Bahamas Petroleum Company - Countdown has begun
Bahamas Petroleum Company (LON:BPC) is in the final stages of completing the funding necessary to drill its inaugural exploration well (Perseverance-01) offshore Bahamas, which it expects to spud in the second quarter of 2020. The current valuation is inline with its peers, but with an estimated 1,030mln barrels of Prospective Resources (UBEST) targeted by its first well, a successful discovery will see the potential to see fair value rise to $1,014mm (36p/share), over 10x the current share price.
Summary
Asset & Forward Programme
Bahamas Petroleum Company’s (BPC's or the Company's) five licences total 3.9mln acres. Four of the five licences (the Southern Licences) are located to the south of the Bahamas forming a contiguous licence area on the southern maritime border with Cuba; the fifth licence is located to the north of the Bahamas.
The Southern Licences, consisting of four separate licence blocks - Bain, Cooper, Donaldson and Eneas - are the focus for the near to medium term forward programme. The Company has mapped three prospects in the Southern Licences, C-Fold, B-North and B-South, which together total 2,080mln barrels of oil equivalent (boe) of prospective resources.
The inaugural well in BPC’s exploration programme has recently been confirmed for early April 2020. The Perseverance-01 well (PRC-01) is targeting the 1,030mln boe (UBEST prospective resources) multi-target Perseverance prospect.
Funding
BPC is seeking a farm-in partner or partners to participate in the drilling of Perseverance-01 and has a number of participants active in its data room; the process is ongoing. In the absence of a completed farm-in, BPC's management has manoeuvred the Company into the position of being sufficiently funded to drill PRC-01 on a sole risk basis.
To this end, the Company has recently completed an equity funding round, which raised US$11.4mln in a 60% oversubscribed open offer and institutional placing. The equity funding followed up the US$13.3mln conditional convertible bond financing, announced in the fourth quarter of 2019, which should be drawn down in the first quarter of 2020, pending the satisfaction of certain conditions.
Additionally, the Company has also established a Bahamian mutual fund, to which it has allocated 100mln shares, which provides the capacity to raise a further US$2.8mln.
Value Potential
If Perseverance proves to be a discovery and the UBEST estimate of 1,030mm boe is reclassified as Contingent Resources, fair value, which would be a combination of the volumes from Perseverance and the remaining portfolio, could be up to $1,014mm (36p/share), a significant step change in value.
(Note: see end of documents for more information on 1U, 2U & 3U)
BPC has five offshore licences totalling 3.9mln acres...
Assets
BPC operates solely offshore Bahamas, where it has five licences. The licences encompass 3.9mln acres and were initially granted in 2007 for a period of 12 years, consisting of three separate exploration periods of four years each, with the respective licences entering the next exploration period only when all the requirements for the respective period have been met or waived.
...which are grouped into two areas
The licences are arranged into two groups, with four of the five licences, referred to as the southern licences, located to the south of the Bahamas, forming a contiguous licence area on the southern maritime border with Cuba. The remaining licence is located in the north of the Bahamas; we summarise the licences in the following table.
Table 2 - BPC Licence Summary
Source: Company & Proactive data
BPC has invested significantly since acquiring its interests...
To date, BPC has expended over US$100mln on its licences, including the acquisition of modern 3D seismic data and completion of a range of technical studies.
...completing a significant body of study on its acreage...
...with the Southern Licences in the second exploration period...
As a result of various licence extensions and revisions, the Southern Licences are currently in the second three-year exploration period, with the Company’s obligation being to drill a single exploration well prior to the end of this period (31 December 2020).
....all the licences are in known hydrocarbon basins
The “Miami” licence is wholly within the Bahamas Platform Basin (BPB), while the Southern Licences are in the Cuba Fold & Thrust Province; locations of the licences are summarised in the following map.
Overall, the offshore basins surrounding the Bahamas are relatively underexplored, with only a handful of wells drilled. We discuss the general geological setting for each of the basins later in this document.
Figure 4 - BPC Licences
Source: ESRI, Company & Proactive data
The Southern Licences are the focal point for BPC's current work programme...
