Common Abbreviations

abst Abstract G Gas

BOP Blowout preventer GB Gun barrel
BSW Barrels salt water HEX Heat Exchanger
BOPD Barrel oil per day IW Injection well
Basic sediment &
BS&W KB Kelly bushing
water
C/H Cased hole MH Manhole
centr Centrifugal O Oil
csg Casing OAL Overall length
cplg Coupling off-sh Off-shore
Pressure control
DCS Drill Collars PCV
valve
depl Depletion PJ Pump Jack
drk Derrick R&T Rods & Tubing
drl Drill sep Separator
DS Drill Stem SHDP Slim hole drill pipe
dstl Distillate SI Shut in
dwks Drawworks slur Slurry
elev Elevator SWD Salt water disposal
eng Engine SWU Salt water unit
equip Equipment tk Tank
FCV Flow control valve WH Wellhead
FJ Flush Joint wkor Workover rig
FST Forged Steel Xtree Christmas tree

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Oil and gas industry terminology

These general terms will assist the general public to understand

terminology used in the Oil and Gas business. Additionally these terms

will assist a person new to the Oil and Gas business or an

experienced person to better understand terms and forms when filing

reports or documents with Donner Properties.

Donner Properties shall not be held liable for improper or incorrect use

of the following public information, which is provided via this Web site

as a public service for informational purposes only. PLEASE NOTE

that the following is not a legal document and is not intended to be

used as such.

Users of this information are responsible for checking the

accuracy, completeness, currency and/or suitability of this

information themselves. Donner Properties makes no

representation, guarantees, or warranties as to the accuracy,

completeness, currency, or suitability of this information. Donner

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Properties specifically disclaims any and all warranties,

representations or endorsements, express or implied, with regard

to this information, including, but not limited to, all implied w

arranties of merchantability, fitness for a particular purpose,

or non infringement

Drilling abbreviations

ADJCK - Adjustable Choke P&A - Plugged and Abandoned

BC - Barrels condensate
BCPD - Barrels condensate per day
BHL - Bottom hole location
BHSIP - Back hole shut-in pressure
BW - Barrels of water
BWPD - Barrels water per day
D&A - Dry and abandoned
FEL - From the east line
FNL - From the north line
FSL - From the south line
FTP - Flowing tubing pressure
FWL - From the west line
IPF - Initial potential flowing
MCFGPD - 1000 cubic feet/gas/day
MD - Measured depth
MTD - Measured total depth
MW - Mud weight
Industry terms
PBHL - Proposed bottom hole
PI - Petroleum information
PPM - Parts per million
PSI - Pounds per square inch
SI - Shut-in
SITP - Shut in tubing pressure
STH - Side track hole
TD - Total depth
TVD - True vertical depth
WOC - Waiting on completion
WOCR - Waiting on completion rig
WOCT - Waiting on cement
WOO - Waiting on orders
WOPL - Waiting on pipeline
WOPT - Waiting on potential test
WOR - Waiting on rig
WOSP - Waiting on state potential

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Abandoned Well - A well no longer in use, whether dry, inoperable or no longer
productive, and the previous operator has intentionally relinquished its interest in the
well.

Acre-Feet - Unit of volume; one acre of producing formation one foot thick. One
acre foot equals 7,758 barrels, 325,829 gallons or 43,560 cubic feet.

Adjacent Estuarine Zones - This term embraces the area inland from the coastline
of Texas and is comprised of the bays, inlets, and estuaries along the gulf coast.

Administrative Penalty - Statutory penalty imposed by the RRC for violation of a

rule.

Administrative Procedure and Texas Register Act (APTRA) - The statute setting
out procedures to be followed by state agencies for rulemaking and contested cases.

Allowable - Amount of oil or gas which a well, leasehold or field may produce per
month under proration orders of the RRC.

