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Petroleum Industry Industry Overview Series - Industry Terms

Date: December 2008

"This document is not an official pronouncement of the law or the position of the Service and cannot be used, or cited, or relied upon as such."

IV. Industry Terms

Industry Term

Definition or Explanation

Abandonment Costs:

Once production from an oil or gas well becomes unprofitable it is abandoned. Usually, before a well is abandoned, some of the casing is removed and salvaged and one or more cement plugs are placed in the borehole. In many states, abandonment must be approved and by the official regulatory agency.


To treat an oil-bearing formation with acid causing a chemical reaction, thereby increasing pore space and permeability in the immediate vicinity of the bore hole. This allows easier passage of oil to the hole.

Acquisition Well

A well drilled for a mineral interest in a property.

Advance Royalty

An advance payment made by the owner of an operating interest to the royalty owner for a specific number of units of minerals regardless of whether oil or gas was extracted within the year. The payment is recoupable out of the future production.


Authorization for expenditures.


Average Freight Rate Assessments. A measure of the cost of sea transportation incurred on crude oil and products.


Most oil producing states have regulatory agencies, which are concerned with the conservation of natural resources, including extractive minerals. In regard to oil and gas, efficient extraction rates promote conservation of the resource.  State regulatory agencies determine the amount of production that will be permitted within a given period.  This may be stated in terms of producing days or a percentage of full production and is usually figured on the basis of the individual well.  Thus, the term allowable production has been shortened to allowables.  These allowables are based on the market demand for oil or gas and the most efficient rates of production for the particular fields


American Petroleum Institute.

API Well Number

A 12 digit number assigned to every US well. The 12 numbers represent State (1-2),County/Parish (3-5) Well (6-10), Specific Conditions (11-12)

Area of Interest

The original project area which is then subdivided into smaller projects or "Areas of Interest" to conduct more intensive geological and geophysical exploration in order to determine whether to acquire or retain certain mineral interests within or adjacent to the area of interest.  The costs incurred with respect to these surveys are capital in nature, and must be added to the basis of any mineral interests acquired or retained and are recoverable through depletion or deductible as a loss upon abandonment.  See Rev. Rul. 77-188, 1977-1 C.B. 76.

Assignment of Lease

A legal document transferring all or a portion of the operating rights of a lease.

Barrel (BBL)

A standard measure of volume for crude oil and liquid petroleum products; barrel means 42 U.S. gallons


Billion Cubic Feet (of gas)


Barrel of oil Equivalent.  The amount of energy produced by gas usually equated as approximately six MCF of gas to one barrel of oil (i.e. “6:1”)


A clean burning alternative fuel produced from renewable resources.

Biodiesal contains no petroleum but it may be blended with petroleum.

Black Oil

A general term used to describe liquid crude oil or heavy fuel oils. (Also referred to as "Dirty cargoes.")  It is necessary to clean a tank car, storage tank, etc., that has contained black oils before they can be used for clean fuels


The consideration received by the lessor or sublessor upon execution of an oil or gas lease.

Bottom-Hole   Contribution

Money or property given to an operator for use in drilling a well on property in which the payor has no property interest.  The contribution is payable when the well reaches a predetermined depth, regardless of whether the well is productive or nonproductive.  Usually, the payor receives geological data from the well

British Thermal Unit (BTU)

A measure of the amount of heat required to raise the temperature of one pound of water one degree Fahrenheit

Carried Interest

A fractional interest in an oil or gas property, most often a lease. Its holder has no obligation for operating costs.  The owner or owners of the remaining fraction who reimburse themselves out of profits from production pay these.  The person paying the costs is the carrying party, the other person is the carried party

Carved-Out Drill Site

A site for drilling a single well. It is “carved out” of a large tract and is transferred in total or in part to an operator or operators who will drill a well on it.  It is generally the smallest sized tract on which the state regulatory body will allow a well to be drilled. For example, the carved out drill site may be 40 acres out of 160 acre tract owned

Carved-Out Oil or Gas Payment

A payment in oil or gas assigned by the owner of an interest in oil and gas. The payment is to be paid out of a fractional part of the owner’s interest and will run for a period less than the life of the interest from which it was carved.  Except for oil or gas production payments pledged for development and those arising in leasing transactions, production payments are treated as loans


Steel pipe placed in an oil or gas well.  Its main function is to prevent the well walls from caving and to protect the well bore and in-hole equipment. It also prevents oil from migrating into other porous zones.

