GLOSSARY
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ACCREDITED INVESTOR
A person or institution deemed capable of understanding
and affording the financial risks associated with the
acquisition of unregistered securities.
The SEC recognizes the following parties as accredited:
1. An individual who alone, or with a spouse, has a
net worth of over $1 million.
2. An individual who alone had income in excess of $200,000
in each of the past two years (or with a spouse, in
excess of $300,000 in each of the past two years) and
has a reasonable expectation of doing as well in the
current year.
3. A financial institution such as bank, broker/dealer,
insurance company or business development company.
4. Any director, officer or general partner of the issuer.
5. A trust or business partnership, with assets in excess
of $5 million, that wasn't formed for the purpose of
acquiring the unregistered securities.
6. Any entity wholly owned by accredited investors. |
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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 restriction.
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BARREL OF OIL
42 U.S. gallons of oil at 60 degrees Fahrenheit. |
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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. |
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BLOWOUT
An unexpected violent eruption of oil and gas from a
well during the drilling phase of operation. This happens
when high pressure gas is encountered and the proper
precautions have not been taken. The initial eruption
is followed by an uncontrolled flow of fluids from the
well.
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BLOWOUT PREVENTER
A "BOP" is a large, specially designed valve
that is mounted on top of the well during the drilling
and completion stages of operation. The operator can
close this valve to stop the flow of oil or gas in case
of emergency. |
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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 production will give an engineer information
regarding the reserves of the well. |
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C&E
Well completion and equipment cost. |
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CASING
Steel pipe which screws together and is lowered into
the hole after drilling is complete. It is used to seal
off fluids and keeps the hole from caving in. |
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CEMENT OR "SET PIPE"
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. |
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COMMERCIAL WELL
A well which is capable of producing enough products
to pay for itself and give a profit to its owners. |
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COMPLETION
A general term referring to all activities necessary to
put a well in production after it has been drilled to
casing point. |
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CUTTING OR SAMPLES
Pieces of rock cut out of the formation by the bit and
circulated to the surface by the mud. Geologists study
this rock for signs of oil and gas as the well is drilled. |
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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. |
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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 partner prior to filing his income
tax returns on April 15th of each year. |
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DEPOSIT
An accumulation of oil, gas or other minerals which
is capable of production. |
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DEVELOPMENTAL WELL
A well drilled to a known producing formation in an
existing oil field.
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DISCOVERY WELL
An exploratory well which encounters production in a
previously unknown deposit. |
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DRILLING
The act of boring into the earth.
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DRILLING RIG
The equipment used to bore into the earth. There are
two types: a. Rotary b. Cable tools. The rotary type
is more modern and efficient. |
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ELECTRIC LOG
An electrical survey made on uncased holes. A special
tool is lowered into the hole which ejects an electrical
current into the rock and records its resistance to
the current. The data from the survey is used by the
geologist to determine the nature of the rock and its
contents. |
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EXPLORATION
A general term referring to all efforts made in the
search for new deposits of oil and gas. |
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FLOWING WELL
A well capable of producing oil or gas by its own energy
without the aid of a mechanical pump. Normally a pump
is put on the well after the pressure reduction inhibits
the rate of production. |
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FRAQING
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. |
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GAS WELL
A well that produces natural gas which is not associated
with crude oil. |
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IDC (Intangible Drilling
Costs)
All costs incurred in drilling a well other than equipment
or leasehold. These expenses are 100% tax deductible
even if the well is productive. |
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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. |
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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. |
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IP
(Initial Production) Production from a well is generally
broken down into three categories: a. Flush or Initial
b. Settled c. Stripper. It is important for investors
to realize that a well cannot maintain the flow rates
it made during the first stages of its life. |
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LIMITED LIABILITY
Entities limiting liability
If a taxpayer holds his working interest through any
of the following entities, the entity is considered
to limit his liability, and the taxpayer's interest
in the activity will not be exempt from the passive
loss rules
1. A limited partnership interest is a partnership in
which the taxpayer is not a general partner.
2. Stock in a corporation.
3. Any entity other than a limited partnership or corporation
that, under applicable state law, limits the potential
liability of a holder of such interests for all obligations
of the entity to a determinable fixed amount. (e.g.,
the taxpayer's capital contributions). |
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NON-COMMERCIAL
A well that is not capable of producing enough oil to
pay for the drilling. |
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NRI
(Net Revenue Interest) That percent of the production
revenue allocated to the working interest after first
deducting proceeds allocated to royalty and overriding
interest. |
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OIL
A liquid hydrocarbon. (see "Crude Oil") |
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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. |
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OIL & 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. It is simply a "ticket
to hunt". |
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OPERATING EXPENSE
The expenses incurred through the operation of producing
properties. |
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PAYOUT
When the costs of drilling, producing and operating have
been recouped from the sale of products on a well. |
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PERMEABILITY
A measure of the resistance of rock to the movement
of fluids. Rocks may have holes or void spaces in them
(porosity), but if these holes do not connect, the permeability
can be drastically reduced. |
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POROSITY
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. |
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PROVEN RESERVES
Oil and gas which has not been produced but has been located
and is recoverable. |
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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.
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SECONDARY RECOVERY
A broad term encompassing any method of extracting oil
from a reservoir after a well or field has exhausted its
primary production. |
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SEDIMENTARY ROCKS
Rock is generally classified in one of three categories:
a. Sedimentary; b. Igneous; c. Metamorphic. |
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STRUCTURAL TRAP
A fold or break (or both) in the earth's crust which
creates an impervious trap for oil and gas. Oil will
migrate underground through rock until it is "trapped". |
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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. |
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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. |
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TANK BATTERY
A group of tanks at a well site used to store oil prior
to sale to a pipeline company. |
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TESTING
When each new well is competed, a series of tests are
run on the well. The various tests are used to estimate
the daily deliverability, payout, and reserves. |
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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. |
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TURNKEY CONTRACT
A contract in which an operator or drilling contractor
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. The operator or contractor
assumes all of the responsibility and risks involved
in completing the operation. |
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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).
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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 nonpassive losses by reason of the working interest
exception. In such 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 nonpassive. The income from that interest may
not be offset by other passive activity deductions. |
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WRITE-OFFS
That portion of an oil investment which is deductible
for tax purposes. All intangibles are deductible. |
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This website is
an informational website only, sponsored by Triple
Diamond Energy Corporation. The site is intended
as a convenient source of information. These general
terms will assist the general public to understand terminology
used in the Oil and Gas business. Triple
Diamond Energy Corporation makes no warranties and
is not responsible for your use of this information
or for any errors or inaccuracies resulting from your
use. |