Fundamentals of Oil and Gas Accounting

Activities include exploration, acquisition, drilling, developing, and producing oil and gas.


Include refining, processing, marketing and distribution.


Characteristics of both upstream and downstream activities.

Integrated oil and gas company

Company involved in E&P activities as well as at least one downstream activity.

Independent oil and gas company

Company involved primarily in only E&P activities.


Organization of Petroleum Exporting Companies

Sedimentary rock

The weight and pressure of the overlaying layers caused the eroded rock particles.


Impervious rock that prevents further movement of oil and gas.

Fault trap

A trap formed when the movement of the earth's crust causes different rock strata to offset or shear off. A nonporous rock formation that has shifted stops the movement of oil and gas within an offsetting formation that allows petroleum to migrate.


A trap formed by the folding of the earth's crust into a dome. This upward folding is caused by pressures developed from the earth's molten core. An impervious or nonporous layer of rock overlying the oil or gas in the this structure. Most of the earth's oil and gas reserves are found in this trap.

Salt dome

With substantial heat or pressure, salt buried deep within the earth may slowly begin to move upward. As it does so, the rock layers are cracked, bent and folded. Often oil and gas are trapped in these cracked and folded rock beds.


A porous and permeable formation containing natural accumulation of producible oil and/or gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.


The measure of the pore space. Ie, openings in a rock in which petroleum can exist.


Measures the "connectability" of the pores, which determines the ability of the petroleum to flow through the rock from one pore space to another.


Increases the flow from a "tight" formation. This method usually involves introducing sand mixed with water or oil into the formation under high pressure to open or clean channels between the pores.


Involves introducing hydrochloric acid into the formation to enlarge or reopen the channels between the pores.

Reconnaissance Survey

A geological and geophysical study covering a large or broad area.

Detailed Study

A geological and geophysical study covering a smaller area, called an area of interest.

Successful Well

A well that finds reserves in economically producible quantities.

Mineral interest or economic interest

The right to explore, develop and produce any minerals that might exist below a property and share in the proceeds from the sale b

Fee interest

An ownership of both the surface and mineral rights.

Surface owner

Rights to use the surface in any legal way the owner seems appropriate.

Mineral rights

The ownership, conveyed by deed, of any mineral beneath the surface.

Mineral interest

An economic interest or ownership of minerals-in-place, giving the owner the right to a share of the minerals produced either in-kind or in the proceeds from the sale of the minerals.

Sharing in-kind

The company or individual has elected to receive the oil and gas itself rather than the proceeds from the sale of the minerals.

Royalty interest

Retained by the owner of the mineral rights when the owner enters into a lease agreement with another party. Responsible for any severance or production taxes assessed on his or her share production from the property.

Nonoperating interest/nonworking interest

Royalty interest owner not responsible for the exploration, development or production of the property

Working interest/ operating interest

Responsible for the exploration, development and operation of a property. Pay all costs of exploring, drilling, developing and producing the property.

Undivided interest

Multiple owners share and share alike, according to their proportion of ownership in any minerals severed from the ground.

Divided interest

Interest exists when specific parties own specific acreage, minerals or equipment.

Joint working interest

An undivided working interest owner by two or more parties.


Manages day to day operations of the property.


Responsible for paying their proportionate share of any costs incurred while the operator maintains the property.

E&P joint ventures

Each working interest owner accounts for its own share of costs.

Overriding royalty interest (ORI)

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.

Production payment interest (PPI)

Nonworking interest created out of a working interest and is similar to an ORI, except that interest is 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.

Net profit interest (NPI)

This type of interest is similar to a royalty interest or an 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.

Pooled or unitized working interest

This type of interest is created when the working interests as well as the nonworking interests in two or more properties are combined.

Pooling or unitization

The 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.


Combining of undrilled acreage to form a drilling unit.


A larger combination involving an entire producing field or reservoir for purposes of enhanced oil and gas recovery.


An individual who specializes in searching for and obtaining leases.


The mineral rights owner who leases the property to another party and retains a royalty interest.


The party leasing the property, receives a working interest.

Lease bonus

Initial amount paid to the mineral rights owner in return for the rights to explore, drill, and produce.

Royalty provision

Specified fraction of the oil and gas produced free and clear of any costs (except severance taxes and certain costs to market the product) to which the royalty interest owner is entitled.

Primary term

Initial term of the lease; the maximum time that the lessee has to begin drilling or commence production from the property.

Delayed rental payment

In the absence of drilling or production, the lessee can keep the lease in effect during this term by making an annual payment.

