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123 Cards in this Set
- Front
- Back
upstream
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-exploration, acquisition, drilling, developing, and producing oil and gas;
-all of the activities involved in finding and producing oil and gas up to the initial point that the oil or gas is capable of being sold or used; -frequently referred to as exploration and production activities |
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downstream
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generally include refining, processing, marketing, and distribution
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midstream
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activities that have characteristics of both upstream and downstream activities
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integrated oil and gas company
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oil and gas company involved in E&P activities as well as at least one downstream activity
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independent oil and gas company
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one involved primarily in only E&P activities
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unique characteristics of upstream activities
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-high level of risk
-long time span before a return on investment is received -lack of correlation between the magnitude of expenditures and the value of any resulting reserves -high level of regulation -complex tax rules -unique cost sharing agreements |
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classification of oil and gas activities as being upstream versus midstream or downstream is of special significance because:
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due to the fact that a specialized set of accounting rules and standards apply to the financial accounting for and reporting of upstream oil and gas operations
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when and where did the modern history of the U.S. oil and gas industry begin?
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-latter half of the 19th century with the first commercial oil drilling venture in Pennsylvania
-demand at time was for kerosene, lamp fuel -industry grew with invention of automobile |
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1920's
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-WWI
-great decade of U.S. oil discovery -US companies began exploring foreign oil in Middle East, South America, Africa, Far East |
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WWII
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-drilling began is U.S. waters on offshore structures
-increased foreign exploration |
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Post WWII
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-natural gas established as major fuel for industry and home heating
-natural gas transmission pipelines constructed |
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1950s and 60s and 70s
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-US increased reliance on foreign oil with OPEC in 60s
-oil embargo of the 70s made previously ineffective OPEC create an oil crisis in the US -prompted passage of Energy Policy and Conservation Act of 1975 to encourage energy conservation and reduce reliance on foreign oil -'77 US dependence on foreign petroleum reached a high of 47% -Bc of price increases, foreign reliance fell to 27% by '85 -between 1984 and 2004, foreign reliance increased 142% |
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supply and demand of oil and gas
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-historically supply and demand of crude oil has been inelastic in the short run
-so political events that affect supply tend to cause volatility in the short run prices -higher prices result in E&P companies expanding their exploration efforts and the US conserving energy -these two efforts relieve supply and demand pressure which moves price downward in the years following a spike in prices |
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-most widely accepted hypothesis of the origin of oil and gas
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organic theory
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organic theory
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-most widely accepted hypothesis of the origin of oil and gas
-petroleum (hydrocarbons) is formed from organic material including marine plants and animals that lived millions of ears ago in low-lying areas - normally in the oceans of the world -remains were deposited throughout the years, along with layer after layer of eroded particles of igneous rock -weight and pressure of overlying layers caused the eroded rock particles to form sedimentary rock -weight and pressure and other not fully understood factors, such as chemical and bacterial processes changed, and still change, the organic material into oil and gas -after formation, oil and gas move upward through the layers of sedimentary rock due to pressure and the natural tendency of oil and gas to rise through water -petroleum migrates upward through porous and permeable rock formations until it becomes trapped by an impervious layer of rock |
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sedimentary rock
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-weight and pressure of the overlying layers caused eroded rock particles (of igneous rock) to form sedimentary rock
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trap
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impervious rock that prevents further movement of the oil and gas
-types of traps: *fault trap *anticline *salt dome |
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fault trap
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trap formed when the movement of the earth's crust causes different rock strata to offset or sheer off
-nonporous rock formation that has shifted stops the movement of oil or gas within an offsetting formation that allows petroleum to migrate |
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anticline
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-trap formed by the folding of the earth's crust into a dome
-most of the earth's oil and gas reserves are found in these -upward folding caused by pressure developed from the earth's molten core -impervious or nonporous layer of rock overlying the anticline traps the oil or gas in the anticline structure |
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salt dome
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-substantial heat and pressure cause salt buried deep within the Earth to slowly begin to move upward
-as it does so the rock layers are cracked, bent, and folded -oil and gas are often trapped in these cracked and folded rock beds |
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4 conditions that must be present for an oil or gas reservoir to be formed
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-source of petroleum
-conditions such as heat and pressure resulting in transformation of the organic material into petroleum -porous and permeable rock through which the petroleum was able to migrate after formation -an impervious rock formation that acts as a trap or cap rock, permitting petroleum to accumulate in substantial quantities |
