Oil & gas investing glossary

Plain-English definitions of the terms used across this site — the language of lease negotiations, offering memoranda, division orders, and K-1s. Each entry links to the guide where the concept is explained in full. Educational reference material, not investment or tax advice.

A

Ad valorem tax

An annual county property tax on the appraised value of a mineral or royalty interest — in Texas, producing minerals are taxed; non-producing minerals generally are not. See mineral rights.

AFE (Authorization for Expenditure)

The operator's itemized cost estimate for drilling and completing a well, sent to working-interest owners for approval. Comparing a program's turnkey price to its AFE reveals the sponsor's markup — see DPPs.

B

Barrel (bbl)

The standard unit of oil volume: 42 U.S. gallons. Production and prices are quoted per barrel (e.g., bbl/d for barrels per day).

Basin

A large geologic depression where sediments — and hydrocarbons — accumulated, such as the Permian, Appalachian, or Williston basins. Which basin your acreage sits in is the biggest driver of its value.

BOE (Barrel of oil equivalent)

A unit that converts natural gas into oil-barrel terms (roughly 6,000 cubic feet of gas = 1 BOE) so mixed production can be quoted as one number. Watch it in marketing materials: a "BOE" of gas usually earns far less revenue than a barrel of oil.

Bonus (lease bonus)

The up-front, per-net-mineral-acre payment a lessee pays the mineral owner for signing an oil & gas lease — yours to keep whether or not a well is ever drilled. See mineral rights.

C

Carried interest

A share of a deal's working interest (or profits) that the sponsor keeps without paying its share of costs — the investors "carry" it. Common in drilling partnerships; always quantify it before investing.

Casing point

The decision moment after a well is drilled and logged: run casing and complete the well, or plug it as a dry hole. Many agreements shift cost obligations or interests at casing point.

Completion

Everything done after drilling to make a well produce — casing, perforating, and (in shale) hydraulic fracturing. Completion costs often rival drilling costs and are partly tangible, partly intangible for tax purposes.

Cost depletion

A depletion method that recovers your actual investment in a property proportionally as reserves are produced — the alternative to percentage depletion; you use whichever gives the larger deduction each year. See tax benefits.

D

Decline curve

The graph of a well's falling production over time. Modern shale wells decline steeply — often 50%+ in year one — which is why valuing any interest off its current monthly check overstates it. Try the royalty calculator.

Delay rental

A small annual payment that keeps an old-style lease alive during the primary term without drilling. Most modern leases are "paid-up" — the bonus covers the whole primary term — so delay rentals are increasingly rare.

Depletion allowance

The tax deduction that treats extracted oil & gas as the using-up of a capital asset, taken as either cost depletion or percentage depletion. One of the three pillars of oil & gas tax benefits.

Division order

The document an operator sends interest owners confirming each owner's decimal share of a well's revenue before payments begin. Verify the decimal against your deed and the unit size — in most states signing it doesn't amend your lease. See royalties.

DPP (Direct participation program)

A non-traded, pass-through investment vehicle — typically a limited partnership — through which investors own a drilling or production business directly, with income and deductions flowing to their K-1. Covered in full in the DPP guide.

Dry hole

A well that fails to find hydrocarbons in commercial quantities and is plugged. The signature risk of exploratory drilling; working-interest owners bear its full cost.

E

EUR (Estimated ultimate recovery)

The total volume a well is expected to produce over its life. Sponsor projections hang on EUR assumptions — always ask whose estimate it is and whether third-party engineers agree.

F

Farmout

An agreement in which a leaseholder assigns acreage to another company that agrees to drill it, usually keeping an override or back-in interest. The receiving party "farms in."

H

Habendum clause

The lease clause setting its duration: a fixed primary term (commonly three years) and a secondary term lasting "as long thereafter as oil or gas is produced." It's why one well can hold a lease for decades. See leasing your minerals.

Held by production (HBP)

The status of a lease kept alive past its primary term by ongoing production. HBP acreage can't be re-leased at today's bonus rates, which matters when valuing minerals.

Horizontal drilling

Drilling down and then sideways through the reservoir rock — often for one to three miles — exposing far more of the formation than a vertical well. Paired with fracturing, it's the technology behind the shale era.

I

IDC (Intangible drilling costs)

The non-salvageable costs of drilling a well — labor, fuel, drilling fluids, site work — typically 65–80% of the total. Working-interest owners can generally deduct 100% in year one under IRC §263(c), the headline oil & gas tax benefit.

L

Landman

The professional who researches mineral title in county records and negotiates leases on behalf of operators (or owners). If someone knocks on your door about your minerals, it's a landman.

Lease (oil & gas lease)

The contract by which a mineral owner grants an operator the right to drill and produce, in exchange for a bonus and a royalty. Despite the name it conveys a determinable interest in the minerals, not a rental. See mineral rights.

LOE (Lease operating expenses)

The recurring costs of running a producing well — pumping, maintenance, water disposal, overhead. Working interests pay their share of LOE; royalty owners don't.

