Terminologies In Petroleum Industry

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.