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porosity
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the measure of pore space, i.e. openings in rock in which petroleum can exist
-the greater the porosity, the more fluid the rock can hold |
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permeability
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-measures the "connectability" of the pores, which determines the ability of the petroleum to flow through the rock from one pore space to another
-high porosity is often accompanied by high permeability |
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fracturing
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method used to increase the flow from a tight formation that involved introducing sand mixed with water or oil into the formation under high pressure to open or clean channels between the pores
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acidizing
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method to increase permeability of the formation by introducing hydrochloric acid into the formation to enlarge or reopen the channels the pores
-fracturing and acidizing are effective for only a small area of the foramtion around the wellbore |
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geological methods
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-rely on the identification of rocks and minerals on or near the surface and the understanding of the environments in which they were formed
-surface studies -aerial photography, satellite imaging, imaging radar, and topographical and geological mapping -aimed at gathering data about surface features that can be used to make inferences regarding the potential existence of petroleum-bearng subsurface formations |
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geophysical methods
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-involve subsurface studies
-aimed at locating and detecting the presence of subsurface structures and the determination of their size, shape, depth, and physical properties in order to identify the presence of certain physical characteristics that are indicative of oil and gas reservoirs -gravitational studies, magnetic and electromagnetic evaluation, and seismic studies |
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reconnaissance survey
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-G&G study covering a large or broad area
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detailed survey
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G&G study covering a smaller area, called an area of interest
-due to the high cost of seismic studies, they are usually performed after general reconnaissance studies have indicated a formation where high potential for oil and gas accumulation exists |
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success rate of traditional G&G technology in the past
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approximated only 10% of wells drilled in new, unproved areas were successful
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current success rate of G&G
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with the advent of 3d and 4d seismic technology, success rates in unproved areas have increased to approximately 60%
-with current technology, more than 75% of all wells drilled (unproved and proved) are successful |
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successful well
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a well that finds reserves in economically producible quantities
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outline of procedure for exploring for oil and gas
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1. broad G&G reconnaissance work is done to identify area of interest followed by seismic surveys
2. a lease or option to lease may be obtained 3. Detailed G&G work is done to evaluate the area of interest. More closely spaced seismic surveys may be done, and/or test wills may be drilled 4. data gathered in 1 and 3 are analyzed. if results are positive lease is obtained if it has not already been obtained 5. further analysis of available data and possibly more seismic studies are done to select the drillsite 6. well is drilled 7. based on data obtained during drilling process (cuttings, well logs, etc.) a decision is made as to whether there is sufficient oil and gas to justify completion 8. -sufficient - well is completed and production started -insufficient - another drillsite on the lease is selected or the lease is abandoned and the entire process repeats |
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mineral or economic interest
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the right to explore, develop, and produce any minerals that might exist beneath the property paired with the right to simply share in the proceeds from the sale of any minerals produced
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fee interest
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ownership of both the surface and mineral rights
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mineral owner and surface owner
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-if mineral rights are owned by one party and the surface is owned by another, the surface owner must allow the mineral rights owner, or his lessee, access to the surface area that is required to conduct exploration and production operations. the surface owner is entitled to compensation for any damages that may result from exploration and production operations
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sharing-in-kind
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the company or individual has elected to receive the oil or gas itself rather than the proceeds from the sale of the minerals
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two types of mineral interests created when the mineral rights owner enters into a lease agreement or contract
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royalty interest and working interest
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royalty interest
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-created by leasing
-retained by the owner of the mineral rights when that owner enters into a lease agreement with another party -receives a specified portion of the minerals produced or a specified portion of the gross revenue from selling the production, *free and clear of any costs of exploring, developing, or operating the property* -*responsible for any severance or production taxes assessed on is or her share of production from the property* -1/8 royalty is common in the US on nongovernment leases -most leases provide that the royalty owner bear a proportionate share of postproduction costs -nonoperating or nonworking interest -stated in terms of its share of gross revenue (1/8) |
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postproduction costs
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costs related to the transportation of the saleable product as well as costs necessary to get the product into marketable condition, such as dehydration, compression and liquid extraction costs
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working or operating interest
