongside them will be vital to any analysis of these emerging oil and gas players.

SPE Oil & Gas Reserves and Resources Definitions

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with over a decade of historical financial and operating data, and extensive M&A, Assets and
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