Abstract of Title: A chronological history of the ownership and/or significant events affecting a particular piece of property; a document prepared by a title or abstract company and certified by the preparer to contain all pertinent information or copies of all documents affecting title to a given piece of property.
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.
Division Order: A contract with a purchaser of oil and gas which directs the payments of oil and gas revenues to the interest owners of a well.
Exchange: The sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind qualified use real estate or personal property (replacement property) in a transaction structured as a tax-deferred, like-kind exchange pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations. The purpose of a 1031 exchange is to defer federal, and in most cases state, depreciation recapture, depletion, and capital gain income tax liabilities.
Fracking: 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.
Initial Production (IP): 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.
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. It is simply a "ticket to hunt.”
Operating Expense: The expenses incurred through the operation of producing properties.
Payout: When the costs of drilling, producing, and operating have been recouped (cost recovery) from the sale of products on a well.
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. 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.
Proven Reserves: Oil and gas which has not been produced but has been located and is recoverable.
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.”
Tank Battery: A group of tanks at a well site used to store oil prior to sale to a pipeline company.
Testing: When each new well is completed, a series of tests are run on the well. The various tests are used to estimate the daily deliverability, payout, and reserves.