The Southern Licences
The Southern Licences are the focal point for the Company’s near-term exploration and comprise four separate licence blocks, namely, Bain, Cooper, Donaldson and Eneas. The blocks are contiguous, and all abut the Bahamas’ marine boundary with Cuba. The water depths across the southern licences vary significantly; the shallowest are in the north, where water depths average eight metres (m), deepening to about 500m towards the south.
Figure 5 - The Southern Licences
Source: ESRI, Company & Proactive data
...and the scope is significant due to the lack of exploration wells to date...
There has only been one well drilled in the Southern Licences, Doubloon Saxon-01, which was drilled in the mid-1980s to a depth of 21,750 feet, terminating in the early Cretaceous.
...which has demonstrated significant prospectivity...
The well encountered significant dead and live oil shows over its length, and although Doubloon Saxon-01 was subject to a drill stem test to assess permeability and porosity, records indicate that only formation fluid was recovered.
...which has been the basis for work conducted by BPC, through which the Company has identified three areas of prospectivity
Original 2D seismic (pre-2011) identified three structures of potential interest (A, B and C), with A deemed to be a Cretaceous platform, while structures B and C deemed to be folds; the rough location of structures A, B & C are shown in the following map.
BPC's 3D seismic data allowed for a better understanding of the regional plays....
...and the "B" and "C" structures...
Data from the 2011 3D seismic campaign allowed for better definition of the structures, resulting in the high grading of folds B and C. More significantly, however, the 2011 3D seismic data provided a better understanding of the play and prospect risks associated with structures B and C, particularly those associated with the areal distribution of the petroleum system and prospect derisking.
...where the greater resolution offered by 3D seismic images gave better understanding of the structures...
The 2011 3D seismic data indicated a deeper sedimentary column and potential source in the Upper Jurassic which is, therefore, more likely to have been in the oil window. Furthermore, the data allowed the team to identify two elements to structure B, which were formally identified as “North” and “South,” with “C” being named “C-Fold.”
Figure 6 - Approximate Location of the A, B & C Structures
Source: ESRI, Company & Proactive data
...to the point that B-North (Perseverance) is now deemed drill ready
Further study integrating the 2011 3D seismic data with existing datasets provided higher resolution to refine the prospectivity at the Albian and Aptian horizons at each of the structures, namely Perserverance (B-North), B-South and C-Fold; the stock tank oil initially in place (STOIIP) numbers and prospective resources for each of the prospects are summarised in the following tables.
Table 3 - Prospect STOIIP (mm boe)
Source: Company & Proactive data
Table 4 - Prospective Resources (mm boe)
Source: Company & Proactive data - † - estimated assuming 25% recovery
The Miami block is BPC's most northerly licence in the Bahamas...
Miami Licence
Miami is BPC’s most northerly block and has water depths that range between 3 – 550m. It contains one exploration well, Great Isaac-01, which was drilled in 1971 to a depth of 17,500ft into Upper Jurassic age sedimentary rocks; the Miami block is shown in the following map.
Figure 7 - Miami Licence
Source: ESRI, Company & Proactive data
...with previous drilling suggesting promising signs of prospectivity...
Great Isaac-01 intersected both dead and live oil in its cores, the most promising of which was the Jurassic. While from a commercial perspective these findings were inconclusive, it demonstrated the presence of competent source rock, active migration and the potential for trapping structures to create prospective accumulations in the Miami block.
...that will require further work to delineate its potential
Given the limited activity in the Miami block to date, the Company remains in discussions with the Bahamian government on entering the third exploration phase. Further announcements will follow once there has been a resolution to the outstanding matters and a forward plan developed.
The extension of the current trends have been postulated, precipitating additional acreage applications...
Application Areas
In addition to the existing licences, the Company made applications to the Bahamian government for a further five licences in the Cay Sal region of The Bahamas, on-trend from the current Southern Licences.
...which are currently pending
In 2015 two applications were withdrawn, while the outcome of the remaining three applications (outlined in the following map) has yet to be decided by the Bahamian government.
Figure 8 - Application Areas
Source: ESRI, Company & Proactive data
BPC has adopted a multi-tiered approach to funding...
Funding & 2020 Drilling Campaign
The Company has adopted a multi-tiered approach to meeting the funding requirement for drilling Perseverance-01 (PRC-01), targeting the Perseverance (B-North) structure, leveraging equity, convertible debt and possible third-party participation via a farm-in, and its recently established Bahamian mutual fund, established to facilitate participation by local Bahamian investors in BPC.