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-creating via leasing
-responsibly for the exploration, development, and operation of a property -responsible for paying all (100%) of the cost of exploring, drilling, developing, and producing the property -share of revenue is the amount that remains after deducting the share of the royalty interest and other nonworking interests -stated in terms of how the costs are to be shared (100%) -can be divided or undivided |
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undivided mineral interest
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-working interest that exists when multiple owners share and share alike, according to their proportion of ownership in any minerals severed from the ground
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divided interest
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-working interest that exists when specified parties own specific acreage, minerals, or equipment
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joint working interest
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-an undivided working interest owned by two or more parties
-sharing the working interest is common in the oil and gas industry since it provides for companies to share the costs and risks of operations -one party is designated as the operator (manages the property) of the property -all other working interest owners are called non operators (just account for their proportionate share of costs) (called E&P joint ventures) |
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proportionate consolidation
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in a typical E&P joint venture operation, each working interest owner accounts for its own share of costs
-partnership accounting is typically NOT used to account for joint oil and gas operations |
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E&P joint ventures
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--partnership accounting is typically NOT used to account for joint oil and gas operations
-most are not set up as separate legal entities -rather, the joint ventures involve undivided interests in jointly controlled assets -if the joint venture is incorporated or otherwise established as a separate legal entity, consolidation or the use of the equity method of accounting may be required |
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overriding royalty interest
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a nonworking interest created from the working interest
-share of revenue is a stated percentage of the share of revenue belonging to the working interest from which it was created -like a royalty interest, the owner does not pay any of the exploration, development, or operating costs but is responsible for its share of any severance or production taxes -can be created by either being retained by the working interest owner when the working interest is sold or otherwise transferred or by being carved out |
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carved out ORI
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created when the working interest owner sells or transfers the ORI and retains the working interest
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production payment interest
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-nonworking interest created out of a working interest and similar to ORI except,
-limited to a specified amount of oil or gas, money, or time after which it reverts back to the interest from which it was created and ceases to exist -payable in money - payment is typically stated as a percentage of the working interest's share of revenue -payable in product - payment is typically stated as a percentage of the working interest's share of current production -created by carve out or retention |
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net profits interest
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nonworking interest created on *onshore property* typically from the working interest
-offshore a NPI is the type of interest that the government, as the mineral rights owner, often retains when leasing an offshore block to a petroleum company -similar to a royalty interest or ORI except that the amount to be received is a specified percentage of *net profit* from the property versus a percentage of the *gross revenues from the property* -NPI owners are entitled to a % of the profits, they are NOT responsible for any portion of losses incurred in property development or operations -BUT losses may be recovered by the working interest owner from future profits -created from retention or carved out |
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pooled or unitized working interest
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created when the working interest as well as the nonworking interests in two or more properties are combined
-each interest owner now owns the same type of interest, but at a smaller % in the total combined property as they held previously in the separate property -properties are operated as one unit, resulting in more efficient, economical operation |
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pooling and unitization
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-combining of small or irregular tracts of land into a unit large enough to meet state spacing regulations for drilling, or the combining of tracts in a field or reservoir in order to facilitate enhanced recovery projects
-most common usage of the term pooling is the combining of undrilled acreage to form a drilling unit -term unitization is commonly used to refer to a larger combination involving an entire producing field or reservoir for purposes of enhanced oil and gas recovery -in most states pooling or unitization can be forced to facilitate maximum recovery ad more efficient production |
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oil and gas lease agreement
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-petroleum companies must obtain the rights to explore, drill and produce subsurface minerals before conducting those activities
-these rights can be acquired through an outright purchase of a fee interest or mineral rights, however they are usually acquired through an oil and gas lease agreement |
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landman
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oil and gas leases are typically obtained through the use of one of these
-an individual who specializes in searching for and obtaining leases -acts as an agent for an undisclosed principal in trying to obtain a lease at the lowest possible price |
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lessor
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mineral rights owner who leases the property to another party and retains a royalty interest
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lessee
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the party leasing the property, receiving a working interest
-this person's working interest provides for investigating, exploring, prospecting, drilling, and mining for oil, gas, and other minerals, as well as for conducting G&G surveys, installing production equipment, and producing said products |
