Terminologies in Petroleum Industry

API Gravity.

It is an arbitrary scale expressing the gravity or density of liquid petroleum products. The

measuring scale is calibrated in terms of degrees API. The higher the API gravity, lighter is the

compound. Light crudes generally exceed 38 degrees API and heavy crudes are commonly

labeled as all crudes with API gravity of 22 degrees or below. Intermediate crudes fall in the

range of 22 degrees to 38 degrees API gravity

Barrels per Calendar Day

The amount of input which a distillation facility can process under normal operating conditions.

The amount is expressed in terms of capacity during a 24-hour period and reduces the maximum

processing capability of all units at the facility under continuous operation (see Barrels per

Stream Day) to account for the limitations that may delay, interrupt, or slow down production:

British Thermal Unit (BTU)

The amount of heat required to increase the temperature of a pound of water 1 degree Fahrenheit.

A BTU is the common measure of heating value for different fuels. Prices of different fuels and

their units of measure (dollars per barrel of crude, dollars per ton of coal, cents per gallon of

gasoline, cents per thousand cubic feet of natural gas) can be easily compared when expressed as

dollars and cents per million BTUs.

Bulk Station

A facility used primarily for the storage and/or marketing of petroleum products which has a

total bulk storage capacity of less than 50,000 barrels and receives its petroleum products by tank

car or truck.

Bulk Terminal

A facility used primarily for the storage and/or marketing of petroleum products which has a

total bulk storage capacity of 50,000 barrels or more and/or receives petroleum products by

tanker, barge, or pipeline.

Buy Back Agreement

An agreement between a host government and a contractor under which the host pays the

contractor an agreed price for all volumes of hydrocarbons produced by the contractor. Pricing

mechanisms typically provide the contractor with an opportunity to recover investment at an

agreed level of profit. These agreements may include financial incentives for more efficient,

lower cost developments and production levels higher than the minimum level agreed. These

agreements may give rights to oil volumes and generally carry a risk for the contractor. They

may allow booking of reserves.

Carried Interest

A carried interest is an agreement under which one party (the carrying party) agrees to pay for a

portion or all of the pre-production costs of another party (the carried party) on a license in

which both own a portion of the working interest. This arises when the carried party is either

unwilling to bear the risk of exploration or is unable to fund the cost of exploration or

development directly. Owners may enter into carried interest arrangements with existing or

incoming joint venture partners at the exploration stage, the development stage, or both.

Commercial

A project is commercial if the degree of commitment is such that the accumulation is expected to

be developed and placed on production within a reasonable time frame. A reasonable time frame

for the initiation of development depends on the specific circumstances but, in general, should be

limited to around 5 years.

Committed Project Petroleum development projects are committed when firm commitments have been made for the

expenditures and activities needed to bring a discovered accumulation to the production stage.

Undeveloped projects are committed only when it can be clearly demonstrated that there is intent

to develop them and bring them to production. Intent may be demonstrated with firm

funding/financial plans, declarations of commerciality, regulatory approvals and satisfaction of

other conditions that would otherwise prevent the project from being developed and brought to

production. These commitments should be unconditional, except for timing that may be

dependent on the development of prior committed projects. An example of this would be where

production is dedicated to a long-term sales contract and will only be developed as and when the

capacity is required to satisfy the contract.

Concession

A grant of access for a defined area and time period that transfers certain rights to hydrocarbons

that may be discovered from the host country to an enterprise. The enterprise is generally

responsible for exploration, development, production and sale of hydrocarbons that may be

discovered. Typically granted under a legislated fiscal system where the host country collects

taxes, fees and sometimes royalty on profits earned.

Cost Recovery

Under a typical production-sharing agreement, the contractor is responsible for the field

development and all exploration and development expenses. In return, the contractor recovers

costs (investments and operating expenses) out of the gross production stream. The contractor

normally receives payment in oil production and is exposed to both technical and market risks.

Current Economic Conditions

Establishment of current economic conditions should include relevant historical petroleum prices

and associated costs and may involve an averaging period that is consistent with the purpose of

the reserve estimate, appropriate contract obligations, corporate procedures, and government

regulations involved in reporting these reserves.

Crude Oil

A mixture of hydrocarbons that exists as a liquid in natural underground reservoirs and remains

liquid at atmospheric pressure after passing through surface separating facilities. Crude is the raw

material which is refined into gasoline, heating oil, jet fuel, propane, petrochemicals, and other

products.

Crude Oil, Refinery Receipts

Receipts of domestic and foreign crude oil at a refinery. Includes all crude oil in transit except

crude oil in transit by pipeline. Foreign crude oil is reported as a receipt only after entry through

customs. Crude oil of foreign origin held in bonded storage is excluded.

Crude Oil Losses.

Represents the volume of crude oil reported by petroleum refineries as being lost in their

operations. These losses are due to spills, contamination, fires, etc. as opposed to refinery

processing losses.

Crude Oil Production.