Casing Point

The point in time in the drilling of a well when drilling is completed and the operator must decide to set casing and attempt to complete the well or plug the well as a dry hole.

Casinghead Gas

Gas produced from an oil well.  The casinghead gas is usually taken off at a gas/oil separator.


A substance which affects, provokes, or accelerates chemical reactions without being altered itself

Catalytic Cracking

A method of cracking in which a catalyst is employed to bring about the desired chemical reaction


The process by which a slurry of cement and water is placed in the well bore between the casing and the walls of the hole or another string of casing.  The cement is forced behind the casing from the bottom up. It holds the casing in place and seals the producing zone off from other upper (possible “thief’) zones

Christmas Tree

An assembly of valves mounted on the casinghead through which a well is produced.  The Christmas tree also contains valves for testing the well and for shutting it down if necessary.  A subsea production system is similar to a conventional land tree except it is assembled complete for remote installation on the sea floor with or without diver assistance.  The marine tree is installed from the drilling platform and anchored to foundation legs implanted in the ocean floor.  The tree is then latched mechanically or hydraulically to the casinghead by remote control.


The carbon residue left in the still after a charge of reduced crude has been run to dryness.

Common Carrier

Any cargo transportation system that may be accessed by any appropriate shipper and each shipper is charged the same rate schedule.  Many pipelines are common carriers

Complete Payout

Complete payout occurs when the owner of the operating interest completely recovers the cost of drilling, equipping, and operating a well from proceeds of production of that well

Completion Cost

Costs incurred, after the completion of the drilling of a well, in preparing the well for production; i.e., fracturing, wellhead cost, acidizing, cleaning, swabbing, and cementing the oil string.

Compression or Compressor

The act of boosting the pressure of the natural gas flowing from a well so that the gas will go into the pipeline or gathering system.  Accomplished by using compressors, which are large machines located on the surface.


A light hydrocarbon liquid, which is in a gaseous state in the reservoir, but which becomes liquid when temperature and pressure, is reduced.

Contiguous Property

Tracts which have common boundary.  Tracts that touch only at a common corner are not contiguous.

Continuing Interest

An economic interest in an oil or gas property which entitles the holder to receive all or a portion of the oil and/or gas produced or the proceeds from the sale of such oil and/or gas for the entire life of the property.  A continuing interest is contrasted to a production payment which must, by definition, have an economic life of shorter duration that the economic life of one or more of the properties which it burdens. See Treas. Reg. § 1.636-3(a) for definition of production payment.


Council of Petroleum Accountants Society of North America.


The refinery process of breaking down the larger, heavier, and more complex hydrocarbon molecules into simpler and lighter molecules.

Crude Oil

A mixture of hydrocarbons which exist in a liquid phase in natural underground reservoirs and which remains liquid at atmospheric pressure after passing through surface separating facilities.  In the United States, crude oils are classified as paraffin base, naphthene base, asphalt base, or mixed base.  The properties of the residuum left from nondestructive distillation determine the appropriate classification.

D D & A

Depreciation, Depletion and Amortization

Damage Payments

Payments made to the landowner by the oil or gas operator for damages to the surface, to growing crops, to streams, or other assets of the landowner.

Day Rate

An agreed rate per day to drill a well.  This rate does not include additional cost for such items as drilling mud, site preparation, fuel, etc.

Deferred Bonus

A lease bonus payable in installments over a period of years. The deferred bonus is distinguishable from delay rentals because the deferred bonus payments are due even if the lease is terminated, while delay rentals are discontinued with the termination of the lease or when the lease becomes productive.

Delay Rental

Money payable to the lessor by the lessee for the privilege of deferring drilling operations or commencement of production during the primary term of the lease.

Delineation Well

A well drilled to determine the boundaries of the field.


Treas. Reg. § § 1.611 through 1.613A provide taxpayers with a deduction based upon the higher of an amount representing a portion of the cost of capital investment in the minerals in place (cost depletion) or a percentage of the gross receipts from the sale of the extracted minerals (percentage depletion).

Development Well

A well drilled for production in an area where proven reserves are located.