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most contracts contain
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1. lease bonus
2. royalty provision 3. primary term 4. delay rental payment 5. shut-in payments 6. right to assign interest 7. rights to free use of resources for lease operations 8. option payment 9. offset clause 10. minimum royalty 11. pooling provisions |
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lease bonus
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initial amount paid to mineral rights owner in return for the rights to explore, drill and produce
-usually a dollar amount per acre |
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royalty provision
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-specified fraction of oil and gas produced free and clear of any costs except severance taxes and certain costs to market the product
-most common in the US is to provide a share of the proceeds from the sale of production -sliding scale royalty - the amount of royalty paid is determined by the amount of oil and gas produced |
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primary term
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initial term of the lease
-maximum time that the lessee has to begin drilling or commence production from the property -lessee must begin drilling within one year from the signing of the lease |
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delay rental payment
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-yearly payment made during the primary term in the absence of drilling operations (or production) in order to retain the lease
-annual payment made to allow the lessee to delay drilling operations for one additional year -based upon a dollar amount per acre -must be paid on or before one year from the date the lease was signed and each year following during the primary term if drilling operations (or production) have not commenced -some short-term leases (2 or 3 year primary term) called *paid up leases*, require the lessee to pay the delay rentals at the inception of the lease -after the primary term, the lease can be held only by drilling or production -after the primary term, a delay rental payment can no longer keep the lease from terminating -once production begins, the revenue from production from the lease keeps the lease in effect whether during or after the primary term -when production commences before the expiration of the primary term, no additional delay rental payments are necessary: the royalty provides compensation to the royalty interest owner |
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shut-in payments
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if the well is capable of producing oil or gas in paying quantities but is *shut-in* (not producing), the lessee may hold the lease by making these payments
-usually made in natural gas situations where access to a pipeline is not available or an oversupply of gas exists -generally not recoverable from future royalty payments |
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right to assign interest
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-rights may be assigned in whore or in part without the approval of the other party
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rights to free use of resources for lease operations
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operator has the right to use, without cost, any oil or gas produced on the lease to carry out operations on that lease
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option payment
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payment made to obtain a preleasing agreement that gives the lessee a specified period of time to obtain a lease from the entity receiving the payment
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offset clause
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if producing well is drilled on Lease B close to property line with Lease A, within a specified distance, the offset clause requires Lease A lessee to rill an offset well on Lease A, within a certain period of time, to prevent the well on Lease B from draining the reservoir (they are both on top of the same reservoir)
-forced pooling or unitization makes offset clause irrelevant -in a state without forced pooling, the only recourse for lessee A is to make lessee B assume the burden of offset drilling |
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minimum royalty
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provides for the payment of a stipulated amount to the lessor regardless of production
-similar to shut-in royalty except that it is commonly recoverable from future royalty payments |
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pooling provisions
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if the working interest owner forms a pool or unit with other leases, the royalty interest and other nonworking interest owners may also be forced to combine their interests with the nonworking interest owners of the other leases forming the unit
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day rate
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payment to a drilling contractor based on the number of days drilled
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footage rate
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payment made to the drilling contractor based on the number of feet drilled
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turnkey basis
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payment of a fixed sum of money to the drilling contractor based on drilling to a certain depth or stage of completion
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drilling operations
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onshore drilling operations include building access roads to the drillsite, preparing the site for the drilling rig, transporting the rig to the site, and drilling the wellbore
-most drilling operations in the US are performed by drilling contractors |
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drilling process
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1. selecting actual drillsite. seismic studies
2. site preparations begin - well site is surveyed and staked, access roads are built, site is graded and leveled. reserve and waste pits are also prepared, and a water supply is obtained 3. initial 20-100 feet of the well will be drilled with a small truck-mounted rig 4. drilling rig and related equipment are moved in and set up (rigging up) 5. well is ready to be spudded in 6. routine rotary drilling - drilling fluid (mud) constantly circulated down into the well bore because it raises cuttings to the surface, lubricates drilling bit, and keeps formation fluids from entering the well bore 7. every 30 feet as hole is deepened, a joint of drill pipe is added, a process called mousehole connection 8. pipe is lowered back into the hole (called tripping in) 9. casing is set into the well bore 10. after total depth has been reached, the well is logged by lowering a device to the bottom of the well and then pulling it back up to the surface to measure and record properties of the formations and the fluids residing in them 11. decision is made whether to complete the well |
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rigging up