The volume of crude oil produced from oil reservoirs during given periods of time. The amount

of such production for a given period is measured as volumes delivered from lease storage tanks

(i.e., the point of custody transfer) to pipelines, trucks, or other media for transport to refineries

or terminals with adjustments for (1) net differences between opening and closing lease

inventories, and (2) basic sediment and water (BS&W).

Crude Oil Qualities.

Refers to two properties of crude oil, the sulfur content and API gravity, which affect processing

complexity and product characteristics.

Daisy chain:

Term refers to the "chain" of linked sales and transfers by which a cargo of oil or oil products is

sold many times before being delivered to the customer.

Downstream sector:

It refers to all of the linked businesses which refine and market petroleum including pipeline

systems, refineries, gas distribution, and petrochemical companies.

Farm-in:

An outside party paying a land owner all or a percentage of the drilling costs of a well in order to

obtain a working interest in the land or well.

Farm-out:

The land owner gives a percentage of his land or a portion of his working interest in a well in

order to allow an outside party to drill or explore on his property. This generally reduces risk as

capital is provided by the company farming-in.

Feedstock:

The supply of crude oil, natural gas liquids, or natural gas to a refinery or petrochemical plant or

the supply of some refined fraction of intermediate product to some other manufacturing process.

Field:

The surface area above a petroleum formation.

Flaring:

The controlled and safe burning of gas which cannot be used for commercial or technical

reasons. This usually occurs at the point of production, and during processing.

Gas field:

A field or group of reservoirs of hydrocarbons containing natural gas but insignificant quantities

of oil.

Independent Producer:

Term generally applies to a non-integrated oil or natural gas company, usually active in only one

or two sectors of the industry. An independent marketer buys petroleum products from major or

independent refiners and resells them under his own brand name or buys natural gas from

producers and resells it. There are also independents which are active exclusively either in oil or

gas production or refining.

Joint venture:

An investment undertaken by a consortium, usually with one member acting as the operator.

Liquified natural gas (LNG):

Natural gas that has been liquified for ease of transport by cooling the gas to -162-C. Natural gas

has 600 times the volume of LNG.

Liquefied Petroleum Gas (LPG):

Propane, butane, or propane-butane mixtures derived from crude oil refining or natural gas

fractionation. For convenience of transportation, these gases are liquefied through pressurization.

Loan Agreement

A loan agreement is typically used by a bank, other financial investor, or partner to finance all or

part of an oil and gas project. Compensation for funds advanced is limited to a specified interest

rate. The lender does not participate in profits earned by the project above this interest rate.

There is normally a fixed repayment schedule for the amount advanced, and repayment of the

obligation is made before any return to equity investors. Risk is limited to default of the

borrower or failure of the project. Variations in production, market prices, and sales do not

normally affect compensation. Reserves are not recognized under this type of agreement.

Major

A term broadly applied to those multinational oil companies which by virtue of size, age, or

degree of integration are among the preeminent companies in the international petroleum

industry.

Market capitalization:

It is calculated by multiplying the number of outstanding shares by the current stock price. This

represents the market's valuation of the company at that specific time.

Mineral Interest

Mineral Interests in Properties Including

(i) a fee ownership or lease, concession or other interest representing the right to extract

oil, or gas subject to such terms as may be imposed by the conveyance of that interest,

(ii) royalty interests, production payments payable in oil or gas, and other nonoperating

interests in properties operated by others; and

(iii) those agreements with foreign governments or authorities under which a reporting

entity participates in the operation of the related properties or otherwise serves as

producer of the underlying reserves (as opposed to being an independent purchaser,

broker, dealer or importer). Properties do not include other supply agreements or

contracts that represent the right to purchase, rather than extract, oil and gas.

Natural Gas

A gaseous mixture of hydrocarbon compounds, the primary one being methane.

Natural Gas Field Facility

A field facility designed to process natural gas produced from more than one lease for the

purpose of recovering condensate from a stream of natural gas; however, some field facilities are

designed to recover propane, normal butane, pentanes plus, etc., and to control the quality of

natural gas to be marketed.

Natural Gas Processing Plant

Facilities designed to recover natural gas liquids from a stream of natural gas that may or may

not have passed through lease separators and/or field separation facilities. These facilities control

the quality of the natural gas to be marketed. Cycling plants are classified as gas processing

plants.

Netback:

The amount of money a company receives per barrel of oil equivalent produced, after subtracting

operating costs, royalties, and general and administrative costs.

Net production:

Petroleum production that is owned by a company, individual, trust, or foundation, less royalties

and production due others.

Operator:

The individual, company, trust, or foundation responsible for the operation of the project. It

applies in exploration, development, and production of an oil or gas well or lease.

Petroleum Products Petroleum products are obtained from the processing of crude oil (including lease condensate),

natural gas, and other hydrocarbon compounds. Petroleum products include unfinished oils,

liquefied petroleum gases, pentanes plus, aviation gasoline, motor gasoline, naphtha-type jet fuel,

kerosene-type jet fuel, kerosene, distillate fuel oil, residual fuel oil, petrochemical feedstocks,

special naphthas, lubricants, waxes, petroleum coke, asphalt, road oil, still gas, and

miscellaneous products.

