Glossary

Absolute Open Flow (AOF) pertains to figures that are reported to state authorities for a 24-hour production test. These test figures should not be relied upon as a sustainable daily production rate for a well.
Accredited Investor is any person who falls within the definition of accredited investor as that term is contained in regulation d, section 230.501, as adopted by the securities and exchange commission under the securities act of 1933, as amended.
Additional Mandatory Assessments are the amounts of additional capital assessments, which may be assessed for the completing, and equipping of the wells to be drilled if completion is deemed advisable without turnkey protection provision.
Alternative Minimum Tax (AMT) Beginning in 1993 intangible drilling costs and depletion allowance no longer are considered tax preference items under the Alternative Minimum Tax.
At Risk Limitation is the amount of losses deductible from gross income and is limited to the amount the taxpayer has invested in cash or property for which he is liable, that is at risk.
B/MCF Barrels per Thousand Cubic Feet of Gas
Barrel (BBL) 42 U.S. Gallons of crude oil.
Bbl OR bbls barrel or Barrels
BC Barrels of Condensate
Note: Condensate is a high gravity crude oil generally associated with gas wells.
BCF Billion Cubic Feet
BCFG Billion Cubic Feet of Gas
BCPD Barrels of Condensate Per Day
BHSIP or SIBHP Bottom Hole Shutin Pressure
BO Barrels of Oil
BOPD Barrels of Oil Per Day
CIBP Cast Iron Bridge Plug
Commercial Well a well capable of producing products recoverable under the lease(s) by the owners of the working interest, in commercial quantities.
Completion to do the necessary work and provide the necessary equipment in order to produce hydrocarbons.
Completion Costs all costs of completing one zone and attempting to put the well into production after drilling activities. Such costs shall also include the cost of plugging the well if completion of the well as a commercial well is attempted but the well is plugged prior to any sale of products.
Deadline Investments must be made prior to December 31st of the year claimed to qualify these substantial tax saving write offs.
Deductions are the tax items, which may be subtracted from gross income to arrive at taxable income in federal income tax computations.
Deepen an operation whereby a well is drilled to an objective zone below the well’s previous total depth.
Depletion Allowance Normally, this deduction is 15% of well gross revenue received from gas and oil production per year. This means that fifteen cents of every income dollar is not taxable, therefore, produces limited tax sheltered income. This depletion allowance can be as high as 25% for low producing gas wells and if the price of oil goes below previous years average.
Depletion Allowance is the income tax deduction allowed for the exhaustion of a natural resource that is usually either 15% or 20%.
DHP Bottom Hole Pressure
Drill Stem Test the test of the producing capabilities of a geological zone through the use of special tools mounted on the drill stem.
Drilling Agreement the agreement to drill and test a well at a turnkey, invoice, or estimated cost to participants, and to complete and equip the well at a turnkey, invoice, or estimated cost to participants.
Drilling Cost the costs of drilling a well to the point at which an attempt is made to complete the well.
Dry Hole a well that the operator determines, in the exercise of its sole discretion, is not capable of producing oil and/or as in commercial quantities.
Expenses and Costs where referring to costs and expenses of the program, the following special meaning shall apply:
Farmout shall mean an agreement whereby the owner of an specific leasehold or working interest assigns such interest to other parties while retaining some part of its original interest (such as an overriding royalty interest oil and/or gas payment, offset Acreage, or other type of interest) subject to the drilling of one or more specified wells or other performance by the other parties as a condition of the assignment.
Fault is a fracture in the earth where the rocks on one side have moved relative to the rocks on the opposite side. The movement could be sideways or up and down, and can range from a few inches to tens (or even hundreds) of miles. A fault can juxtapose a non-porous layer of rock against oil bearing reservoir, sometimes thereby forming a trap.
FBHP Flowing Bottom Hole Pressure
Formation is a layer of rock having characteristics that are distinct and recognizable. The rock layer can thus be mapped, even among other layers of similar rocks. The thickness can range from a few feet to hundreds of feet. Distinctive features might include mineral composition; texture, diagnostic plant or animal remains (fossils) contained in it.