M

Mcf

One thousand cubic feet of natural gas — the standard sales unit (MMcf is a million; Bcf a billion). Gas prices are quoted per Mcf or per MMBtu, which are close but not identical.

Mineral estate

The ownership of oil, gas, and other minerals beneath a tract, legally separate from the surface estate — and dominant over it in most producing states. See mineral rights.

Mineral rights

The bundle of rights in the mineral estate: to explore and develop, to lease (the executive right), and to receive bonus, delay rentals, and royalties. Explained in full in the mineral rights guide.

MLP (Master limited partnership)

A publicly traded partnership, common in pipelines and midstream energy, offering pass-through taxation with stock-like liquidity — a different animal from a private DPP. Compared in ways to invest.

N

Net mineral acre (NMA)

Your fractional mineral ownership expressed in acres: a 1/4 interest in 320 gross acres is 80 NMA. The unit in which minerals are priced and sold. See what minerals are worth.

Net revenue interest (NRI)

The share of production revenue an interest actually receives after royalties and overrides are subtracted. A 10% working interest under a 75% NRI lease collects 7.5% of revenue while paying 10% of costs — the gap careless investors mis-model. See DPPs.

NPRI (Non-participating royalty interest)

A carved-out right to royalty only — no bonus, no delay rentals, and no say in lease negotiations. Common in old Texas title chains; check for them when buying minerals.

O

Operator

The company that drills and runs the wells, bills working-interest owners, and disburses royalties. For a mineral or royalty owner, operator quality is the biggest risk you can't control.

ORRI (Overriding royalty interest)

A royalty carved out of the working interest's share — often for a geologist, landman, or dealmaker — that lasts only as long as the underlying lease. Unlike a mineral royalty, it dies when the lease does. See royalties.

P

Payout

The point at which a well or program's cumulative revenue equals the money invested. Many deals re-slice interests at payout — e.g., a sponsor "back-in" — so read how it's defined.

Percentage depletion

A depletion method allowing qualifying owners to deduct a flat 15% of gross production income under IRC §613A, potentially exceeding their actual cost — limited to independent producers and royalty owners within volume caps. See tax benefits.

Pooling

Combining multiple tracts or leases into one drilling unit so a well can be drilled and its revenue shared proportionally. Some states (notably Oklahoma) can "force pool" unleased owners by regulatory order.

Proved reserves

Reserves with reasonable certainty (typically 90% probability) of recovery under existing conditions — subdivided into developed (PDP) and undeveloped (PUD). The further a projection drifts from proved reserves, the more skepticism it deserves.

Pugh clause

A lease clause releasing acreage (and, in a vertical Pugh, depths) not included in a producing unit when the primary term ends — preventing one small well from holding your entire tract. Worth insisting on; see leasing your minerals.

R

Royalty interest

A cost-free share of production revenue — typically 12.5–25% — paid to the mineral owner off the top, with no drilling costs, operating costs, or well liability. The subject of our royalties guide.

Rule of capture

The old common-law doctrine that oil or gas belongs to whoever produces it from a well on their land, even if it migrated from under a neighbor's. Modern spacing, pooling, and conservation rules exist largely to blunt it.

S

Severance tax

A state tax on oil and gas at the wellhead as it's produced ("severed"), deducted from revenue before checks go out. Rates vary by state and product — one reason identical wells in different states net differently.

Severed estate

Land whose surface and mineral ownership have been split into separate chains of title by a past conveyance. Most acreage in the older producing states is severed. See mineral rights.

Shut-in royalty

A token payment that keeps a lease alive when a completed well is capable of producing but isn't — commonly a gas well without pipeline access. Good leases cap how long shut-in payments can substitute for production.

Spacing unit

The state-prescribed acreage allocated to one well (or one horizontal lateral), which determines whose interests share in its production. Your decimal in a division order is your acreage's share of the unit.

Spud

To begin drilling a well. The spud date starts the clock on many contractual obligations.

Surface rights

Ownership of the land itself — buildings, water access, agriculture — as distinct from the minerals beneath. In most producing states the surface estate is subordinate ("servient") to the mineral estate. See mineral rights.

T

Turnkey contract

A fixed-price drilling arrangement in which the sponsor charges investors a set amount to deliver a completed well, keeping the difference from actual cost. Compare the turnkey price to the AFE — markups of 15–25% and worse exist. See DPP fees.

Type curve

The expected production profile for a "typical" well in an area, built from offset-well data, used to forecast new wells. Sponsors pitch type curves; actual wells scatter around (and often below) them.

U

Unitization

Combining an entire field or reservoir under one operating plan so it can be developed efficiently as a single unit, with owners sharing in the whole — pooling at field scale.

W

Wildcat well

An exploratory well drilled in unproven territory, away from known production. The highest-risk, highest-reward drilling there is — and a word that should recalibrate any return projection attached to it.

Working interest

The operating ownership of a well: the right to drill and produce paired with the obligation to pay your share of every cost, receiving revenue after royalties (the NRI). Non-passive under IRC §469(c)(3), which unlocks the IDC deduction against active income. See DPPs and tax benefits.