...comprising a combination of equity and debt...
The recent US$11.4mln in equity, raised through an oversubscribed open offer and institutional placement is likely to prove to have been the most crucial, as we believe that its success will have been one of the critical conditions precedent to allowing the drawdown of the £10.3mln (US$13.3mln) conditional convertible bond.
...allowing it to drill PRC-01 on a sole risk basis...
...but a farm-in is still being persued...
The Company’s current expected cash resources are roughly equivalent to the anticipated US$25mln required to drill the PRC-01 exploration well; however, this is tight, and we expect that the Company will seek to secure additional financing to provide greater comfort on its ability to drill the exploration well, including on the sole risk basis, should it want to.
...either way, PRC-01 will spud in 2Q 2020
While permitting is still ongoing, the heads of terms with the drilling contractor and the disclosure that the Company has ordered the long-lead items and its more recent update, have both started the countdown to the spudding of PRC-01, set for April.
The first well is targeting Perseverance...
...which could contain up to 2.4bn boe of Prospective Resources
The PRC-01 is targeting the Perserverence (B-North) structure, which contains up to 2,350mln boe (3U) of prospective resources over multiple horizons, most notably the Albian and the Aptian; Perserverance's prospectivity is summarised in the following table.
Table 5 - Perserverance Summary
Source: Company & Proactive data - † - estimated assuming 25% recovery
The Bahamas gained independence in 1973...
Country Summary
The Bahamas is a chain of islands in the North Atlantic Ocean, southeast of Florida, northeast of Cuba (see map following). Formerly a British colony, the Bahamas gained independence from the United Kingdom in 1973, generating the majority of its revenue (>65%) through tourism and the financial services sector. Shipping, either directly or indirectly, also makes a significant contribution to the country’s gross domestic product, leveraging off of its location on the global sea lanes and its proximity to the United States.
Bahamas Regional Location
Figure 9 - Location of the Bahamas
Source: ESRI & Proactive data
...establishing a parliamentary democracy...
The Bahamas operates a Westminster-style democracy, operating a common law system based on the English model, with the final court of appeal being the privy council, based in London.
...with the Queen as Head of State, but parliament voted for by the population...
Queen Elizabeth II is the hereditary head of state, with the Prime Minister, who is elected by the Bahamian people in a general election, being appointed by the Governor-General.
...parliament has an elected Upper and Lower chamber...
Parliament consists of two chambers, an upper house called the Senate, consisting of 16 members appointed by the Governor-General to serve five-year terms, and a lower house called the House of Assembly, consisting of 38 members that are elected by plurality vote in single-member constituencies to serve five-year terms.
The Bahamas participates in all regional collective economic unions...
The Bahamas is a member of the British Commonwealth and a full member of the Caribbean Community (CARICOM), which is an association that provides a focal point for the strengthening of the negotiating power of the member states by collective bargaining and improvement in, and alignment of, governance and social mobility standards.
...which will help it to grow ~1.2%/year over the next four years...
...but some headwinds exist...
While the International Monetary Fund predicts the Bahamas to grow by an average of 1.2% per annum to 2024 (World Economic Outlook Update October 2019), the current administration led by Prime Minister Hubert Minnis (elected May 2019), has faced weakening economic growth, rising unemployment, high levels of household indebtedness.
...not least the significant costs associated with hurricane clean-up operations
This has been compounded to some extent by the ongoing cost of repairs, precipitated by an unprecedented sequence of “direct hits” from category four and five hurricanes in recent years.
The oil & gas segment is embryonic in the Bahamas, but the government has created the right environment for growth...
The Bahamian oil and gas sector is currently embryonic and exemplified by the limited number of exploration wells that have been drilled within its maritime boundary, both offshore and onshore. Given this, and the over-reliance on a limited number of cyclical sectors, it is understandable that the country wishes to see growth in oil and gas exploration/potentially production.
...which is reflected in the Bahamas' legislative framework
This is exemplified in the adoption (in 2016) of a comprehensive suite of new laws and regulations to govern the sector, as well as the establishment of a sovereign wealth fund to manage future potential oil revenues.