Pipeline (Petroleum)

Crude oil and product pipelines used to transport crude oil and petroleum products respectively,

(including interstate, intrastate, and intercompany pipelines

Possible reserves:

An estimate of possible oil and/or gas reserves based on geological and engineering data from

undrilled or untested areas.

Probable reserves:

An estimate of oil and/or gas reserves based on penetrated structures, but needing more advanced

confirmation to be classified as proven reserves.

Proven reserves:

The quantity of oil and gas estimated to be recoverable from known fields under existing

economic and operating conditions. It is determined on the basis of drilling results, production,

and historical trends.

Refinery

An installation that manufactures finished petroleum products from crude oil, unfinished oils,

natural gas liquids, other hydrocarbons, and oxygenates.

Revenue Sharing Contract

Revenue-sharing contracts are very similar to the production-sharing contracts described earlier,

with the exception of contractor payment. With these contracts, the contractor usually receives a

defined share of revenue rather than a share of the production. As in the production- sharing

contract, the contractor provides the capital and technical expertise required for exploration and

development. If exploration efforts are successful, the contractor can recover those costs from

the sale revenues. A very similar type of agreement is commonly known as a risked-service

contract. This type of agreement is also often used where the contracting party provides expertise

and capital to rehabilitate or institute improved recovery operations in an existing field. Provided

that the requirements for reserves recognition are satisfied, reported reserves are typically based

on the economic interest held or the financial benefit received.

Reversionary Interest

The right of future possession of an interest in a property when a specified condition has been

met

Risk

It is the probability of loss or failure. As “risk” is generally associated with the negative

outcome, the term “chance” is preferred for general usage to describe the probability of a discrete

event occurring. Risk and Reward Risk and reward associated with oil and gas production

activities stems primarily from the variation in revenues from technical and economic risks.

Many companies use exposure to risk in conjunction with the rights that they are assigned to

operate and to take volumes in kind to support reserves reporting. Technical risk affects a

company's ability to physically extract and recover hydrocarbons and is usually dependent on a

number of technical parameters. Economic risk is a function of the success of a project and is

critically dependent on the ability to economically recover the in-place hydrocarbons.

Risk Service Contract

These agreements are very similar to the production-sharing agreements with the exception of

contractor payment. With a risked-service contract, the contractor usually receives a defined

share of revenue rather than a share of the production. As in the production-sharing contract, the

contractor provides the capital and technical expertise required for exploration and development.

If exploration efforts are successful, the contractor can recover those costs from the sale revenues

and receive a share of profits through a contract-defined mechanism. Under existing SEC

regulations, it may be more difficult for the contractor to justify reserves recognition, and special

care must be taken in drafting the agreement. Provided that the requirements for reserves

recognition are satisfied, reported reserves are typically based on the economic interest held or

the financial benefit received.

Royalty

An interest in an oil and gas lease, that gives the owner of the interest, the right to receive a

portion of the production from the leased acreage (or of the proceeds of the sale of production).

Generally does not require the owner to pay any portion of the costs of drilling or operating the

wells on the leased acreage. Royalties may be either landowner's royalties, which are reserved by

the owner 'of the leased acreage at the time the lease is granted, or overriding royalties,

Royalty holiday

Some jurisdictions or regulators grant royalty free wells in certain situations

Sour or Sweet Crude:

Industry terms which denote the relative degree of a given crude oil's sulfur content. Sour crude

refers to those crudes with comparatively high sulfur content, 0.5% by weight and above; sweet

refers to those crudes with sulfur content of less than 0.5%.

Spot market:

An international market in which oil or oil products are traded for immediate delivery at the

current price

Terminal:

An onshore transit facility that receives and stores crude oil and products from offshore

production facilities via pipeline and/or tankers

Unitization:

Owners of adjoining properties pool reserves together to form a single producing unit in which

each has an interest.

Upstream industry:

Produces petroleum, also referred to as upstream sector; namely, exploration and development

companies, seismic and drilling contractors, service rig operators, engineering firms.

Working capital:

Current assets minus current liabilities, shows a company's ability to meet its short-term

obligations.

Working Interest

an interest in an oil and gas lease that gives the owner of the interest the right to drill for and

produce oil and gas on the leased acreage and requires the owner to pay a share of the costs of

drilling and production operations. The share of production to which a working interest owner is

entitled will always be smaller than the share of costs that the working interest owner is required

to bear, with the balance of the production accruing to the owners of royalties. For example, the

owner of a 100% working interest in a lease burdened by a landowner's royalty of 12.5% would

be required to pay 100% of the costs of a well but would be entitled to retain 87.5% of the

production.

Workovers

Major repairs or modifications which restore or enhance production from a well are referred to as

workovers.