Paid up leases

Short term leases, two or three year primary term. The lessee to pay the delay rentals at the inception of the lease.

Shut-in payments

The well is capable of producing oil or gas in paying quantities but is not producing, the lessee may hold the lease by making payments.

Right to assign interest

The rights of each party may be assigned in whole or in part without the approval of the other party.

Rights to free use of resources for lease operations

The operator usually has the right to use, without cost, any oil or gas produced on the lease to carry out operations on that lease.

Option payment

Payment made to obtain a preleasing agreement that gives the oil company (the lessee) a specified period of time to obtain a lease from the entity receiving the payment.

Offset clause

If a producing well is drilled on Lease B close to the property line of Lease A, within a distance specified in the lease contract, this clause requires the lessee of Lease A to drill an offset well on Lease A, within a specified period of time, in order to prevent the well on Lease B from draining the reservoir.

Minimum royalty

Provides for the payment of a stipulated amount to the lessor regardless of production.

Pooling provisions

If 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.

Drilling contract

An agreement between the lessee (working interest owners) and a drilling contractor for the drilling of a well.

Day rate

Payment based on number of days drilled.

Footage rate

Payment based on the number of feet drilled.

Turnkey basis

Payment of a fixed sum of money based on drilling to a certain depth or stage of completion.

Rigging up

The drilling rig and related equipment are moved in and set up.

Spud date

Date the rotary drilling bit touches ground.


Routine rotary drilling consists of rotating a drill bit downwards through the formations towards target depth, cutting away pieces of the formation.


Constantly circulated down the wellbore. Raises the cuttings to the surface, lubricates the drilling bit, and keeps formation fluids from entering the wellbore.

Mousehole connection

Approximately every 30 feet as a hole is deepened, a joint of drill pipe is added.

Tripping out

When the drill bit becomes worn or damaged, all of the drill pipe had to be removed from the hole.

Tripping in

A new drill bit is attached, the pipe is lowered back into the hole.

Derrick or mast

Four-legged, load-bearing structure that is part of a drilling rig.


Steel pipe that is set (cemented) into the wellbore.

Directional wells

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.

Horizontal wells

Initially drilled straight down but then are gradually curved until the hole runs parallel to the earth's surface.

Core sample

Larger piece of formation rock obtained by cutting cylindrical core.


Total depth is reached, a device is lowers to the bottom of the well to measure and record properties of the formations and fluids residing in them.


Setting off charges to create holes in the casing and cement so formation fluids can flow from the formation into the wellbore.

Christmas tree

Valves and fittings controlling production at the wellhead.

Production facilities

Separators, heater-treaters, tanks, etc.

Multiple completion

The well is capable of simultaneous production from multiple zones containing oil or gas.

Stratigraphic test well

An offshore well drilled for information only.

Exploratory wells

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 and gas in another reservoir, or to extend a known reservoir.

Development well

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

Primary recovery

Recovery of oil and gas either by natural reservoir drive or by pumping.

Secondary recovery

Inducing artificial drive into the formation to replace the natural drive.


Injecting water under pressure into the formation to drive the oil to the wellbore.

Tertiary recovery

Injection of chemicals, gas or heat into the well to modify the fluid properties and enhance the movement of the oil through the formation.

Flow lines

Take well fluid from individual wells to a central gathering point.

Run ticket

The amount of oil transferred from the storage tanks is recorded on a document.

Gas settlement statement

Used to record amount of gas transferred from storage for production and sale.

Maximum efficiency rate (MER)

The maximum rate at which oil or gas can be produced without damaging the reservoirs natural energy.

Acquisition costs

Costs incurred in acquiring property, i.e., costs incurred in acquiring the rights to explore, drill and produce oil and natural gas.

Exploration costs

Costs incurred in exploring property. Includes identifying areas that may warrant examination and examining specific areas, including drilling exploratory wells.

Development costs

Costs incurred in preparing proved reserves for production, i.e., costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing oil and gas.

Production costs

Costs incurred in lifting the oil and gas to the surface and in gathering, treating and storing oil and gas.

Proved reserves

The estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from know reservoirs under existing economic and operating conditions.

Proved developed reserves

Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.

Proved undeveloped reserves

Reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.


An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.

Proved area

The portion of a property at a certain depth to which proved reserves have been specifically attributed.

Service well

A well drilled or completed for the purpose of supporting production in an existing field.

A drilling effort, geologically directed, to obtain information pertaining to a specific geological condition.

Proved properties

Properties with proved reserves.

Unproved properties

Properties with no proved reserves.