Geology
The Company’s licences sit within the Bahama Platform Basin (BPB) and the North Cuba Fold and Thrust Belt Basin (NFTB), with the Southern Licences straddling the boundary between the two; a map showing the location of the licences and basins is shown in figure 8.
Basin Regional Extent
Figure 10 - Licences and Basin Location
Source: USGS, ESRI, Company & Proactive data
Bahama Platform
The Bahama Platform Basin (BPB) is relatively under-explored, with only a handful of wells drilled deep enough to test oil and gas prospectivity. The current extent of the BPB (see following picture) has been shaped by three different periods of orogeny.
Figure 11 - Bahama Platorm
Source: USGS, ESRI, Company & Proactive data
In the Late Jurassic-Coahuilan, northwestern and southeastern sedimentary provinces were separated by the Sarasota arch, located on the west Florida shelf. Modern basin configurations began to appear in the early Jurassic.
From the Late Jurassic, the continental margin was occupied by a carbonate complex that restricted marine circulation in some areas, although in the southeast this barrier caused the deposition of lagoonal carbonates and anhydrites, with clastics being deposited in the northern reaches of the basin.
Carbonate-evaporite deposition in the south ended at the close of the Comanchea and was followed by the deposition of chalk and chalky limestone in the Gulfian. During this epoch, the rapid subsidence of the Blake Plateau basin to bathyal depths and the collapse of the Florida straits associated with tectonic activity in northern Cuba.
By the middle Gulfian, the Rebecca Shoal barrier reef had appeared on the upthrown northern side of the straits. This barrier reef expanded to encircle the Florida peninsula completely, at which time the Cedar Keys (Paleocene) lagoonal dolomite-anhydrite deposition was initiated.
Examination of core samples and cuttings from seven wells in northern Cuba has shown that the southern margin of the Florida-Bahamas Platform is mainly composed of dolomitised carbonate mound and talus material. Dolomitisation is possibly due to reflux of the highly saline waters from the South Florida evaporite basin to the north.
North Cuba Fold and Thrust Belt Basin
The Cuba Fold and Thrust Belt Basin (NFTB) has been more widely explored than the BPB, although relatively little of this exploration has occurred offshore; most of the wells targeting oil and gas exploration have been drilled onshore Cuba; the region is shown in the following map.
Figure 12 - North Cuba Fold and Thrust Belt Basin
Source: USGS, ESRI, Company & Proactive data
The geology of the Caribbean area in general and the NFTB in particular is complex, has been subject to numerous revisions as successive periods of study have revealed greater detail on the complex regional orogeny. From the earliest studies, the geology of NFTB as a whole could be represented by the general geology observed in Cuba
The GDB has been recognised as a series of north-verging thrust-fault-bounded tectonostratigraphic units (TSU), the definition of which has been the focus of the majority of the investigation into the NFTB.
Detailed work has demonstrated that the TSUs were the product of the collision between shelf, slope, and basinal sediments of the Mesozoic passive margin of the Yucatan and Bahama Platforms and the arc-forearc rocks of the leading edge of the Pacific-derived Caribbean plate as the Yucatan Basin opened in the Paleogene.
The stratigraphy of Cuba is complex, and many stratigraphic studies reflect the stacked thrust sheets produced during plate collision; however, the general stratigraphy of many TSUs has been interpreted and restored, documenting general stratigraphic relations. Major events in the geologic history of NFTB include:
- Rifting between North America, South America, and Africa in Late Triassic-Early Jurassic time;
- The tectonic evolution and passive-margin sedimentary history of the southeast Gulf of Mexico;
- The development of the proto-Caribbean ocean basin and its passive margin;
- Movement of the Caribbean plate since the Early Cretaceous; and
- Paleogene development of the Yucatan Basin and resultant collision and suturing of allochthonous Cuba terranes with the passive margin of the Bahama Platform.
Board Officers
Bill Schrader (non-executive Chairman)
Bill Schrader has more than 30 years’ experience in the oil and gas industry, having served as chief executive officer of several country operations at BP PLC, as the president of the Azerbajan International Operating Company and as chief operating officer of TNK-BP. Characterised as a strong leader by his peers, Schrader has an extensive industry network and proven ability to manage complex operating environments and liaise with governments around the world.