Discovery Well

The first oil or gas well drilled in a field revealing oil or gas deposits.


This generally refers to vaporization processes in which the vapor evolved is recovered by condensation; and thus, a separation is effected between volatile fractions that vaporize at a specific temperature and those which do not.

Disposal Well

A well used for disposal of saltwater.

Division Order

A contract between all of the owners of an oil and gas property and the company purchasing production from the property.  The contract sets forth the interest of each owner and serves as the basis on which the purchasing company pays each co-owner their respective share of the proceeds of the oil and gas purchased.


U.S. Department of Energy.


Dismantlement, Removal and Restoration.  Generally what a lessee must perform to return a producing property to a condition suitable to the lessor.  Can include such items as well plugging, equipment removal and soil remediation.  Publicly traded companies must estimate these costs for financial accounting purposes, although they are often just included in a footnote.

Drilling Mud

A special mixture of clay, water, and chemical additive circulated through the well bore during drilling. Its functions are to cool the drill bit, lubricate the drill pipe, protect against blowouts by holding back subsurface pressure, carry rock cuttings to the surface, and deposit mud cake on the wall of the hole to prevent the bore hole from collapsing.

Drill Site

The location at which a well is to be drilled.  The "site" contains sufficient leasehold working interest acres to permit the drilling of one well.

Dry Gas

Natural gas composed of vapors with only small amounts of dissolved liquid. Dry gas generally is composed almost 100 of methane (CH4 ).


A well drilled for the production of oil and/or gas that has not produced and is not expected to produce oil or gas in commercial quantities.

Dry-Hole Contributions

Money or property paid by property owners to another operator drilling a well on property in which the payers have no property interest.  Such contributions are payable only in the event the well reaches an agreed depth and is found to be dry. Usually the payor receives geological data for this payment.

Dual Capacity Taxpayer

One who is subject to a foreign tax levy, but who also receives a specific economic benefit (directly or indirectly) from that foreign country. In the oil and gas context, the most frequent concern is whether payments made by companies to the sovereign are income taxes or royalties


85 percent ethanol mixed with 15 percent gasoline.

Economic Interest

In order to be eligible to obtain income tax benefits, such as depletion, a taxpayer must possess a legal or equitable ownership interest in the minerals in place and receive income from the extraction and sale of such minerals.  The definition of "Economic interest" is found in Treas. Reg. § 1.611-(b) as follows:

"An economic interest is possessed in every case in which the taxpayer has acquired by investment any interest in mineral in place or standing timber and secures, by any form of legal relationship, income derived from the extraction of the mineral or severance of the timber, to which he must look for a return of his capital."

Investment in the minerals in place is not an indispensable element that would preclude a taxpayer from possessing an economic interest in the minerals in place. See Palmer v. Bender, 287 U.S. 551 (1933) and Commissioner v. Southwest Exploration Co., 350 U.S. 308 (1956).

Enhanced Oil Recovery

Sophisticated recovery methods for crude oil that go beyond the more conventional secondary recovery techniques of pressure maintenance and waterflooding.  Enhanced recovery drives now being used include micellar surfactant, steam, polymer, miscible hydrocarbon, CO2 , and steam soak. EOR methods are not restricted to secondary or even tertiary projects. Some fields require the application of one of the above methods even for initial recovery of crude oil.


A form of alcohol that some can be commercially produced from agricultural products, such as corn.  In recent years blended with gasoline in major metropolitan areas to help reduce air pollution.

Excess IDC

Intangible drilling cost (IDC) paid or incurred in connection with producing wells, less the amount which would have been allowable for the taxable year had the costs been capitalized and recovered by cost depletion or straight-line 120-month amortization. See IRC § 57(a)(2

Exchange Oil

Name given to oils exchanged between companies.  Company A has excess oil on the West Coast but needs oil on the East Coast. Company B has excess oil on the East Coast but needs oil on the West Coast. Rather than incur large transportation costs, Company A exchanges oil with Company B

Expendable Wells

Another name for exploratory and delineation wells drilled in relatively deep waters and which the operators have no intention of completing for production.

Expired Leases

A lease which is no longer in force due to either an expiration of a time limit or nonpayment of rentals.

