Oil & Gas Basics: Vocabulary You Should Know

Understanding the oil & gas industry requires a working knowledge of some of the terms used. Take a look at some of the terms you’ll encounter working in the industry below.

[Editor’s Note:  Updated to add extra terms to the list]


If you’ve looked at any oil and gas reference books or even glance online at some of the websites, you’ll know the list I’m presenting is not a comprehensive one, but one that highlights some key words and phrases I think you should know. Here they are in alphabetical order.


Authorization for Expenditure (AFE): A document shown to investors in a well that will estimate drilling and completion costs. An AFE can then be used as drilling occurs to show actual costs versus estimated costs.


Annulus: The spacing between the casing and the wall of the borehole, two strings of casing or the tubing and the casing


API Number: A unique identifying number for all oil and gas wells drilled in the U.S.


Appraisal Wells: “Definition wells” drilled at locations around an existing well to determine the size and quality of the reservoir. Appraisal wells are not as common today because of the expense, and instead 3D seismic analysis is used.


bcf: Billion cubic feet


Blowout: Uncontrolled flow of gas, oil or other fluids from a well (think Deepwater Horizon Oil Spill)


Bonus: A cash fee paid to the lessee (person or company who grants the exploration company the right to drill on their land) of petroleum rights at the beginning of exploration (bonus for signing over the land).


Brine: Another word for salt water


Borehole: The hole drilled by the drilling bit


Cap rocks: Rocks geologists look for that trap the oil and gas so they cannot rise to the surface over time.


Casing: Pipe cemented to the wall of the drilled well to seal off the water supply and to keep the hole from collapsing.


Christmas Tree (Wellhead): The system of pipes, valves, gauges and other related equipment located at the ground level of a well that controls the petroleum product produced from a well after it is completed.


Completion: The installation of permanent wellhead equipment for the production of oil and gas


Compression: Term to describe when natural gas needs to be compressed to a higher pressure in order to get it to the pipelines so it can be transported to the market.


Concessions (lease agreements): Allow a private individual or organization to explore for and hopefully produce on behalf of the mineral right’s owner


Condensate: Hydrocarbons which are in the gaseous state under reservoir condition which become liquids when the temperature or pressure is reduced


Delay Rental: Yearly payments made to landowners during their initial agreement to compensate for delayed drilling.


Development wells: Wells drilled to begin production after a reservoir has been discovered and defined.


Division Order: A breakdown of the owners involved in the well and their decimal share in revenue and expenses, too if they are working interest owners, from an oil and or gas well.


Dry hole completion: Used when a well is drilled but not enough sufficient oil is there to justify production. They then complete it by plugging the hole with cement and abandoning it. See plugging & abandoning term


Dry well: No commercially viable oil was found in the well.


E & P: An abbreviation for Exploration and Production


Exploratory well: “Wildcat well” drilled in an unproven area to discover oil


Flat Rate Royalty: A flat rate paid to royalty owners in a well instead of a percentage of the production or production sold.


Fracturing: A method of breaking down a formation by pumping fluid at very high pressures


Gas window: Term used to describe the deeper level in the earth at which any remaining kerogen and the crude oil formed at shallower depths are cracked into methane.


Gathering: Expenses incurred to transport natural gas from the well to a pipeline


Geological surveys: Tool used by geologists to collect and analyze rock samples to find sedimentary rocks


Gravimetric surveys: Tool used by geologists to survey the ground to determine if there are any minute changes in gravity that could indicate the type of rock or fluid below ground.


Horizontal: Wells drilled vertically until the desired depth, then horizontal to the oil pay.


Independent Producer: An energy company who is usually involved in the exploration and production phase of the oil and gas industry that usually doesn’t have any marketing transportation or refining operations.


Injection Well: A well used for injecting fluids into an underground formation to increase the resevoir pressure in order to extract the oil


Infill or offset drilling: Drilling additional wells within 40 acre spacing


Intangible Drilling Costs (IDC): All costs incurred in drilling a well other than equipment or leasehold.


Intangible Completion Costs (ICC): Costs incurred with completing a well that are non-salvageable if the well is dry or not including labor, materials, rig time, etc.


Injection Well Completion: Completion of a well that is used to enhance recovery in which gas or liquid is pumped at high pressure into the reservoir through a separate well drilled than the production well to maintain the reservoir’s high pressure.


