Definition Of Terms

Accredited Investor

A person or institution deemed capable of understanding and affording the financial risks associated with the acquisition of unregistered securities.

Acidizing

A technique for increasing the flow of oil and /or gas into a well. hydrochloric acid is pumped into the oil-bearing rock. The acid dissolves limestone in the producing zone enlarging pores and flow into the well bore with less restrictions.

API

American Petroleum Institute. The primary U.S. oil industry trade association, based in Washington, D.C. API conducts research and sets technical standards for industry equipment and products from wellhead to retail outlet. It also compiles statistics which are regarded as industry benchmarks.

API Gravity

The American Petroleum Institute scale used to express the specific gravity of oils.

Barrel of Oil

42 U.S. gallons, 159 liters or 0.159 cubic meters of oil at 60 degrees Fahrenheit.

Barrel of Oil per Day (BPD)

The number of barrels of oil produced from a well over a 24 hour period.

Bit

A bit is the drilling tool that bores or cuts into the earth. There are two basic types: the cable tool bit which moves up and down the hole, striking the bottom, chipping away the rock, and the rotary bit which revolves to grind the rock. The rotary is the modern technique used in most drilling operations.

Blowout

An unexpected violet eruption of fluids, solids or gases from a well.

Blowout Preventer

A ‘Bop’, or ‘Christmas tree’ is a large, specially designed series of valves that is mounted on top of the well during drilling and completion stages of operation. The operator can close this valves to stop the flow of oil or gas in case of emergency.

BOP

See Blowout Preventer

Bottom Hole Pressure

The reservoir pressure at the bottom of the well. When the well is flowed, a decline in pressure occurs. The amount of decline in pressure related to the amount of oil and/or gas production will give the engineer information regarding the reserves of the well.

C&E

Well completion and equipment cost.

Casing

The process of lining a drilled hole with steel pipe which screws together and is lowered into the hole after drilling is complete. It is cemented in place to keep the hole from caving in.

Cement

A process whereby cement is pumped into the hole between the walls of the hole and the outside of the casing. Upon hardening, the cement holds the pipe in place and prevents fluid movement in the hole.

Christmas Tree

See Blowout Preventer

Circulation

The techniques for bringing rock cuttings from the bottom of the well bore to the surface by continuously pumping drilling mud and/or water down through the drill string and up the annulus during rotary drilling.

Commercial Well

A well which is capable of producing enough products to pay for itself and give a profit to its owners.

Completion

A general term referring to all activities necessary to put a well on production after it has been drilled.

Crude

See Crude Oil

Crude Oil

A mixture of hydrocarbons that exists as a liquid in natural underground reservoirs and remains liquid at atmospheric pressure after passing through surface separating facilities. Crude is the raw material which is refined into gasoline, heating oil, jet fuel, propane, petrochemicals and other products.

Cubic Foot

The amount of gas required to fill a volume of one cubic foot.

Cuttings

Pieces of the formation cut and ground up by the bit and circulated to the surface by the mud.

Density

The gravity of crude oil. Density is measured in kilograms of large, carbon rich molecules per cubic meter on the American Petroleum Institute (API) gravity scale.

Depletion

The reduction in value of mineral deposits as it is produced. Oil is a wasting asset, in that proceeds from the well represent both income and return of capital.

Depletion Allowance

An allowance granted on taxable income from oil and gas by the federal and most state governments. The current federal rate is 15% of gross income. The law is rather involved and a tax specialist should be used when computing the tax free portion of income. This information is supplied to each working interest owner prior to filing his income tax returns on April 15th of each year.

Deposit

An accumulation of oil, gas or other minerals which is capable of production.

Derrick

Steel structure mounted over the bore hole to support the drill pipe and other equipment which is lowered and raised during drilling operations.

Division Order

A contract which directs the payments of oil and gas revenues to the interest owners of a well.

Drill String

Steel pipes roughly 10m long joined together to form a pipe from the drill bit to the drilling platform. It is rotated during drilling and is the conduit for the drilling mud.

Drilling Mud

A mixture of clays, water and chemicals used in drilling operations to lubricate and cool the drill bit, carry drilling wastes to the surface, prevent the walls of the well from collapsing, and to keep the upward flow of oil or gas under control.

Electric Log

Wireline logs involve lowering sensing devices down the borehole on the end of an electric cable. These logs provide information about the type of rock penetrated, the fluids contained in the rock, and the condition of the borehole. Measurements include: borehole diameter (caliper log), electrical resistivity of the rock (resistivity log), rock density (neutron log), acoustic properties (sonic log), natural gamma-ray radiation of the rock (gamma ray log), inclination of the rock (dipmeter log), and borehole temperature (temperature log).

Fault

A geological structure consisting of a fracture in the rock along which there has been an observable amount of displacement.

Field

A commercial oil or gas accumulation. The size can range from a few acres to thousands of square miles.

Fish

An object lost (or stuck) in the well bore, obstructing operations.