Exploration Rights

Permission granted by landowners allowing others to enter upon their property for the purposes of conducting geological or geophysical surveys.

Exploratory Well

A well drilled in a nonproductive area in search of oil or gas deposits. Sometimes it is called a wildcat well.


An arrangement whereby one working interest owner acquires an interest in a lease owned by another. Consideration for the transfer is usually an agreement by the transferee to pay all or part of the drilling and development costs, and the transferor frequently retains some interest.


The same thing as a farm-in, but seen from the opposite perspective. The arrangement is a farm-in to the one who acquires the interest and a farm-out to the one who transfers it.

Federal Energy Regulatory Commission (FERC):

The U.S. Agency which regulates interstate natural gas and oil pipelines


Crude oil or other hydrocarbons that are the basic input to a refinery, petrochemical plant, or intermediate processing units

Fee Interest

The ownership of both surface and mineral rights.

Field Price

Posted price of oil taken from a specific field.

Flow Line

Surface pipe through which oil or gas is pumped or flowed from the well to either processing equipment or storage facilities

Footage Drilling Contract

A well drilling contract which provides for payment at a specified price per foot for drilling to a certain depth

Foreign Oil and Gas Extraction Income (FOGEI):

Taxable income derived from all sources outside the United States and possessions from the extraction of minerals from oil and gas wells; or, taxable income from the sale or exchange of assets used by the taxpayer in the business of extracting minerals from oil and gas wells.

Foreign Oil Related Income (FORI):

  • Taxable income from the processing of oil and gas into their primary products;
  • Taxable income from the transportation, distribution and sale of oil and gas and their primary products;
  • Taxable income from the disposition of assets used in these activities, excepting the sale of the stock of any corporation; or,
  • Taxable income from the performance of any directly related services.


Floating Production Storage and Offloading.  A vessel that resembles both a barge and a tanker ship and which contains equipment that can convert the raw flow from wells into pipeline quality crude oil and natural gas.  Unlike an offshore platform, wells are not located on an FPSO. 


A fluid, usually oil, is forced through the perforations in the casings into the formation.  This fluid enters the formation under high pressure and breaks it or fractures it.  This allows the oil and gas, which is in the formation, to more easily enter the well.

Free-Well Agreement

A form of sharing arrangement in which one party drills one or more wells completely free of cost to a second party in return for an interest in the property.

Gas Payment

A production payment payable out of gas.

Geological and geophysical (G&G):

These costs are expended for the acquisition of information relative to subsurface formations.  This information may be the result of interpretative work of geologists; seismic surveys; gravity meter surveys; magnetic surveys; core samples or any other method used in the industry.  The costs are capital in nature.


Short for "Specific gravity".  It is a measure of the density of oil and is usually expressed in degrees API.  Generally, the higher the API gravity, the higher the value. Light oils have a high API gravity (e.g. 40).  Heavy oils have a low API gravity (e.g. 20).

Gross Income from the Property

Since crude oil and natural gas are normally sold directly at the wellhead, the gross sales from which the percentage depletion allowance is computed is usually the actual sales price.  When oil or gas is transported from the premises or converted into a refined or manufactured product prior to sale, the representative market or field price is used for purposes of computing percentage depletion.  See Treas. Reg. § 1.613-3(a).

Heavy Crude Oil

Crude oil of 20 degrees API gravity or less (adjusted to 60 degrees Fahrenheit).  There are perhaps billions of barrels of heavy oil still in place in the U.S. that require special production techniques, notably steam injection or steam soak, to extract them from the underground formations.

Horizontal Well

A well that starts off being drilled vertically but which is eventually curved to become horizontal (or near horizontal) in order to parallel a particular geologic formation.


Any of the compounds made up exclusively of hydrogen and carbon in various ratios.


Catalytic cracking in the presence of hydrogen.  The combination of the hydrogen, the catalyst, and the operating conditions (temperature and pressure) permit cracking low quality gas oils that would otherwise be made into distillate fuel.  The heavy hydrocrackate product contains aromatics.


