Natural Gas Leasing Glossary of Terms and Acronyms

BOE

Barrels of oil equivalent

BOILER PLATE OFFER

A term often used to describe a standard company lease offer. Boiler plate leases generally grant many rights to the company that an informed landowner would strike out. Some of these often include royalties paid after expenses are deducted, free storage and free pipeline right of way.

BONUS

A monetary incentive given by the company to the mineral owner for executing or ratifying an oil, gas and/or mineral lease.

COMPLETION

The installation of permanent equipment for the production of oil or gas.

CONVEYANCE

A written contract between a grantor and grantee, used to transfer title or rights to real estate or property. Typical conveyances include oil, gas and mineral leases; assignments; deeds and rights of way.

DELAY RENTAL

Consideration paid to the lessor by a lessee to extend the terms of an oil and gas lease in the absence of operations and/or production that is contractually required to hold the lease. This consideration is usually required to be paid on or before the anniversary date of the oil and gas lease during its primary term, and typically extends the lease for an additional year. Nonpayment of the delay rental in the absence of production or commencement of operations will generally result in abandonment of the lease after its primary term has expired.

DEVELOPMENT WELL

A well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive.

EXPLORATORY WELL

A well drilled to find and produce oil or gas in an unproved area, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir, or to extend a known reservoir.

FAVORED NATIONS CLAUSE

A clause which stipulates that if higher terms are negotiated you will get the difference within a certain amount of time or your lease is invalid. A Favored Nations clause may be negotiated for both the bonus and the royalty or one or the other. A time limit specifies the time that the clause is in effect, and a geographic limitation is generally included to define the distance from the leased land where the clause is to be honored.

HORIZONTAL DRILLING

A drilling technique that permits the operator to contact and intersect a larger portion of the producing horizon than conventional vertical drilling techniques and can result in both increased production rates and greater ultimate recoveries of hydrocarbons.

LEASE

A contract between mineral owner, otherwise known as the lessor and a company or working interest owner, otherwise known as the lessee in which the lessor grants the lessee the right to explore, drill and produce oil, gas and other minerals for a specified primary term and as long thereafter as oil, gas or other minerals are being produced in paying quantities. This lease gives the lessee a working interest. The oil and gas lease is granted in exchange for royalty payments to the lessor.

MBbls

One thousand barrels of oil

Mcf

A thousand cubic feet of natural gas

Mcfe1,000 cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.

MMBbls

Million barrels of oil

MMBOE

Million barrels of oil equivalent

MMcf

Million cubic feet of natural gas

MMcfe

Milion cubic feet of gas equivalent, determined using the ratio of 6 Mcf of natural gas to 1 Bbl of crude oil, condensate or natural gas liquids.

PAID UP LEASES

An oil and gas lease in which delay rentals for the entire primary term are paid in advance with the bonus consideration.

POOLING

The accumulation of smaller tracts of land, the sum total acreage of which are required for a governmental agency to grant a well permit or assign a production quota or allowable to an operator.

PRIMARY TERM

The period of time during which an oil and gas lease will be in effect, in the absence of production, drilling or other operations specified by the lease. The oil and gas lease can be perpetuated past the primary term by production in paying quantities, drilling, operations and/or the payment of shut-in royalties specified by the lease.

PUGH CLAUSE

A clause, which is calculated to prevent the holding of non-pooled acreage in a lease while certain portions of the lease acreage are being held under pooled arrangements. The main purpose of a Pugh clause is to protect the landowner from having their entire property held under a lease by production from a very small portion.

RECOMPLETION

The completion for production of an existing well bore in another formation from that in which the well has been previously completed.

ROYALTY

A percentage share of production, or the value derived from production, paid from a producing well. It is important to specify how royalties are to be calculated and paid as well as insuring that you are given the right to have a third party auditor verify the records of the production from your wells. Your royalty should be free of the costs of drilling and producing.

SECONDARY TERM

The term of an oil and gas lease in which the lease is held in force after expiration of the primary term. Production, operations, continuous drilling and/or shut-in royalty payments are often used to extend an oil and gas lease into its secondary term.

SEVERANCE

Mineral rights may be severed or separated from surface rights by mineral deed or by mineral reservation. Severance by mineral deed occurs when a party owning both surface rights and mineral rights sells or grants by deed all or a portion of the mineral rights underlying his/ her property. This deed, known as a mineral deed, is registered with the county register of deeds and will become a part of the abstract of title to the land involved.

SHUT IN ROYALTY

A payment stipulated in the oil and gas lease, which royalty owners receive in lieu of actual production, when a gas well is shut-in due to lack of a suitable market, a lack of facilities to produce the product, or other cases defined within the shut-in provisions contained in the oil and gas lease. It is the responsibility of the landowner to clearly establish the allowable time limits for a well to be shut in by way of an addendum.

TERM LEASE

An oil and gas lease that expires after a specified period of time, regardless of whether oil, gas and/or other minerals are being produced.

TOP LEASE

An oil and gas lease wherein the bonus consideration is paid at the signing of the lease. However, this lease becomes effective only after the expiration or termination of an existing lease on the tract of land.

UNITIZATION

The combining of multiple wells to produce from a specified reservoir.

VERTICAL DRILLING

A drilling technique that bores a single well shaft vertically into the desired geological strate.

WORKOVER

Operations on a producing well to restore or increase production.