Flaring

The controlled and safe burning of gas which cannot be used for commercial or technical reasons.

Flowing Well

A well capable of producing oil or gas by its own energy.

Formation

A (named) succession of sedimentary beds having some common characteristic.

Frac

See Fracing

Fraced

See Fracing

Fracing

The process of pumping fluids into a productive formation at high rates of injection to hydraulically break the rock. The “fractures” which are created in the rock act as flow channels for the oil and gas to the well.

Gas Well

A well that produces usually a higher ratio of natural gas to oil.

Horizontal Drilling

The technique for cutting a hole in geological strata in a horizontal, rather than the normal vertical direction.

Hydrocarbon

Any compound or mix of compounds, solid, liquid or gas, comprised of carbon and hydrogen (e.g., coal, crude oil and natural gas).

IDG

See Intangible Drilling Costs

Intangible Drilling Costs

All cost incurred in drilling a well other than equipment or leasehold. These expenses are 100% tax deductible even if the well is productive.

Joint

See Drill String

Joint Operating Agreement

A detailed written agreement between the working interest owners of a property which specifies the terms under which that property will be developed.

Joint Venture

A specific oil and/or gas drilling project managed by an operator for the joint benefit of the operator and non-operator working interest participants.

Junk

Debris lost in a hole. Junk includes a lost bit, pieces of a bit, milled pieces of pipe, wrenches, or a relatively small object that impedes drilling or any down hole operation.

Landowner’s Royalty

A right to oil and gas as they naturally occur in place. Royalty entitles the owner to a specified share of oil and gas produced from the property, but it bears no costs or responsibility or rights for development of the property. Although he does not pay operating costs, the royalty owner does pay state severance tax and handling costs.

Light Crude

Oil with a gravity of 28 degrees API or higher. High quality light crude has a gravity of 40 degrees or higher.

Liner

A string of casing that does not extend to surface but is either hung inside the previous casing string, or set and cemented in place within the previous casing string.

MCF

See Metric Cubic Feet

Metric Cubic Feet

Thousand cubic feet

Mud

See Drilling Mud

Natural Gas

A naturally occurring mixture of hydrocarbon and non-hydrocarbon gases found in porous rock formations. Its principal component is methane.

Net Revenue Interest

That percent of the production revenue allocated to the working interest after first deducting proceeds allocated to royalty and overriding interest.

Non-Operators

Working interest owners in an oil and gas property who have no operating responsibility. The operator is the working interest owner responsible for drilling, completing, and production operations under terms of a joint operating agreement.

NRI

See Net Revenue Interest

Oil

A liquid hydrocarbon. (see “crude oil”)

Oil and Gas Leases

A contract between an oil operator and a landowner which gives the operator the right to drill for oil and gas on his property for a consideration.

Oil Gravity

The most widely used indicator of a crude oil’s worth to the producer is its API gravity. Normally, the price which a producer receives for his oil depends on its gravity, the less dense oils (higher API gravity) being the most valuable. This price schedule is based on the premise that the lighter oil contains higher percentages of the more valuable products such as gasoline. API gravity (degrees) = (141.5/sp.gr.) – 131.5.

OPEC

Organization of Petroleum Exporting Countries.

Operating Expense

The expenses incurred through the operation of producing properties.

Operator

The party responsible for exploration, development, and/or production projects.

Payout

When the costs of drilling, producing and operating have been recouped from the sale of products on a well.

Plugged and abandoned

The cementing of an oil and gas well, the removal of its associated production facilities, the removal or abandonment in-place of its flow line, and the remediation and reclamation of the well site.

Pooh

Abbreviation for pulling out of hole.

Porosity

The open space within a rock, similar to a sponge. A measure of the relative volume of void space in rock to the total rock volume. These spaces or pores are where oil and gas accumulate; therefore, a formation containing a high percentage of porosity can contain more hydrocarbons.

Production Decline Rate

Production of oil and gas is unique in the fact that productive ability of an oil and gas field begins to decline from the time that it is first put on production. As a result, the prospective gross income is immediately in a declining position. Oil and gas productivity and production decline are directly related to its pressure. As the petroleum is extracted, reservoir pressure is constantly reduced and, therefore, the production is reduced proportionately. An oil reserve can be re pressurized by applying gas, water, or steam into the oil field to maintain adequate pressure. So, petroleum reservoirs are unique with their inability to resist the decline of gross or net income due to decrease in production. Once the oil or gas well has been producing for a few years, a production decline rate can be established for a well or proven reserve. For valuation purposes, the definition of the American Petroleum Institute for “proved reserves” is used: “These are the volumes of crude oil and natural gas which geological and engineering information indicate, beyond reasonable doubt, to be recoverable in the future from oil and gas reservoirs under existing economic and operating conditions. They represent strictly technical judgments and are not knowingly influenced by policies of construction or optimism. They are only by the definition of the term ‘proved’. They do not include what are commonly referred to as ‘probable’ or ‘possible’ reserves.” The production decline rate can be difficult to predict when wells are producing at less than capacity or produced erratically for various economic reasons or are being subject to a secondary recovery method that can alter the normal or natural decline rate. However, establishing production decline rates is still the most practical method of predicting proved reserves.