FP Flowing Pressure
Fracturing is a procedure that attempts to increase the flow of oil or gas from a well. Fluid and gas, usually n2 or c02 is pumped into the reservoir rock, with such great force that the rock is physically broken and split apart. Usually the frac fluid carries sand will lodge in the fractures and prop them open (called the propping agent or proppant).
FT Formation Test
FTP Flowing Tubing Pressure
General and Administrative Expenses all customary and routine legal, accounting, geological engineering, travel, mail, office rent, telephone, compensation to officers and employees, and other incidental expenses of the company necessary to conduct operations.
General Summary In the Tax Reform Act of 1986, Congress continued to give preference tax treatment to investors in gas and oil development. This legislation allows working interest owners of gas and oil not to be considered passive. It is possible to carry intangible drilling cost deductions back 3 years or forward 5 years.
HBP Held by Production
IBHFP Initial Bottom Hole Flowing Pressure
IDC Intangible Drilling Cost (encompasses all costs that are not tangible, i.e. pipe, tanks & other physical equipment)
Initial Potential is the flow rate measured during the initial completion of a well in a specific reservoir. It may or may not reflect the producing capabilities of the well.
Intangible Drilling Cost (IDC) are the expenditures made by an owner of a unit for labor, fuel, rental, repairs, hauling equipment and supplies, service contracts, organizational costs, supervision, etc. Or any of them, which are used: (i) in the drilling, shooting and cleaning of wells; (ii) in clearing of ground, draining, road making, surveying and geological work necessary in preparation for drilling and production; (iii) in organizing and marketing the program, and (iv) in the construction of such derricks, tanks, pipelines, and other physical structures as are necessary for the drilling of wells and preparation of the wells for production. Intangible costs are those costs for goods and services where there is no salvage value or recovery.
Intangible Drilling Cost (IDC) All costs for drilling and completion of wells to production that cannot be salvaged and are necessary for the drilling and completion of wells to produce oil and gas are considered intangible drilling costs. (Examples: land preparation, drilling, fuel repairs, all labor, road building, etc.) Eighty-five percent (85%) of the total investment can be written off income and capital gain the year that the money is invested.
IRS Publication 535Business Expenses is a good reference for income tax purposes. Income and expense attributable to a gas and oil investment is reported on Schedule C (Profit and Loss From Business) included with tax return Form 1040. Texas Western Reserves forwards you each January the information from your gas and oil income needed by you to complete your Schedule C. It should be stressed that Texas Western Reserves is not familiar with individual tax situations of their investors and cannot give specific recommendations.
ISIP Initial Shut in Pressure
Landowner Royalty/Royalty a portion of the total production from an oil and gas lease which is not subject to payment of development or operating costs, and which The grantor of the lease(s) (owners of the minerals under the land to be drilled upon) has retained for themselves. Therefore, if the lessees find oil or as on the land/leases, the Holder of a landowner’s royalty is entitled to a share of the proceeds free of any development or operating costs in proportion to this retained fractional interest.
Lease Operating Expense (LOE) pertains to any period with all cash costs incurred in connection with the running and maintenance of project wells.
Leases the oil and gas leases, which contain the existing wells or leases on which wells will be drilled, re-entered, reworked, or re-equipped.
LOE Lease Operating Expense
MCF Thousand Cubic Feet
MCFPD or MMCFG Thousand Cubic Feet of Gas Per Day
MMBTU Thousand British Thermal Units (Gas is sold in MMBTU and quoted in MCF)
MMC or MMCFG Million Cubic Feet
MMCFG ” Million Cubic Feet of Gas
Note: Cumulative production of gas from a well is generally stated MMCF if production is less than a DCF (Billion Cubic Feet). Sometimes, however, it is stated as a percentage of Billion Cubic Feet. For example: .575 DCF is the same as: 575 MMCF or even possibly 575,000 MCF.
Net Operating Revenues shall mean the amount paid, from the proceeds of the sale of products allocated to the owners of the working interest in accordance with their respective revenue interim, after payment of all royalties, severance taxes and operating costs.
Net Revenue Interest means that portion of the total revenue from producing oil and/or gas wells which will be allocated to the working interest owners (which includes unit owners), with the balance of revenue allocated to royalty owners/overriding royalty owners, those owners are not required to pay any expenses other than their prorated share of taxes.
