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Oil and Gas 102: Glossary of Terms

Whether you are a newcomer or well-versed in the oil and gas business, there is never a shortage of learning opportunities. In part one of our glossary, we compiled a list of some of the most popular terms, such as "Affidavit of Production" and "Non-Participating Royalty." In part 2 of our oil and gas glossary of terms, we highlight more commonly used words, along with their definitions.

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1. Adverse Possession: Obtaining title to land by taking possession of the land and staying in possession for a certain number of years, as set by law. The adverse possession statutes vary by state, but share requirements that the rightful owner has had notice (actual or constructive), that the possession is open, and notorious (i.e., occupation in a manner that is open and obvious to the public)

2. Affidavit: An instrument in writing by a sworn witness that recites certain facts as true.

3. After Payout (APO): The point at which a well’s revenues surpass the costs to drill, complete and operate.

4. Base Royalty: the royalty reserved by the owner of the leasing rights upon execution of an oil and gas lease. This is the royalty amount (percentage) stated on the lease document itself.

5. Before Payout (BPO): The period before a well has paid out the costs to drill, complete and operate.

6. Carried Interest: a fractional interest in an oil and gas property which has no obligation for operating costs. Operating costs are borne by owner(s) of the remaining interest in the property. Carried interests do not generally receive revenue from the well until some payout threshold had been met. This is usually 100% of cost of drilling, but can be contractually set higher.

7. Casinghead Gas: Gas produced with oil wells or from wells located in oil reservoirs – not to be confused with gas from a gas well.

8. Executive Right: The power to execute an oil and gas lease on an interest in minerals.

9. Farmout Agreement: An agreement by which the owner of a lease (the farmor) agrees to assign all or a part of the lease to another party (the farmee) in return for drilling a well on the lease.

10. Fee Simple: Owner of the property in its entirety: surface, minerals, water, gravel, etc.

11. Habendum Clause: The clause in a lease or deed that sets forth the duration of the grantee’s or lessee’s interest in the premises. This is known as the ‘primary term’ in an oil and gas lease.

12. Joint Operating Agreement: An agreement between or among concurrent owners for the operation of a concurrently owned tract of leasehold for oil, gas and other minerals.

13. Metes & Bounds: A method of describing a tract of land by calls and distances from an established beginning point and following boundary lines.

14. Mineral Acre: The full mineral interest in one acre of land.

15. Offset Well: A well drilled on one tract of land to prevent drainage of oil and gas to an adjoining tract of land on which a well is being drilled or is already in production.

16. Oil and Gas Leasing: The general term that refers to the multi-stage process of acquiring the leasehold rights to oil and gas minerals by negotiating with mineral owners with executive rights.

Also read: Top 8 Questions You Might Have About Oil and Gas Leases

17. Operating Interest: The mineral interest minus the royalty interest. Normally created by an oil and gas lease. This term is usually used in reference to a Federal oil and gas lease.

18. Paid Up Lease: A lease effective during the primary term without further payment of delay rentals.

19. Production in Paying Quantities: Production in such quantity as to enable the operator to realize a profit. It has different meanings for different purposes but is usually used as the measure to determine if production is sufficient to hold the underlying lease.

20. Proportionate Reduction Clause: A clause providing for the reduction of payments to a lessor if the interest is less than that which was purported. This clause is a response to the Duhig rule which interprets ambiguous assignments in favor of the assignees, and protects the against accidental over-assignment of interest.

21. Title Due Diligence: The process of analyzing public title records and various forms of supporting documents (e.g. leases, title opinions, agreements, accounting records, division of interest records, etc.) to confirm the title and interest representations of a given property or set of properties. This process takes many forms and may be done for different reasons.

Also read: Are You Doing the Wrong Oil and Gas Title Due Diligence?

22. Quitclaim Deed: A deed that conveys only the grantor’s present interest in the property, if any at all. Offers no implied warranties of any kind.

If you are looking for further details or help with a specific project, contact us today.

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