James Smith (non-executive deputy chairman)
A former Minister of State in the Ministry of Finance and member of the Bahamas’ Senate, James Smith is widely acknowledged as a leading expert on monetary policy and is a respected member of the greater Bahamas community. He has served as the country’s ambassador for trade in the Office of the Prime Minister, as the Governor of the Central Bank of The Bahamas for a decade, as well as chairman of the Bahamas Maritime Authority, The Paradise Island Bridge Company and The Bahamas Development Bank. He has also held a number of board positions at both private and public companies including the Bahamas Stock Exchange.
Simon Potter (chief executive officer)
Simon Potter qualified as a geologist with an M.Sc. in Management Science. He has more than 30 years' oil and gas industry and mining sector experience. From the Zambian Copperbelt to a 20-year career with BP he has held executive roles in companies managing oil and gas exploration, development and production; gas processing, sales and transport; liquefied natural gas manufacture, marketing and contracting in Europe, Russia, America, Africa and Australasia. On leaving BP, having helped create TNK-BP, he took up the role of chief executive officer (CEO) at Hardman Resources where he oversaw growth of the AIM and ASX-listed company into an oil producer and considerable exploration success ahead of executing a corporate sale to Tullow Oil.
After running his own consultancy, he joined Arrow Energy International as CEO and following the sale of Arrow Energy to Shell and PetroChina launched their international assets onto the ASX as the separately listed Dart Energy. He was appointed chief executive officer on 17 October 2011.
Adrian Collins (non-executive director)
Adrian Collins has worked in the fund management business for more than 35 years, a large part of which was at Gartmore Investment Management PLC where, latterly, he was managing director. He was chairman of Liontrust Asset Management PLC and is also on the boards of a number of other companies.
Ross McDonald (non-executive director)
Ross McDonald served 35 years with Royal Bank of Canada (RBC) and was most recently senior vice-president & the head of Caribbean Banking for RBC. From 2003 until his retirement in 2011, McDonald led RBC’s commercial and retail banking operations throughout the Caribbean. He is currently a director of RBC Royal Bank (Bahamas) Limited, RBC’s commercial bank in The Bahamas, RBC FINCO, which is a public company, and RBC’s mortgage banking company in The Bahamas. He also serves as a director of Royal Fidelity Merchant Bank & Trust (a 50% joint venture between RBC and Fidelity Bank), which provides investment and corporate advisory services in The Bahamas and Barbados. He is also a director of Cable Bahamas Limited and BeAliv Limited.
Executive Management
Eytan Uliel (commercial director)
Uliel is a finance executive with significant oil and gas industry experience. He has significant experience in mergers and acquisitions, capital raisings, general corporate advisory work, oil and gas industry-specific experience in public market takeovers and transactions, private treaty acquisitions and farm-in / farm-out transactions. He has held executive roles in various ASX and SGX-listed companies.
Prior to working with BPC, from 2009 – 2014 Uliel was the chief financial officer and the chief commercial officer of Dart Energy Limited, an ASX-listed company that had unconventional gas assets (coal bed methane and shale gas) in Australia, Asia and Europe, and was the chief commercial officer of its predecessor company, Arrow International Ltd, a Singapore-based company that had unconventional gas asset primarily in Asia and Australia. He holds a Bachelor of Arts (Political Science) and Bachelor of Laws (LLB) degree from the University of New South Wales, and was admitted as a solicitor in the Supreme Court of New South Wales in 1997.
Uliel has been Commercial Director of BPC since 2015.
Randolph Hiscock (lead technical)
Randolph (Randy) Hiscock has 30+ years' upstream experience acquired through various technical and managerial roles with Shell, Talisman and EnCana (PanCanadian). He has Master of Science / MBA degrees from Memorial University in Canada.
Hiscock joined Bahamas Petroleum Company after 10 years with Shell as the manager of New Ventures & Business Development, Americas, based in Houston and The Hague.
Previously, he was vice-president of Exploration Latin America for EnCana (PanCanadian) and was located in Calgary for 19 years.
He has worked extensively in Latin America and the Caribbean for ~ 20 years, leading to major offshore discoveries in Guyana and Brazil. Also, he stewarded new county entries in Brazil, Venezuela, Guyana, French Guyana, Colombia and Argentina and has evaluated more than 300+ new venture opportunities.