Associated Reservoir - Oil and gas reservoir with a gas cap. Gas production from
these reservoirs is generally restricted in order to preserve the gas cap energy thereby
increasing ultimate recovery.

Basic Sediment and Water (BS&W) - Impurities and water contained in the fluid
produced by an oil well.

Bay Well - (SWR 14) Any well under the jurisdiction of the Commission for which
the surface location is either:

 (a) located in or on a lake, river, stream, canal, estuary, bayou, or other inland
navigable waters of the state; or
(b) located on state lands seaward of the mean high tide line of the Gulf of
Mexico in water of a depth at mean tide of not more than 100 feet that is

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 sheltered from the direct action of the open seas of the Gulf of Mexico.

 Bbl, Barrel -- In the energy industry, a barrel is 42 U.S. gallons measured at 60 º

Fahrenheit.

BCF - The abbreviation for billion cubic feet of gas. (see "cubic foot of gas")

BCF/D - The abbreviation for billion cubic feet of gas per day.

BHP - The abbreviation for bottom-hole pressure

Blind Nipple - Nipple (pipe with threads at both ends) that can be blocked off from
formation pressure and give a false pressure measurement.

Blowout Prevention - Casinghead equipment that prevents the uncontrolled flow of

oil, gas and mud from the well by closing around the drillpipe or sealing the hole.

BOPD - The abbreviation for barrels of oil per day.

Bradenhead Completion - A head, screwed into the top of the casing, used to
confine gas in the well until release through an outlet into a pipeline.

Bridge Plug - A downhole tool (composed primarily of slips, a plug mandrel, and a
rubber sealing element) that is run and set in casing to isolate a lower casing interval
while testing an upper section.

Brine Well - A well used for injecting fresh water into geologic formation comprised
mainly of salt. The injected freshwater dissolves the salt and is pumped back to the
surface as a saturated sodium chloride brine solution used as a feedstock in
petrochemical refineries and in oil and gas well drilling and workover operations.

BTU, British Thermal Unit(s) -- The amount of heat required to raise the
temperature of one pound of water one degree Fahrenheit under standard conditions

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of pressure and temperature.

Casing - Pipe cemented in the well to seal off formation fluids or keep the hole from
caving in.

Casinghead Gas - Gas found naturally in oil and produced with the oil.

Casing-Tubing Annulus - Space between the surface casing and the production
casing.

Christmas Tree - The system of pipes, valves, gauges and related equipment that is
located on the well at ground level and that controls the flow of gas and other
petroleum products produced from the well.

Commission - The Railroad Commission of Texas.

Common Reservoir - A pool or accumulation of oil or gas that is produced in more

than one well.

Condensate (also called Lease Condensate) -- Liquid hydrocarbons separated from

gas production.

Crude Oil - Liquid petroleum as it comes out of the ground as distinguished from
refined oils manufactured out of it.

Cubic Foot of Gas or Standard Cubic Foot of Gas - As a unit of volume, 1,728
cubic inches. As applied to water, 7.48 gallons. As applied to natural gas, the volume
of gas which, when saturated with water vapor at 60ºF and at a pressure of 30 inches
of mercury occupies one cubic foot of volume.

Diagonal - Farthest distance between two points on a proration unit.

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Discovery Date - Date assigned to discovery of a new field.

Discovery Well - The first oil or gas well drilled in a new field. The discovery well
is the well that is drilled to reveal the actual presence of a petroleum-bearing
reservoir, Subsequent wells are development wells.

Disposal Well - Well used for disposal of saltwater into an underground formation.

Dissolved Gas -- Commonly referred to as solution gas. (Refer to solution gas)

District Office - The Commission designated office for the geographic area in which
the property or act subject to regulation is located or arises.

Downstream -- This term is used in describing operations performed after those at a

point of reference.

Dry Gas - Natural gas that does not have a significant content of liquid
hydrocarbons or water vapor.

Dry Hole -- Any well that fails to discover oil or gas in paying quantities.