A special catalytic hydrogen reforming process employed for upgrading straight run gasolines

Independent Producers and Royalty Owners Exemption

An exemption from the denial of percentage depletion provided in IRC § 613A(a).  This exemption is provided in IRC § 613A(c) and is based on average daily production of oil and/or gas. Independent producers are defined in IRC § 613A(d) as producers who do not have more than $5,000,000 in retail sales of oil or gas in a year and who do not refine more than 50,000 barrels of crude oil on any given day during the year.  This figured was changed to an average of 75,000 barrels per day for tax years ending after August 8, 2005.  See page 37.

Injection or Input Well:

A well used to inject natural gas, water, carbon dioxide, LPG'S, or other foreign substances under pressure into a producing formation to maintain sufficient pressure to produce the recoverable reserves.

Intangible Drilling and Development Costs (IDC)

Those expenditures which do not have a salvage value and which are incurred in the drilling and deepening of an oil and gas well.

Integrated Oil Company

A company engaged in all phases of the oil business, i.e., production, transportation, refining, and marketing. It frequently also includes petrochemicals/chemicals.

Investment in Lease and Well Equipment

Capital investment in items having potential salvage value. Such items include the cost of casing, tubing, wellhead assemblies, pumping units, lease tanks, treaters and separators, etc.


Independent Petroleum Association of America


Process for altering the fundamental arrangement of the atoms in a molecule without adding or removing anything from the original materials. In petroleum refining, straight-chain hydrocarbons are converted to branched-chain hydrocarbons of substantially higher octane rating, in the presence of a catalyst, usually at moderate temperature and pressures.


A buyer of oil products from refiners for resale to retail outlets.

Joint Operating Agreement

  1. An agreement between two owners or among several concurrent owners for the operation of a leasehold for oil, gas, or other minerals. The agreement calls for the development of the lease or the premises by one of the parties to the agreement, who is designated as operator or unit operator for the joint account.  All parties share in the expenses of the operations and in the proceeds resulting from the development.
  2. An agreement among adjoining landowners or leaseholders to develop a common pool, again sharing expenses and profits

Lease Agreement

The legal instrument by which a leasehold is created in minerals. A contract that, for a stipulated sum, conveys to an operator the right to drill for oil and gas.  The mineral lease is not to be confused with the usual lease of land or a building.

Lease and Well Equipment

Capital investment in items having a potential salvage value. Such items include the cost of casing, surface pipe, tubing, wellhead assemblies, pumping units, lease tanks, treaters, and separators.

Lease Bonus

Consideration paid by the lessee to the lessor for executing the lease.

Leasehold Costs

Costs of acquiring and holding a lease.

Lifting costs

Costs of operating wells for the production of oil and gas (producing costs).


Liquefied Natural Gas, composed almost entirely of methane.  The temperature at which methane becomes liquid at normal pressure is -260°F. In liquid form; natural gas retains only 1/600th of its original volume.

Marginal Production

Domestic crude oil or natural gas which is produced from a stripper well property for the calendar year in which the taxable year begins, or oil produced from a property whose production is substantially all heavy oil during such calendar year. See IRC § 613A(c)(6)(E).

Marginal Wells

A well of such low producing capacity that the profitability of future production is marginal.


Thousand cubic feet.  The standard unit for natural gas volumes. 

Mineral Deed

A lease instrument which conveys an interest in minerals on or under a tract of land.

Mineral Interests (Mineral Rights):

The ownership of the minerals and the right to remove them from the property.

Minimum Royalty

An obligation of a lessee to periodically pay the lessor a fixed sum of money after production occurs, regardless of the amount of production.  Such minimum royalty may or may not be chargeable against the royalty ownership of future production.


Million British Thermal Units.  The measure of heat energy.  The standard unit used in pricing natural gas. 


Million cubic feet.


Mobil Offshore Drilling Unit.  A generic term for several classes of self-contained floatable or floating drilling machines such as jackups, semi submersibles, and submersibles.


Motor gasoline.

Mud Pit

Tank near the drilling rig used for storage of drilling mud during drilling operations.  The drilling mud is prepared for drilling in the pit by mixing the mud and water.  Slush pumps withdraw the mud from the pit and circulate it down the drill pipe.  At the surface the mud passes back to the mud pit through the "shale shaker" which removes the drill cuttings which were carried to the surface by the mud.

Multiple Completion Well

An oil and/or gas well completed in such a manner that it is capable of producing oil and/or gas separately from two or more reservoirs.  Such separate production may be simultaneously through two or more strings of tubing or through a string of tubing and between the tubing and the casing.

