Proved and probable reserves

Reserves are the asset of an exploration and production company, and they are reported in confidence bands rather than as one number. Proved, written 1P, is the volume expected to be recovered with high confidence. Adding probable gives 2P, volumes judged more likely than not to be recovered. Adding possible gives 3P, which is a statement about the resource base rather than a valuation input.

European and UK practice usually values on 2P, on the reasoning that probable volumes are more likely than not and excluding them systematically understates the asset. US listed filers report against proved reserves under SEC rules, so a US peer's reserve base can look smaller for a disclosure reason rather than a geological one. That is a comparability point worth making explicitly rather than assuming the two numbers mean the same thing.

Reserves are estimates that move with price as well as with geology. A volume is only a reserve if it is economic to produce, so a sustained fall in the price assumption can reclassify barrels out of reserves without anything changing underground, and a rise can move them back in. Reported reserve movements therefore mix genuine drilling results, revisions and price effects, and the three deserve to be separated before conclusions are drawn.

Because the categories carry different confidence, a valuation should risk them differently rather than treating a barrel as a barrel. Houses vary in how heavily they discount probable against proved and in what they attribute to undeveloped acreage, which is a place to state your convention rather than present a single number as the answer.