Glossary of Natural Gas Terminology

There are many terms that are unique to the Natural Gas Industry and/or are used frequently within the industry. This brief glossary will help familiarize you with some of these terms.

Bit - A drilling tool that cuts the hole. Bits are designed on two basic and different principles: the cable tool bit, which moves up and down to pulverize; and the rotary bit which revolves, to grind.

Blue Sky Law – A statute which regulates the issuance and sale of securities. The term is usually restricted to state statutes.

Bringing in a well – Completing a producing well and beginning production.

BTU – British thermal unit. The amount of heat needed to raise the temperature of one pound of water one degree Fahrenheit.

Completed well – A dry hole; or a well capable of producing oil or gas; or a well drilled to such depth that oil or gas is not likely to be encountered at greater depths; or a well drilled to that reasonable depth at which the existence of oil or gas is usually proved or disproved.

Core – A solid column of rock, usually from two to four inches in diameter, taken as a sample of an underground formation. It is common practice to take cores from wells in the process of being drilled.

Deep Gas – Gas found at depths greater than the average for a particular area.

Depletion – (for tax purposes) The IRS authorizes a deduction from income for depletion in the case of gas wells. There is a deduction from net revenues, recognizing that gas wells eventually stop producing. This deduction is as much as 15%, in addition to Intangible Drilling Costs and depreciation.

Depreciation – After a well is completed and considered commercially viable, the tangible portion of the investment is capitalized and deducted as depreciation over the next several years. The tangibles make up 25-30% of the investment.

Discovery well – An exploratory well that encounters a new and previously untapped mineral deposit.

Farm Out Agreement – A very common form of agreement between operators, whereby a lease owner not desirous of drilling at the time agrees to assign the lease, or some portion of it (in common or in severalty) to another operator who is desirous of drilling the tract.

Formation – A succession of sedimentary beds that were deposited continuously and under the same conditions. It may consist of one type of rock or of alterations of types.

Frac – A term used to refer to the method used to increase the deliverability of a production of underground storage well by pumping a liquid or other substance into a well under pressure to crack (fracture) and prop open the hydrocarbon bearing formation.

Held by production (HBP) – 1) a leasehold kept in force by virtue of production in paying quantities 2) acreage which participates in the production upon a royalty basis and does not receive delay rentals.

Intangible Drilling Costs (IDC's) – Expenditures incurred by an operator for labor, fuel, repairs, hauling and supplies used in drilling. The fundamental test is, do the items have salvage value? If not, they qualify as intangibles. IDC's, for the purpose of taxes, are taken completely in the year of investment. The value is equal to the costs to determine if there is a commercially producible gas. This is usually 70-75% of the cost to bring a well on line. This considerable tax deduction is the primary incentive given by the Federal Government to stimulate investor participation.

Land Manager – An employee of a natural gas company whose primary duties are the management of the company's relations with its landowners; this individual is instrumental in acquiring leases and right-of-ways.

Lessee – The person entitled under an oil and gas lease to drill and operate wells, paying the lessor a royalty and retaining the remainder, known as the “working interest.” The lessee pays all production costs out of his fraction, the lessor's fraction being free and clear of all such costs.

Lessor – The owner of mineral rights who has executed a lease. He is normally entitled to the payment of a royalty on production, free and clear of the cost of developing or operating the property, except taxes on his share of the production.

Mineral deed – A conveyance of an interest in the minerals in, on or under a described tract of land. The grantee is given operating rights on the land; easements of access to the minerals are normally implied unless expressly negated.

Net Revenues – These are the monies received by the investor after royalty payments, management fees and direct well operating costs are deducted. These revenues are impacted by commodity pricing fluctuations and the seasonal demands of natural gas.

Open Flow – The production of oil and/or gas by virtue of reservoir energy without artificial restriction of the rate of flow.

Pay-out period – The period required for a well to produce sufficient oil or gas to reimburse the investment in the well.

Pinching Back (a well) – Producing the natural gas at lower volumes, typically as a response to volatile market conditions.

Plugging a well – The sealing off of the fluids in the strata penetrated by a well, so that the fluid from one stratum will not escape into another or to the surface.

Pooling – A term frequently used interchangeably with “unitization” but more properly 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 term is used to describe the joint operation of all or some portion of a producing reservoir.

Proven reserves – Natural gas that is still in the ground but that has been located and determined to be recoverable.

Quitclaim – An instrument releasing all interest (or the described interest) in land owned by the grantor at the time the instrument takes effect.

Rental period – The period of time for which rentals are paid in lieu of drilling operations.

Royalties – These monies are paid to parties involved in the drilling process: a) the landowner's share of production, free of the expenses of production. The landowner's royalty is one-eighth of gross revenues, by law, in PA.

Seismic – A method used to learn the nature and contour of underground geological structures. Shock waves are created at surface by means of explosive charges; the waves are reflected off rock formations, back to surface and are recorded by a seismograph.

Shallow well – Any gas well drilled and completed in a formation above the top of the upper most member of the “Onondaga Group” or at a depth of less than six thousand feet, whichever is shallower.

Shut-In – To close down a producing well temporarily, for repair, cleaning out, or building up reservoir pressure. A shut-in may occur when the producer determines that the current market price is inadequate.

Spacing – The regulation of the number and location of wells over a natural gas reservoir.

Spot purchases (or sales) of gas – Contracts for the purchase and sale of gas on a short-term basis.

Spudding in – The first boring of the hole in the drilling of a well.

Surface right – The right of a mineral owner or an oil and gas lessee to use so much of the surface of the land as may be reasonably necessary for the conduct of operations under the lease.

Surrender clause – A lease clause authorizing the lessee to surrender all or part of the leased premises and be relieved of all obligations as to the acreage surrendered.

Swabbing a well – Introduction of a swab into the tubing in order to clean out drilling mud and fluid.

Well head pressure – This is the “shut-in” pressure at the casinghead when all valves are closed for a period of time, usually 24 – 72 hours.

Well tender – An employee of a natural gas company responsible for well maintenance.

Unitization – A term frequently used interchangeably with “pooling” but is more properly used to denominate the joint operation of all or some portion of a producing reservoir as distinguished from “pooling,” which term is used to describe the bringing together of small tracts sufficient for the granting of a well permit under applicable spacing rules.