Natural Gas

Any hydrocarbon product (other than crude oil) of an oil or gas well if a deduction for depletion is allowable under IRC § 611 with respect to such product. Specifically natural gas refers to any hydrocarbon gas.

Natural Gas Liquids:

Natural gas liquids are the heavier hydrocarbon liquids produced along with natural gas, including butane, propane, natural gasoline and ethane.

Natural Gas Sold Under a Fixed Contract

Domestic natural gas sold under a contract in effect on February 1, 1975, under which the price cannot be adjusted to reflect the increase in income tax due to the repeal of percentage depletion. 

See IRC § 613A(b)(3)(A).

Net Profits Interest

An interest in production created from the working interest and measured by a certain percentage of the net profits from the operations of the property.

Nonoperating Interest

An economic interest, which does not meet the definition of operating interest as, defined in Treas. Reg. § 1.614-2(b).  A royalty, overriding royalty, or net profits interest is a nonoperating interest.

Octane Number, Motor Method (MON):

Octane number of automotive gasolines determined by a method of test that indicates the knock characteristics under severe conditions (high temperatures and speed).

Offset Well

Well drilled on one tract of land to prevent drainage of oil or gas to a nearby tract on which a well has been drilled.

Offshore Platform

A structure from which serves as a base for drilling and producing wells in an offshore area.  Such platforms can be rigidly fixed to the seabed with legs or float while held in location by anchors and/or cables. 

Oil Payment

A production payment payable from oil.

Oil or Gas Property

Each separate interest owned by the taxpayer in each mineral deposit in each separate tract or parcel of land.

Oil Shale

Generally refers to a sedimentary rock that contains solid, combustible organic matter in a mineral matrix.   The organic matter, often called kerogen, is largely insoluble in petroleum solvents, but decomposes to yield oil when heated.  

Operating Mineral Interest

A separate mineral interest in respect of which the costs of production of the mineral are required to be taken into account by the taxpayer for purposes of computing the 50 percent of taxable income from the property in determining the deduction for percentage depletion. See IRC § 614(d) and Treas. Reg. § 1.614-2(b).


The individual or company responsible for conducting exploration and production activities in a defined area. In a joint venture the operator is usually the holder of the largest interest.

Overriding Royalty

A right to a stated fraction of production, in kind or in value, created from the working interest, having a term coextensive with that of the working interest, but not burdened with development or operation costs.

Participation Agreement

An agreement between two or more parties to share in the cost and production of a well.


Recovery from the net proceeds of production of the entire cost of drilling, completing, and equipping a well.


The piercing of the casing wall and cement to provide holes through which the hydrocarbons may enter the well bore.

Percentage Depletion

The method of computing the depletion deduction based upon an arbitrary percentage of gross income from production (gross income from the property).  The percentage depletion allowance is limited to 100 percent of the taxable income from oil and gas operations computed with respect to each separate operating mineral interest  See IRC §§ 613 and 613A and Treas. Reg. § 1.613-1(a).


Chemicals derived from petroleum feedstocks for the manufacture of a variety of plastics, synthetic rubber, etc.


A complex mixture of hydrocarbons with small quantities of other materials, such as sulphur (usually combined), nitrogen compounds, water, and silica.

Pool of Capital

Under this theory, a taxpayer contributing property, cash or drilling services to the drilling of an oil or gas well in return for an economic interest in that well makes a capital contribution to the "pool of capital" available to the venture. The taxpayer is considered to have received a capital interest in the well that was not taxable upon its receipt.


The term is used to denominate the bringing together of small tracts sufficient for the granting of a well permit under applicable spacing rules, as distinguished from unitization which is the joint operation of a reservoir.  Pooling is important to prevent the drilling of unnecessary and uneconomic wells.

Possible Reserves

The reserves that are estimated with less certainty than probable reserves and are less likely to be recovered.  See Treas. Reg. § 1.611-2(c)(1)(ii).

Probable Reserves

The reserves that are less likely to be recovered than proven reserves but are estimable and more likely to be recovered than not recovered. See Treas. Reg. § 1.611-2(c)(1)(ii).