Production Site

The area surrounding or encompassing production facilities, including but not limited to production units, tanks and tank batteries, other production–related vessels, accessory equipment, pits, reserve pits, flow lines, sales lines, rights-of-way and easements associated with previous or current oil and gas operations, and tank batteries.

Pumper

An employee of an operator who is responsible for gaging the oil and gas sold off the leases he has been assigned and who is also responsible for maintaining and reporting the daily production.

Raw Natural Gas

Natural gas containing impurities and unwanted substances that have to be removed.

Reservoir

Porous permeable rock containing petroleum.

Rework Operations

Any major operation performed on a well after its completion in an attempt to restore or improve its ability to produce.

Royalty

See Landowner’s Royalty

Salt Water Disposal Well

Many wells produce salt water while producing oil. The disposal of this water is a problem to an operator because of pollution. The best solution to the problem is to pump the waste back into a formation that is deep enough not to pollute shallow water sands. Many stripper wells which are no longer commercial are converted for this purpose.

Set Pipe

See Cement

SPUD

The commencement of drilling operations.

Surface Pipe

Pipe which is set with cement through the shallow water sands to avoid polluting the water and keep the sand from caving in while drilling a well.

Swab

A tool which is lowered down the pipe on a wire line. The “swab” is then pulled out of the hole. As it travels up the pipe, rubber elements expand so that the fluid in the pipe is trapped above the swab and pushed to the surface. This operation is necessary when the formation pressure is not high enough to blow the fluids in the pipe to the surface.

Tank Battery

A group of tanks at a well site used to store oil prior to sale to a pipeline company.

Transmission Lines

These are pipelines extending from a producing area to a refinery terminal or connecting to gathering lines or delivery point of purchase. These lines are used for longer distance transportation of gas.

Tubing

Small diameter pipe which is installed in the casing. Oil is produced through tubing because it increases the viscosity of fluid and a well’s flow capabilities.

Turnkey Contract

A contract in which an operator agrees to furnish all labor and materials necessary to drill a well to a certain depth or stage of completion for a specified sum of money.

Viscosity

The resistance of fluid to flow. A high viscosity fluid will not flow as easily as a low viscosity fluid (mud will not move as easily as water).

Wellhead

The control equipment fitted to the top of the well consisting of outlets, valves, blowout preventors, etc.

Working Interest

Oil and gas working interests. A working interest in an oil or gas property held by the taxpayer directly or through an entity that does not limit the liability of the taxpayer is not treated as a passive activity, whether or not the taxpayer materially participates in the activity. Thus, an owner of a working interest in oil or gas property is permitted to deduct otherwise allowable losses attributable to the working interest against other income without limitation under the passive loss rule. A working interest in an oil or gas property is one that is burdened with the cost of development and operation of the property, such as the responsibility to share expenses of drilling completed or operating oil and gas property, according to working or operating mineral interest in any tract or parcel of land. Rights to overriding royalties, production payments, and the like do not constitute working interests because they are not burdened with the responsibility to share expenses of drilling, completing, or operating oil and gas property. Likewise, contract rights to extract or share in oil and gas, or in the profits from extraction, without liability to share in the costs of production do not constitute working interests. Income from such interests is generally considered to be portfolio income. A special rule applies in any case where, for a prior tax year, net losses from a working interest in a property were treated by the taxpayer as non-passive losses by reason of the working interest exception. In such a case, any net income realized by the taxpayer from the property (or any substituted basis property) in a subsequent year also is treated as active income. For example, suppose a taxpayer claims losses with regard to a working interest that starts to generate net income. If he transfers the interest to an S corporation in which he is a shareholder or to a partnership in which he is a limited partner, the income will continue to be non-passive. The income from that interest may not be offset by other passive activity deductions. In general — the term “passive activity” shall not include any working interest in any oil or gas property which the taxpayer holds directly or through any entity which does not limit the liability of the taxpayer with respect to such interest. Income in subsequent years — if any taxpayer has any loss for any taxable year from a working interest in any oil or gas property which is treated as a loss and is not from a passive activity, then any net income such as property (or any property the basis of which is determined in whole or in part by reference to the basis of such property) for any succeeding taxable year shall be treated as income of the taxpayer which is not from a passive activity. If the preceding sentence applies to the net income from any property for any taxable year, any credits allowable under Subpart B (other than section 27(a) or d of part IV of Subchapter A for such taxable year which are attributable to such property shall be treated as credits not from a passive activity to the extent that the amount of such credits does not exceed the regular tax liability of the taxpayer for the taxable year which is allocable to such net income. You can go to the IRS website for more information.

Workovers

Major repairs or modifications which restore or enhance production from a well.

Write-offs

That portion of an oil investment which is deductible for tax purposes. All intangibles are deductible.