Electric Logs - Recording that indicates the well's rock formation characteristics by
different responses to electric current.

Enhanced Oil Recovery (EOR) - The use of any process for the displacement of oil
from the reservoir other than primary recovery.

Ethane -- A colorless odorless gaseous hydrocarbon with the characteristics of the

predominant molecule, CH3CH3.

Exploratory Well - Any well drilled for the purpose of securing geological or
geophysical information to be used in the exploration or development of oil, gas,
geothermal, or other mineral resources, except coal and uranium, and includes what

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is commonly referred to in the industry as "slim hole tests," "core hole tests," or
"seismic holes".

Extraction Loss -- The reduction in volume and energy content of natural gas
resulting from the removal of natural gas liquid constituents.

Farmout - Assignment or partial assignment of an oil and gas lease from one lessee
to another lessee.

Field - Area of oil and gas production with at least one common reservoir for the
entire area.

Field Rules - Spacing and production rules for the common reservoir in an area.

Formation -- A separate layer of rock or group of intermingled beds.

Frac-- High pressure or explosive method of fracturing rock formations

Fuel and Shrinkage - The difference between the amount of gas produced at the
wellhead and the gas that enters a pipeline that can be associated with providing
energy to on lease equipment or removal of solution gas. The losses include but are
not limited to those from the separation process and field use, as well as fuel, flare
gas and plant liquids extraction.

Gas Lift -The process of raising or lifting fluid from a well by means of gas injected
down the well through tubing or tubing casing annulus. Injected gas aerates the fluid
to make it exert less pressure than the formation pressure, consequently forcing the
fluid out of the wellbore.

Gas-Oil Ratio (G.O.R.) - Number of cubic feet of gas produced per barrel of oil.

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Gas Well - Any well:

 (A) which produces natural gas not associated or blended with crude
petroleum oil at the time of production;

(B) which produces more than 100,000 cubic feet of natural gas for each barrel
of crude petroleum oil from the same producing horizon; or

(C) which produces natural gas from a formation or producing horizon

productive of gas only encountered in a wellbore through which crude
petroleum oil also is produced through the inside of another string of casing or
tubing. A well which produces hydrocarbon liquids, a part of which is formed
by a condensation from a gas phase and a part of which is crude petroleum oil,
shall be classified as a gas well unless there is produced one barrel or more of
crude petroleum oil per 100,000 cubic feet of natural gas; and that the term
"crude petroleum oil" shall not be construed to mean any liquid hydrocarbon
mixture or portion thereof which is not in the liquid phase in the reservoir,
removed from the reservoir in such liquid phase, and obtained at the surface as
such.

 Gatherer - Includes any pipeline, truck, motor vehicle, boat, barge, or person
authorized to gather or accept oil, gas, or geothermal resources from lease production
or lease storage.

Gathering Line -- A pipeline that transports oil or gas from a central point of
production to a transmission line or mainline.

Geothermal Energy and Associated Resources--

 (A) All products of geothermal processes, embracing indigenous steam, hot

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 water and hot brines, and geopressured water; (B) Steam and other gases, hot
water and hot brines resulting from water, gas, or other fluids artificially
introduced into geothermal formations;

(C) Heat or other associated energy found in geothermal formations;

(D) Any by-product derived from them.

 Geothermal Resource Well - A well drilled within the established limits of a

designated geothermal field.
 (A) A geopressured geothermal well must be completed within a geopressured
aquifer.

(B) A geopressured aquifer is a water-bearing zone with a pressure gradient in

excess of 0.5 pounds per square inch per foot and a temperature gradient in
excess of 1.6o F per 100 feet of depth.

 Henry Hub -- Located in Erath, LA, the Henry Hub is a pipeline interchange and
the delivery point for the New York Mercantile Exchange (NYMEX) active natural
gas futures contracts. Natural gas from the Gulf of Mexico moves through the Henry
Hub onto interstate pipelines serving the Midwest and the Northeast.