Benjamin Proffitt (finance director and company secretary)
With a physics degree from Imperial College London, Ben Proffitt qualified as a chartered accountant in 2007 with BDO, working in their audit team with a focus on AIM-listed resource clients. In 2008 Proffitt joined Renewable Energy Holdings PLC to manage their wave energy intellectual property development in Australia before joining Bahamas Petroleum Company PLC in 2010.
David Bond (drilling director)
Bond is an experienced drilling engineer having worked in the demanding North Sea and Gulf of Mexico operating environments. A qualified mechanical engineer, he has more than 30 years' experience, working with companies such as ConocoPhillips, Woodside and BHP.
Prior to joining BPC, Bond was the founder and chief executive officer of "Technical Limit Performance Pty" (TLP) a consultancy aimed at assisting companies to access cutting-edge drilling and completion processes, with a brief to enhance safety while simultaneously reducing costs; TLP's clients included Santos, Woodside, BG Group and Shell, consistently delivering an excess of 20% cost reductions.
Richard Turner (drilling manager)
Turner has extensive drilling experience, operating in some of the most demanding offshore and onshore environments including Norway, Gulf of Mexico, Australia and Gabon. A qualified petroleum engineer, he has in excess of 50 years' experience, working with super majors and world-scale drilling contractors.
Prior to joining BPC, Richard was an adviser to a joint-venture group with operations offshore Mexico.
Roberta Quant (environmental scientist)
Roberta Quant has been working with Bahamas Petroleum Company for about two years and is responsible for ensuring that health, safety and environmental policies are maintained to the highest international standards; she oversees environmental studies for oil and gas exploration (EIA, EMP, Oil Spill, etc.) and promotes the activities of the Company throughout The Bahamas. She also liaises with the Government of The Bahamas on environmental matters.
She has worked in the environmental field for nine years and previously worked with the Bahamas Environment, Science and Technology (BEST) Commission where she provided advice to the Government of The Bahamas in the areas of environmental issues and policy development.
Notes
Reserves
Those quantities of petroleum anticipated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions. Reserves must satisfy four criteria: they must be discovered, recoverable, commercial, and remaining (as of a given date) based on the development project(s) applied
1P, 2P & 3P
1P: An incremental category of estimated recoverable quantities associated with a defined degree of uncertainty. Proved Reserves are those quantities of petroleum that, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods, and government regulations. If deterministic methods are used, the term “reasonable certainty” is intended to express a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate.
2P: An incremental category of estimated recoverable quantities associated with a defined degree of uncertainty. Probable Reserves are those additional Reserves that are less likely to be recovered than Proved Reserves but more certain to be recovered than Possible Reserves. It is equally likely that actual remaining quantities recovered will be greater than or less than the sum of the estimated Proved plus Probable Reserves (2P). In this context, when probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the 2P estimate.
3P: An incremental category of estimated recoverable quantities associated with a defined degree of uncertainty. Possible Reserves are those additional reserves that analysis of geoscience and engineering data suggest are less likely to be recoverable than Probable Reserves. The total quantities ultimately recovered from the project have a low probability to exceed the sum of Proved plus Probable plus Possible (3P), which is equivalent to the high estimate scenario. When probabilistic methods are used, there should be at least a 10% probability that the actual quantities recovered will equal or exceed the 3P estimate.
Contingent Resources
Those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations by application of development projects, but which are not currently considered to be commercially recoverable owing to one or more contingencies.
1C, 2C & 3C
1C: Denotes Contingent Resources of same technical confidence as Proven, but not commercially matured to Reserves
2C: Denotes Contingent Resources of same technical confidence as Probable, but not commercially matured to Reserves.
3C: Denotes Contingent Resources of same technical confidence as Possible, but not commercially matured to Reserves.
Prospective Resources
Those quantities of petroleum estimated, as of a given date, to be potentially
recoverable from undiscovered accumulations by application of future development
projects.
1U, 2U & 3U
1U, 2U & 3U are the SPE PRMS categories that are used in the oil & gas business in reference to undiscovered hydrocarbons; 2U is roughly the equivalent of proved + probable reserves, although it is important to remember it refers to undiscovered hydrocarbons.