What Are 3P Oil Reserves?

3P oil reserves are the total amount of reserves that a company estimates having access to, calculated as the sum of all proven and unproven reserves. The 3Ps stand for proven, probable, and possible reserves.

The oil industry breaks unproven reserves into two segments: those based on geological and engineering estimates from established sources (probable) and those that are less likely to be extracted due to financial or technical difficulties (possible). Therefore, 3P refers to proven plus probable plus possible reserves. This can be contrasted with 2P oil, which includes only proven and probable reserves.

Understanding 3P Oil Reserves

The 3P estimate is an optimistic estimate of what might be pumped out of a well by an oil company. The three different categories of reserves also have different production probabilities assigned. For example, the oil industry gives proven reserves a 90% certainty of being produced (P90). The industry gives probable reserves a 50% certainty (P50), and possible reserves a 10% certainty (P10) of actually being produced.

Another way to think about the concept of different reserve categories is to use a fishing analogy where proven reserves are the equivalent of having caught and landed a fish. It is certain and in hand. Probable reserves are the equivalent of having a fish on the line. The fish is technically caught, but is not yet on land and may still come off the line and get away. Possible reserves are a bit like saying, “there are fish in this river somewhere.” These reserves exist, but it is far from certain that an oil company will ever fully discover, develop, and produce them.

Energy companies update their investors on the amount of oil and natural gas reserves they have access to through an annual reserve update. This update typically includes proven, probable, and possible reserves, and is similar to an inventory report that a retailer might provide to investors.

However, there is no legal obligation for companies to report their 3P reserves. In recent years, oil and gas startups and exploration companies have taken to reporting their 3P reserves. This is because the third “P” (i.e., possible reserves) can artificially inflate reserves figures and result in an acquisition by a bigger player. The cost benefits of investing in hiring a 3P reserve calculation versus putting money into a costly exploration operation works out in their favor.

Independent Consultant Resource Assessment

Several consulting firms provide oil companies with independent assessments of their oil reserves. These audits are also beneficial to investors who want the assurance that a company has the reserves they claim. One such firm is DeGolyer and MacNaughton and another is Miller and Lents, who have served the oil and gas industry with trusted upstream insights and reservoir evaluation for many years.

Investors in oil and gas companies, as well as independent oil projects, rely on consulting firms like these to provide accurate and independent assessments of a company’s full reserve base, including 3P reserves. Crucial information includes things like estimations of reserves and resources to be recovered from discoveries and verification of hydrocarbon and mineral reserves and resources.

Rapid Classification Changes in Proven Reserves

Understanding the natural resource extraction industry can be challenging because proven reserves are just one of three classifications. Most people assume proven oil and gas reserves should only go up when new exploratory wells are drilled, resulting in new reservoirs being discovered. In reality, there are often more significant gains and losses resulting from shifts between classifications than there are increases in proven reserves from truly new discoveries. For this reason, it is useful for investors to know a company’s proven, probable, and possible reserves rather than just the proven reserves.

If an investor does not have the data on probable reserves, proven reserves can suddenly change in a number of different situations. For example, if a company has a large amount of probable reserves and a relevant extraction technology improves, then those probable reserves are added to the proven reserves.

What Is the 183-Day Rule?

The 183-day rule is used by most countries to determine if someone should be considered a resident for tax purposes. In the U.S., the Internal Revenue Service (IRS) uses 183 days as a threshold in the “substantial presence test,” which determines whether people who are neither U.S. citizens nor permanent residents should still be considered residents for taxation.

Understanding the 183-Day Rule

The 183rd day of the year marks a majority of the days in a year, and for this reason countries around the world use the 183-day threshold to broadly determine whether to tax someone as a resident. These include Canada, Australia, and the United Kingdom, for example. Generally, this means that if you spent 183 days or more in the country during a given year, you are considered a tax resident for that year.

Each nation subject to the 183-day rule has its own criteria for considering someone a tax resident. For example, some use the calendar year for its accounting period, whereas some use a fiscal year. Some include the day the person arrives in their country in their count, while some do not.

Some countries have even lower thresholds for residency. For example, Switzerland considers you a tax resident if you have spent more than 90 days there.