JIB Statements: A statement sent to an owner detailing the revenue earned that month from the wells they have an interest in. With JIB statements, owners are then billed for the expenses incurred that month instead of the amount being deducted automatically from their revenue earned.


Landman: Professional who negotiates the purchase of the exploration and production rights.


Lead: Geological feature of interest


Lease Operating Costs: Day to day costs incurred with the general operation of a well


Magnetic Field Survey: Tool used by geologists to survey variations of the earth’s magnetic field. Most oil is contained in non-magnetic rocks.


Oil Play: Investing to find oil


Oil Window: The term used to describe the range of depths in the earth at which kerogen is heated sufficiently to form liquid oil.


Operator: A company or individual who has primary responsibility for maintaining well operations and complying with state rules and regulations.


Optimal Rate of Production: The rate at which oil should be produced in order to produce the most from the well before it runs dry.


Overriding Royalty: A royalty that gets paid before working interest owners. Usually bestowed on a “Landman“, or the person who acquired or found the lease the well(s) are located on.


Payout: When the costs of drilling, producing and operating a well have been recouped from the sale of the products of the well


Plugging & Abandoning (P&A): After a well’s productive life, it is usually plugged and abandoned with cement and heavy mud. The wellhead is removed and the casing is cut off 3-6 feet underground and a steel plate is welded on top.


Production Well Completion: Completion of a well used to continue producing the well just drilled. The company will then build the surface installations required to extract, store and transport crude oil.


Prospect: When surface and mineral rights have been legally secured and the area is ready for drilling.


Recovery Factor: Percentage of original oil in place that someone can recover. The average is 30 percent.


Remote Imaging Analysis: Tool used by analysts to look at photography and radar images taken from air and satellite to look for fault lines.


Revenue Statement: The monthly statement sent from either the purchaser or operator to all the interest holder’s within an oil and gas property detailing the expenses and revenue charged or received each month.


Rent: Paid to the lessee (person or company who leased the land to be drilled upon) to retain concession if production is not taking place on the land.


Reservoir Rock: A rock that must have access with the source rock, sufficient porosity to hold oil and sufficient permeability to allow oil to pass through it to an oil well.


Royalty Interest: An interest in an oil and gas well that gives the owner the right to receive a portion of production from the leased acreage or proceeds from the sale of the oil or gas, but does not typically require them to pay any portion of the drilling or operating costs of the well.


Seismic Surveys: Tool used by geologists to create an image of subsurface rock by bouncing sound waves against subsurface material and measuring the time it takes to reflect back.


Severance Tax: A state tax levied against royalty and working interest owners based on their share of oil and gas production.


Slant Drilling: Wells that deviate from straight down.


Source Rock: “Mother rock” which is laden with kerogen, and is a solid dark waxy rock


Spud In: To begin drilling the well


Step-out Drilling: Additional wells outside the standard 40 acre spacing


Step-out Well: A well drilled outside a proven oilfield to determine if production can be expanded.


Subsurface Trespass: Using slant drilling to put a well bore under a neighbor’s property


Surface Reclamation: The restoration of the surface around a well site after the well is completed


Tangible Completion Costs: Lease and well equipment costs incurred from completing a well.


Tangible Drilling Costs: Actual costs of drilling equipment.


Vertical Wells: Wells drilled straight down


Working Interest: An interest in an oil and gas well that shares the expense associated with drilling, completing or operating a well, as well as the share in the revenue made on the well


Workover: Remedial work to the equipment within a well, the well pipework, or relating to attempts to increase the rate of flow


Want to learn more than just the definitions? Check out our free ebook that walks you through the basics of oil & gas accounting below:


Accounting 101 E-Book


Click Here to Leave a Comment Below 2 comments
Rebecca Gardner - July 29, 2020

It was interesting when you explained that the casing is cemented to the wall in order to keep the well from collapsing. Now that I think about it, I’d be interested to learn more about the methods used for installing well casings and what tools are used to clean up after the process. I enjoyed reading your article and learning more about common terms in the oil and gas industry, so thanks for sharing!

Rebecca Gardner - August 7, 2020

Thanks for explaining that the tangible drilling costs describe how much the drilling equipment itself is worth. Now that I think about it, it must be important to include these costs accurately when creating a budget so there are no issues when shopping for oil machinery parts. I’m glad I read your article and learned this interesting info about the oil and gas industry, so thanks for sharing!


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