Primary Production

Oil production, which is recovered through the use of the natural energy source in the reservoir.  Also called primary recovery

Primary Term

The period of time a lease may be kept in force even though no drilling operations have commenced. Payments of delay rentals may or may not be required.  The time period varies.


One who owns an economic interest in a well that produces oil or gas.


Production Payment:

A share of the minerals produced from a lease, free of the cost of production, which, inter alia, terminates when a specified sum of money has been realized.  Production payments may be reserved by a lessor or carved out by the owner of the working interest.

Production Taxes

Taxes levied by state governments on mineral production based on the value and/or quantity of production.  These are also referred to as severance taxes.

Project Area

In the search for mineral producing properties, it is customary for a taxpayer to conduct geological and geophysical studies and surveys within a large geographical area (the project area).  The purpose of these initial reconnaissance type surveys is to identify specific geological features with sufficient mineral producing potential to merit further exploration.  The costs incurred with respect to these initial surveys are capital in nature and must be allocated equally among the "areas of interest" that are selected for more intensive surveys.  See Rev. Rul. 77-188,1977-1 C.B. 76


Each separate interest owned by a taxpayer in each mineral deposit in each separate tract or parcel of land. See IRC § 614(a) and Treas. Reg. § 1.614-8.

Pumping Unit

Sometimes referred to as a pump jack.  Normally consists of an electric or gas motor that causes an elevated walking beam to reciprocate up and down. 


A specialized kind of workover that normally results in the well producing from a different geologic formation or interval than before. 

Reconnaissance Survey

A survey of a project area utilizing various geological and geophysical exploration techniques to identity specific geological features with sufficient mineral producing potential to merit further exploration. See Rev. Rul. 77-1 88, 1977-1 C.B. 76, Rev. Rul. 83-105, 1983-2 C.B. 51.

Recoverable Reserves

The total recoverable units (e.g., barrels or thousands of cubic feet) of minerals reasonably known to exist in place as of the estimation date.  The estimation of recoverable reserves must be made in accordance with the method current in the industry in light of the most accurate and reliable information obtainable.  The estimation must be made in the first taxable year within which depletion is taken with respect to a mineral interest and the recoverable reserves can only be reestimated if it is determined by operations or development work that the number of recoverable reserves are materially greater or less than the number remaining from the prior estimate.  (See page 21 for discussion on elective safe harbor allowed by Revenue Procedure 2004-19 for computation of recoverable reserves.)


A catalytic process for converting low octane number naphthas or gasolines into high octane number products.


In catalytic cracking, removal of carbon from the catalyst in order to make it suitable for reuse.


A porous, permeable sedimentary rock containing commercial quantities of oil or gas.

Residue Gas

Natural gas, mostly methane, which remains after processing in a separator or plant to remove liquid hydrocarbons contained in the gas when produced.

Retained Interest

A special nonoperating interest retained by the lessor when the lessor transfers the responsibilities for developing the property to another party.


A share of the gross production of the minerals (or a share of the proceeds from sale) on a property by the landowner without bearing any of the cost of producing the minerals.  The usual landowner's royalty is one-eighth of gross production.

Run Statement

A statement supplied by the purchaser of oil or gas to an interest owner setting forth the gross volume of product taken, sales value, taxes paid, and net payment to the owner.  The run statement usually accompanies the payment for the runs.

Run Ticket

Evidence of receipt or delivery of oil issued by a pipeline or other carrier or purchaser.

SAE Viscosity

An arbitrary system for classifying motor oils according to their viscosities established by the Society of Automotive Engineers.

Salt Water

Disposal Wells

Wells used for disposal of saltwater that is produced along with oil or gas.

Secondary Production

Oil recovered by a secondary recovery method used to recover oil from a field by a means other than the normal pumping or flowing methods.  This will normally involve the flooding of the formations through injection wells with water or another substance to drive the recoverable oil to producing wells.

Seismic Survey

Geophysical information on subsurface rock formations gathered by means of a seismograph.


A gas-oil separator is a cylindrical tank, usually located at or near the tank battery, which is used to separate oil and/or gas well effluent into liquids and gas at or near atmospheric pressure

Severance Taxes

See Production taxes.

Sharing Arrangement

A transaction where a person contributes to the acquisition, exploration, or development of an oil or gas property and receives as consideration an interest in the property to which the contribution is made.