Offset Well a well drilled next to the location of the original well, or at a nearby location that was chosen as a result of an original well. The distance from the original well to the offset well depends upon spacing regulations, availability of leases, reservoir considerations, and whether further drilling is justified to fully develop the lease.
Operating Agreement the contract between the operator and all other owners (or owner’s agents) of the working interest. This agreement spells out the provisions relating to the sharing of expenses and revenues and accounting methods. The authority of the operator and restrictions imposed upon it are also contained in this agreement.
Operating Expenses the customary expenses of operations of oil and/or gas wells, and the producing and marketing of the oil and/or gas, including, but not limited to, the costs of reworking or similar expenses relating to any well, the costs for re-completion in or deepening to another productive zone, but excluding initial drilling or completion costs or the depletion, depreciation or amortization thereon.
Operator is the working interest owner responsible for the drilling, completion, and production operations of a well, and the physical maintenance of the leased property.
Organizational and Offering Cost (I) expenses for printing, graphics, and mailing materials used in connection with the placement of the units; (II) attorney’s fees and other fees in connection with the preparation of this memorandum and the placement of units: (III) other expenses including, but not limited to, rent, phone, utilities, supplies, and labor costs, incurred by the company in connection with the placement of the units and the collection of assessments.
Passive or Active Activity A working interest in gas and oil producing property is not considered as a passive activity for tax purposes. The current IDC deduction for the Current Prospect is 85% of total investment.
Payout that point in time when there shall have been paid to the participants, proceeds from the sale of products produced, less expenses in an amount equal to total initial capital paid by participants.
Pay zone an interval of rock front which oil and gas production in commercial quantities is expected.
PBTD Plugged Back Total Depth
Perforating accomplished by an instrument containing explosive charges lowered and controlled from the surface. When the instrument is at the level of the pay zone bullets (shaped charges) are detonated into the reservoir rock, piercing the casing. The resulting holes allow rock fluids to flow from the pay zone into the borehole.
Permeability is the measurable capacity of rock to allow a fluid or gas to flow through it. Along with porosity, one of the two most critical properties of the reservoir rock to be commercially productive. Oil or gas must be able to flow from the reservoir rock into the well.
Porosity is the percentage, by volume, of space or voids in a rock. Commercially productive rock typically has porosity ranging from about 5% to 35%. The higher the porosity, the more oil or gas can be contained in the pore spaces, hence the better quality of reservoir rock.
PSI Per Square Inch
Reserves are the amount of oil or gas in a reservoir currently available for production. Usually described as barrels of oil or mcf (thousand cubic feet) of gas attributable to a well, property, or to an entire field.
Risk is defined as the possibility of loss in oil and gas exploration; a level of uncertainty is associated with the drilling of a well.
Spud to begin drilling a well.
Subscription Period the period of time during which the units shall be offered for sale or such later date thereafter to which the company may elect to extend the offering.
Tangible Drilling Cost The portion of drilling costs that does have salvage value. (Examples: casing, tubing, well head, flow lines, etc.) Normally, these tangible costs are depreciated over 5 years using the Accelerated Cost Recovery System (ACRS). Section 179 is an election whereby an investor may be allowed to write off up to $17,000 of capitalized cost per year.
TD Total Depth
TDC Tangible Drilling Costs (pipe, tanks, meters, gauges other materials)
Turnkey the costs of the program, drilling and completion, are fixed and that no further assessment shall be made to the participants. In the event costs of the program exceed estimated costs, the company shall absorb those costs.
Unit is a percentage of the undivided ownership in the properties/prospect, each unit to receive its prorated share of income and having the obligation to pay that unit’s pro-rata share of lease acquisitions, drilling, testing, reworking, reequipping, or other activities required which represents that owner’s share.
Working Interest the operating interest owned under an oil and gas lease entitling the owner to that interest’s share of revenue and the obligation to pay that interest’s share of expenses for drilling activities and operations. The working interest owners bear all expenses and costs of drilling and operations, unlike the royalty/overriding royalty interest. Which bears no expenses except for taxes.