Horizontal Drilling - A well which is not vertically drilled as defined in Statewide

Rule 86.

Hub -- A location where several pipelines interconnect. Also known as a market

center.

Hydrocarbon -- An organic chemical compound of hydrogen and carbon, called

petroleum. The molecular structure of hydrocarbon compounds varies from the
simplet, methane (CH4), a constituent of natural gas, to the very heavy and very

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complex. Octane, for example, a constituent of crude oil, is one of the heavier, more
complex molecules.

Independent Producer - An energy company, usually in the exploration and

production segment of the industry and generally, with no marketing, transportation
or refining operations. A non-integrated producing company in the oil industry.

Injection Well - Well used to inject fluids (usually water) into a subsurface
formation by pressure.

Kelly Bushing - Drilling rig equipment that fits inside the rotary table and is also
used as a reference point on logs to calculate depth.

Long String - Last string of casing set in the well, covering the productive zone.

Low Temperature Extraction (LTX) Unit - Condensation of gas into a liquid by

refrigeration.

Mcf -- One thousand cubic feet of natural gas measured at standard pressure and
temperature conditions (see "cubic foot of gas").

MMbo -- Million barrels of oil.

MMBtu -- One million British thermal units, 252,000 Kilocalories or 293 Kilowatt
Hours.

MMcf - One million cubic feet.

Mud - Drilling fluid used to lubricate the drill string, line, the walls of the well, flush
cutting to the surface and create enough weight to prevent blowouts.

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Multiple 49(b) - Rule governing gas well production from an oil reservoir gas cap.

Multiple Completion -- The completion of a single well into more than one
producing horizon. Such a well may produce simultaneously from the different
horizons, or alternatively from each.

Natural Gas or Gas - A naturally occurring mixture of hydrocarbon and non-

hydrocarbon gases in porous formations beneath the earth's surface, often in
association with petroleum. The principal constituent is methane.

Natural Gasoline - Gasoline manufactured from casinghead gas or from any natural
gas.

NGL, Natural Gas Liquids - Hydrocarbon liquids extracted from natural gas.

Odorant - Any malodorous substance added to natural or LP-gas in small

concentrations for the purpose of making the presence of the gas detectable.

Offshore Well - (SWR 14) Any well subject to Commission jurisdiction for which
the surface location is on state lands in or on the Gulf of Mexico, that is not a bay
well. (see bay well)

Oil Well - Any well which produces one barrel or more crude petroleum oil to each
100,000 cubic feet of natural gas.

Open-flow Test - A test made to determine the volume of gas that will flow from a
well during a given time span with minimum restrictions.

Operator - A person, acting for himself or as an agent for others and designated to
the Commission as the one who has the primary responsibility for complying with its
rules and regulations in any and all acts subject to the jurisdiction of the

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Commission.

Overproduction - Production in excess of the well's monthly allowable.

PPM -- Parts per million.

Perforations - Holes through casing and cement into the productive formation.

Permeability - Ability of rock to transmit fluids through pore spaces.

Person - Any natural person, corporation, association, partnership,

receiver, trustee, guardian, executor, administrator, and a fiduciary or representative

of any kind.

Pit - Hole dug out in the ground surface for temporary storage of fluids

during drilling operations.

Plug - Seal off formations to stop open communication of formation fluids within a
well.

Pollution - Unauthorized contamination of surface or subsurface waters or land.

Pooled Unit - Unit created by combining separate mineral interests under the
pooling clause of lease or agreement.

Porosity - Percentage of the rock volume that can be occupied by oil, gas

or water.

Proration Unit - Acreage allocated to a well for the purpose of determining an

allowable.

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PSIA - Pounds of pressure per square inch absolute, using absolute zero as a base.

PSIG - Pounds of pressure per square inch guage, using atmospheric pressure as a
base.