Shooting Rights

The right to make a geological survey on land.

Shut-in Wells

A producing well that has been closed down temporarily, or one that was never connected to a pipeline because of a very remote location.


A secondary wellbore drilled away from the original hole.   It is possible to have multiple sidetracks, each of which might be drilled for a different reason.

Sour Oil or Gas

Oil or gas containing more than a certain proportion of hydrogen sulfide or other sulfur compounds, usually 0.5 percent or more.


To start the actual drilling of a well.

Stripper Oil

Oil recovered from a stripper well. Oil produced from a well that is not a gas well which produces less than 15 barrels a day

Stripper Well Property

A property where the average domestic crude oil and domestic natural gas produced during a calendar year divided by the number of such wells is 15 barrels or less.

Sweet Oil or Gas

Crude oil or natural gas which contains little or no sulphur or hydrogen sulfide.

Take or Pay Contract

A contract by which a pipeline company, within a specific period of time, must pay for an agreed number of units whether or not the units have been taken.  The pipeline company usually has the right to take these units, within a specified time period, without further payment.

Tank Battery

Two or more tanks connected together on a property to store oil production prior to sale and/or removal.

Tank Farm

A number of oil storage tanks located together where oil gathered by a pipeline company is stored prior to transportation to the refinery.

Tar Sands

Native asphalt, solid and semisolid bitumen, including oil-impregnated rock or sands from which oil is recoverable only by special treatment.  Processes have been developed for extracting the oil, referred to as synthetic oil

Tertiary Production

A method used to recover oil after a secondary method has been applied, typically by using heat or chemicals to increase the flow of hydrocarbons in the formation.

Three Dimensional Seismic

A set of numerous closely-spaced seismic lines that provide a large amount data regarding the contours of subsurface geological layers.  The resultant data set can be accurately viewed in any direction.    3D seismic data allows the construction of subsurface maps that are more accurate than those based on more widely spaced 2D seismic lines.

Tight Gas

Natural gas produced from a tight formation, one that will not give up its gas readily or in large volumes.  The production of tight gas is more costly and therefore less attractive to producers owing to the need for fracturing, acidizing, and other expensive treatments to free the gas from the relatively impermeable formations

Top Lease

The granting of a new oil or gas lease prior to the termination of an existing lease; the new lease becoming effective upon expiration of the old lease


The planned periodic inspection and overhaul of the units of a refinery or processing plant requiring the shutting down of a refinery (or individual units) for inspection, cleaning, repair, or upgrading.

Turnkey Well

A completed well, drilled and equipped by a contractor for a fixed price.


A term denoting the joint operation of separately owned producing leases in a pool or reservoir. Unitization makes it economically feasible to undertake cycling, pressure maintenance, or secondary recovery programs.

Unit of Production Method

A method used to calculate depletion, depreciation, or amortization based upon quantities produced in relation to expected ultimate recovery of oil and/or gas.  See Treas. Reg. § 1.611-2(a) for a description of the calculation for depletion of oil and/or gas wells.


That property of a liquid which causes it to offer resistance to flow.  The higher the viscosity of an oil the less readily it will flow; the lower the viscosity of the oil the more readily it will flow.  Motor oil with a viscosity of SAE 10 will flow more readily than a SAE 20.


A measure of the propensity of a substance to change from the liquid or solid state to the gaseous state.  A volatile liquid is one that readily vaporizes at comparatively low temperatures.


A method of secondary recovery, in which water is injected into an oil reservoir for the purpose of pushing the oil out of the reservoir rock and into the bore of a producing well.


Equipment used to maintain surface control of a well. See Christmas Tree.

Wildcat Well

A well drilled in an unproved area, far from a producing well; an exploratory well in the truest sense.

Working Interest

The usual working or operating interest consists of seven-eighths of the production subject to all of the costs of drilling, completing and operating the lease.

Workover Costs

Expenses of "reworking" a well.  These are costs of cleaning, reaciding, reperforating, recementing, plugging back, and similar costs.  They may be recurring type costs but not on an annual or shorter time basis.


In petroleum refining, the percentage of product or intermediate fractions based on the amount charged to the processing operation.


Chapters II & III | Table of Contents | Chapters V, VI, VII, & VIII

Page Last Reviewed or Updated: 10-Mar-2015