The IRS and the 183-Day Rule

The IRS uses a more complicated formula to reach 183 days and determine whether someone passes the substantial presence test. To pass the test, and thus be subject to U.S. taxes, the person in question must:

• Have been physically present at least 31 days during the current year and;
• Present 183 days during the three-year period that includes the current year and the two years immediately preceding it.

Those days are counted as:

• All of the days they were present during the current year
• One-third of the days they were present during the previous year
• One-sixth of the days present two years previously

Other IRS Terms and Conditions

The IRS generally considers someone to have been present in the U.S. on a given day if they spent any part of a day there. But there are some exceptions.

Days that do not count as days of presence include:

• Days that you commute to work in the U.S. from a residence in Canada or Mexico if you do so regularly
• Days you are in the U.S. for less than 24 hours while in transit between two other countries
• Days you are in the U.S. as a crew member of a foreign vessel
• Days you are unable to leave the U.S. because of a medical condition that develops while you are there
• Days in which you qualify as exempt, which includes foreign-government-related persons under an A or G visa, teachers and trainees under a J or Q visa; a student under an F, J, M, or Q visa; and a professional athlete competing for charity

U.S. Citizens and Resident Aliens

Strictly speaking, the 183-day rule does not apply to U.S. citizens and permanent residents. U.S. citizens are required to file tax returns regardless of their country of residence or the source of their income.

However, they may exclude at least part of their overseas earned income (up to $108,700 in 2021) from taxation provided they meet a physical presence test in the foreign country and paid taxes there. To meet the physical presence test, the person needs to be present in the country for 330 complete days in 12 consecutive months.

U.S. Tax Treaties and Double Taxation

The U.S. has tax treaties with other countries to determine jurisdiction for income tax purposes and to avoid double taxation of their citizens. These agreements contain provisions for the resolution of conflicting claims of residence.

Residents of these partner nations are taxed at a lower rate and may be exempt from U.S. taxes for certain types of income earned in the U.S. Residents and citizens of the U.S. are also taxed at a reduced rate and may be exempt from foreign taxes for certain income earned in other countries. It is important to note that some states do not honor these tax treaties.

183 Day Rule FAQs 

How Many Days Can You Be in the U.S. Without Paying Taxes?

The IRS considers you a U.S. resident if you were physically present in the U.S. on at least 31 days of the current year and 183 days during a three-year period. The three-year period consists of the current year and the prior two years. The 183-day rule includes all the days present in the current year, 1/3 of the days you were present in year 2, and 1/6 of the days you were present in year 1.

How Long Do You Have to Live in a State Before You’re Considered a Resident?

Many states use the 183-day rule to determine residency for tax purposes, and what constitutes a day varies among states. For instance, any time spent in New York, except for travel to destinations outside of New York (e.g., airport travel), is considered a day. So, if you work in Manhattan but live in New Jersey, you may still be considered a New York resident for tax purposes even if you never spend one night there.

It is important to consult the laws of each state that you frequent to determine if you are required to pay their income taxes. Also, some states have special agreements whereby a resident who works in another state is only required to pay taxes in the state of their permanent residence—where they are domiciled.

How Do I Calculate the 183-Day Rule?

For most countries that apply this rule, you are a tax resident of that country if you spend 183 or more there. The United States, however, has additional criteria for applying the 183-rule. If you were physically present in the U.S. on at least 31 days of the current year and 183 days during a three-year period, you are a U.S. resident for tax purposes. Additional stipulations apply to the three-year threshold.

How Do I Know if I Am a Resident for Tax Purposes?

If you meet the IRS criteria for being qualified as a resident for tax purposes and none of the qualified exceptions apply, you are a U.S. resident. You are a tax resident if you were physically present in the U.S. for 31 days of the current year and 183 days in the last three years, including the days present in the current year, 1/3 of the days from the previous year, and 1/6 of the days from the first year.

The IRS also has rules regarding what constitutes a day. For example, commuting to work from a neighboring country (e.g., Mexico and Canada) does not count as a day. Also, exempt from this test are certain foreign government-related individuals, teachers, students, and professional athletes temporarily in the United States.

Do I Meet the Substantial Presence Test?