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drilling rig and related equipement are moved in and set up after the first 20-100 feet are drilled with a small mounted truck rig
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spud date
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the date the rotary drilling bit touches ground
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routine rotary drilling
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rotating a drill bit downwards through the formations towards target depth, cutting away pieces of the formation called cuttings
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mud
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drilling fluid constantly circulated down the wellbore to raise the cuttings to the surface, lubricate the drilling bit, and keep formation fluids from entering the wellbore
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mousehole connection
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after every 30 feet as the hole is deepened, a joint of drill pipe is added
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tripping out
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when the drill bit becomes worn or damaged, all of the drill pipe has to be removed from the hole in this process
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tripping in
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after a new drill bit is attached, the pipe is lowered back into the hole
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stand
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drill pipe is removed and lowered three joints at a time
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derrick or mast
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four legged, load-bearing structure that is part of the drilling rig
-height correlates with the depth of the well since it must support the weight of the drill string (drill pipe) suspended downhole |
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casing
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steel pipe that is set (cemented) into the wellbore
-tripping out is necessary to set it -functions include preventing the caving in of the hole, protecting freshwater sands, excluding water from the producing formations, confining production to the well bore, and controlling formation pressure |
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directional wells
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wells that are normally drilled straight to a predetermined depth and then curved or angled so that the bottom of the wellbore is at the desired location
-used in situations where the drilling objective cannot be achieved vertically -urban locations where limitations exist regarding well location or to sidetrack around an obstruction -normally necessary offshore so that multiple wells can be drilled from a single platform |
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horizontal wells
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initially drilled straight down but then are gradually curved until the hole runs parallel to the earth's surface
-subset of directional drilling -commonly defined as any well in which the lower part of the wellbore parallels the pay zone -angle does not have to reach 90 degrees to be considered this -objective is to explose more reservoir rock to the wellbore than would have been possible with a conventional vertical well -most reservoirs have greater horizontal dimensions than vertical thickness -preferred method in reservoirs with horizontal dimension -cost is 2-3 times of conventional drilling -production factor can be 15-20 times |
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logged
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after total depth is reached a device is lowered to the bottom of the well and pulled back to the surface to gather information and then a decision is made to complete the well or not
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activities incident to completing a well and placing it on production:
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1. obtaining and installing production casing (steel pipe lining the wellbore)
2. installing tubing (steel pipe suspended in the well through which the oil and gas are produced) 3. perforating 4. installing the Christmas tree 5. constructing production facilities and installing flow lines |
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activities incident to plugging and abandoning a well
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1. removal of any equipment possible
2. cementing the wellbore to seal the hole |
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perforating
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setting off charges to create holes in the casing and cement so that formation fluids can flow from the formation into the wellbore
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Christmas Tree
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valves and fittings controlling production at the wellhead that somewhat resemble a Christmas tree
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production facilities
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separators, heater-treaters tanks, etc
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multiple completion
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well is capable of simultaneous production from multiple zones containing oil or gas
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determination to complete or abandon
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-determination of whether or not to complete a well entails a comparison of the incremental costs to complete the well with the net cash flows expected to be received from the sale of petroleum products from the well
-well is judged capable of commercial production fi the expected net proceeds from production exceed the cost of completing the well -costs incurred in drilling prior to completion (*past costs or sunk costs*) are NOT considered in making the decision to plug and abandon or complete the well |
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obtaining offshore federal leases
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offshore federal leases obtained through a system of closed competitive bidding on available offshore tracts
-federal gov't normally keeps 1/6 royalty -more expensive offshore -most offshore drilling is done in the form of a joint venture or joint interest operation |
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offshore areas where very little is known about the types and depths of subsurface formations
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-in those areas, a stratisgraphic test well may be drilled prior to the bidding process and paid for by multiple companies that agree to share the information
-advances in seismic technology have significantly reduced the need to drill stratisgraphic test wells |
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stratisgraphic test wells
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wells drilled only for information
-drilled offshore to determine the existence and quantity of proved reserves and to determine the location for the permanent development drilling and production platform |