It is important to consult the laws of the country for which the test will be performed. If wanting to find out about meeting the U.S.’s substantial presence test, you must consider the number of days present within the last three years.

First, you must have been physically present in the United States for 31 days of the current year. If so, count the full number of days present for the current year. Then, multiply the number of days present in year 1 by 1/6 and the days in year 2 by 1/3. Sum the totals. If the result is 183 or more, you are a resident. Lastly, if none of the IRS qualifying exceptions apply, you are a resident.

What Is a 408(k) Plan?

The term 408(k) account refers to an employer-sponsored retirement savings plan. A 408(k) plan allows employees to put aside pretax dollars for retirement that grow on a tax-deferred basis, making it a type of individual retirement account (IRA). This means that individuals pay taxes when they make withdrawals after they turn 59½. The 408(k) is commonly referred to as a simplified employee pension (SEP) plan. In fact, it is the SEP version of the popular 401(k) plan.

Understanding 408(k) Plans

Section 408(k) of the Internal Revenue Code (IRC) outlines the rules and regulations associated with SEP and salary reduction simplified employee pension (SARSEP) accounts, notably individual retirement accounts (IRAs) or individual retirement annuities. That is why SEP plans are often referred to as 408(k) plans.

The IRC highlights the requirements needed in order to participate in a 408(k) plan. Plans are available to small businesses of any size and to self-employed individuals. Participants qualify if they are:

• Over the age of 21
• Worked for at least three of the last five years for the employer
• Were compensated at least $650 by the employer (for 2022; compensation requirements increase to $750 for 2023)

Annual employer contributions cannot exceed the lesser of 25% of the employee’s pay or $61,000 for 2022 ($66,000 for 2023). The annual compensation limit cannot be calculated on incomes exceeding $305,000 for 2022 ($330,000 in 2023). The maximum deduction claimed on a business tax return for contributions is the lesser of the total contributions into employees’ accounts or 25% of compensation.

Plan holders can make withdrawals from their 408(k) plans at any time—the same way they would from traditional IRAs. But there are certain conditions that apply. For instance, most individuals make withdrawals after they turn 59½. Any distributions from these plans before that age incur a 10% early withdrawal penalty. Withdrawals must be made as required minimum distributions (RMDs) as of April 1 the year after you turn 72 if you were that age on or before Dec. 31, 2022. You must begin taking RMDs if you turn 73 on or after Jan. 1, 2023.

408(k) Plans vs. 401(k) Plans

As noted above, a 408(k) is one type of employer-sponsored retirement plan. The 401(k) plan is the most common option and is offered by the vast majority of American corporations. The plan allows taxpayers to make pre-tax contributions through automatic payroll deductions and employer matches for those that make them.

Plan reform has made several changes to benefit employees, including lower fees and investment options. The average 401(k) plan now offers nearly two dozen investment options by balancing risk and reward, in accordance with an employee’s preferences. Unlike an SEP, employees may contribute to a 401(k) plan. And self-employed individuals who work for a company with a 401(k) can contribute to that plan, too.

Participation in traditional 401(k) plans continues to grow. These plans held roughly $7.7 trillion in assets by the end of 2021, which represented about one-fifth of the retirement market in the United States. There were 600,000 active plans in the country with a total of 60 million employees and retirees at the end of September 2021.

Here are a few other facts related to the 401(k) that taxpayers should know:

• Contribution limits for 401(k) plans are indexed to inflation. The Internal Revenue Service (IRS) allows employees to save up to $20,500 for 2022 and $22,500 for 2023. Catch-up contributions of $6,500 per year (increasing to $7,500 in 2023) are also allowed for people 50 or older.
• Withdrawals before the age of 59½ often result in a 10% early withdrawal penalty, unless an exemption is applied. Taxes are imposed on any withdrawals made as contributions are made with pretax earnings.
• Individuals who turn 72 between Jan. 1, 2020, and Dec. 31, 2022, must begin taking RMDs the following April 1. The SECURE ACT 2.0 raised that age to 73 for anyone who turned that age on or after Jan. 1, 2023.

Correction—Jan. 27, 2023: A previous version of this article misstated that 408(k) plans are available to companies with 25 employees or less. It was corrected to state that plans are open to companies of any size.