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exploratory drilling offshore
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-almost always done from mobile rigs
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types of temporary platforms
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drillings barges and ships
jack-up drilling platforms submersible and semisubmersible drilling platforms |
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jack-up drilling platforms
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platforms towed to location and then legs are lowered to the ocean floor
body of the structure is then jacked up high enough above the water level so as to clear the waves and provide a stable platform for drilling |
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submersible and semisubmersible drilling platforms
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platforms towed to location, then pontoon like legs are flooded with water for extra stability in the open ocean
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development drilling offshore
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often drilled from fixed platforms containing production and well maintenance facilities that are made from steel or concrete and are very expensive
-offshore production may also be achieved via subsea completions |
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subsea completions
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- satellite wells that are situated on the ocean floor
-production is moved directly to platforms, floating production/storgae/offloading vessels or to the shore where it is processed and stored pending sale -commonly used in areas where it is not feasible to access the production location and/or in situations where the economics do not support the cost of a platform |
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ultra deepwater
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outer continental areas where the water depths are 1500 meters or greater
-future of offshore drilling predicted to be in these areas -potential for increasing US reserves by 50% -biggest discovery in the US since Alaska in the 60s |
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recovery processes categories
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primary, secondary, tertiary
-experts estimate that 50% or more of the oil cannot be recovered with current technology |
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primary
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recovery of oil and gas is either by natural reservoir drive or by pumping
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secondary recovery methods
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after maximum amount of oil is recovered through primary methods, use this method
-consists of inducing an artificial drive into the formation to replace the natural drive -most common method is waterflooding |
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tertiary recovery
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-some secondary methods are considered tertiary also
-distinction between secondary and tertiary is hard -injection of chemicals, gas or heat and microwave technology |
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production and sales
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fluids produced from a well include a combination of crude oil and natural gas and basic sediment and water (BS&W)
-before oil and gas are sold the well fluid must be separated, treated, and measured -from this point crude oil goes to stock tanks until it is delivered to a buyer -when the oil is sold it is measured as it is transferred from the storage tanks to either truck or ship transport or an oil pipeline -gas, which is not stored on site, is measured as it is gathered, processed and transferred to a gas pipeline |
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run ticket
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the amount of oil transferred from the storage tanks is recorded on this document
-the amount of payment for the oil is based on the information contained here |
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gas settlement statement
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used to record similar information for the production and sale of gas as the run ticket for oil
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department of the interior
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exploration of federal offshore areas as well as federal onshore lands is regulated by this department
for states it is regulated by states |
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common spacing requirement in the lower 48 US
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no more than one oil well per 40 acres and no more than one gas well per 640 acres
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maximum efficency rate
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maximum rate at which oil or gas can be produced without damaging the reservoir's natural energy
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1. ______________ activities include exploration, acquisition, drilling, developing and producing oil and gas
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upstream
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2. An ______________ oil and gas company is one involved primarily in only exploration and production activities
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independent or E&P
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3. Which would NOT be a characteristic of an upstream E&P activity?
a. low level of risk b. a long time span c. high level of regulations d. complex tax rules e. none of the above |
a. low level of risk
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4. _______________ is the measure of the openings in a rock in which petroleum can exist
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porosity
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5. The term _________________ is combining of undrilled acreage to form a drilling unit.
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pooling
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6. A _________ royalty is similar to a shut-in royalty except that it is recoverable from future royalty payments
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minimum
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7. Drilling operations are more expensive offshore. T/F
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true
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8. the amount of oil transferred from the storage tanks is recorded on a document called the __________ ticket.
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run
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9. which of these is an operating interest?
a. net profit interest b. royalty interest c. joint working interest d. overriding royalty e. none of the above |
c. joint working interest
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10. A _________ test well is a well drilled for information only.
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stratisgraphic
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