PSI (pounds per square inch) - An English system of measure of the amount of
pressure on an area that is 1 inch square.

Processing Plant -- A plant to remove liquefiable hydrocarbon.

Product - Includes refined crude oil, crude tops, topped crude,

processed crude petroleum, residue from crude petroleum, cracking

stock, uncracked fuel oil, fuel oil, treated crude oil, residuum,

casinghead gasoline, natural gas gasoline, gas oil, naphtha,

distillate, gasoline, kerosene, benzine, wash oil, waste oil, blended

gasoline, lubricating oil, blends or mixtures of petroleum and/or any

and all liquid products or by-products derived from crude petroleum oil

or gas, whether hereinabove enumerated or not.

Propane -- A gaseous hydrocarbon with the characteristics of the predominant

molecule CH3CH2CH3.

Quad -- One quadrillion (1,000,000,000,000,000) British Thermal Units (BTU)

Rat Hole - Hole adjacent to well bore for storage of the kelly joint when

not in use during drilling operations.

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Reclamation Plant - Plant that treats and reclaims waste oil.

Regular Permit - Permit to drill, plug back or deepen that does not require an
exception.

Reserve Pit - Pit used to collect spent drilling fluids, cutting and wash water during
drilling operations.

Reservoir - A porous, permeable sedimentary rock containing commercial quantities

of oil and gas.

Residue Gas - Gas remaining after processing and extraction of NGL.

Salt Water Disposal Well (SWD) - A well used for the purpose of injecting
produced water back into the ground.

Secondary Recovery - Hydrocarbons produced in one well bore

by increasing reservoir pressure with water injected into an adjacent well bore.

Solution Gas - Gas which is dissolved in oil in the reservoir under pressure.

Sour Gas - (SWR 79) Any natural gas containing more than 1-1/2 grains

f hydrogen sulfide per 100 cubic feet or more than 30 grains of total

sulfur per 100 cubic feet, or gas which in its natural state is found by

the Commission to be unfit for use in generating light or fuel for domestic purposes.

Spot Market -- Short term, non-regulated, arms length contract

sales of natural gas, crude oil, refined products, or liquid petroleum gas.

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Spud Date - Date that drilling begins.

Storage Gas - A gas that is stored in an underground reservoir

(see underground hydrocarbon storage)

Storage Tank - Tank for the accumulation of oil pending transferal

to a pipeline company or other purchaser.

Stratigraphic Cross Section - Series of electric logs that illustrate

ormation correlation with one formation as a datum.

Structural Cross Section - Series of electric logs that illustrate

ubsurface structure by placing the logs relative to sea level.

Substandard Acreage - Amount of acreage that is less than the

standard amount for a proration unit for a field.

Surface Casing - Outer casing cemented in the upper portion of

the wellbore to protect fresh water formations from contamination.

Sweet Gas - All natural gas except sour gas and casinghead gas.

Tank Battery - Tanks for oil storage before delivery to a refinery.

Texas Offshore - This term embraces the area in the Gulf of Mexico seaward of the
coast line of Texas comprised of:

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  (A) the three league area confirmed to the State of Texas by the Submerged
Land Act (43 United States Code §§1301?1315); and

(B) the area seaward of such three league area owned by the United States.

 Therm - A unit of heat equivalent to 100,000 British Thermal Units (Btu).

3-D, Three Dimensional Seismic --Advanced method for

collecting, processing, and interpreting seismic data in three

dimensions. Three-dimensional seismic data are collected

from closely spaced lines over an area and the data are processed as a volume. The
advantages of three-dimensional seismic methodology include increased resolution
(through 3-d migration and deconvolution) as well as improved interpretational tools
and data displays (such as closely spaced parallel seismic lines, horizontal time
sections).

Tidal Disposal - Discharge of produced water or other waste materials into tide
influenced waters.

Tolerance Acreage - Small amounts of acreage assigned to a proration unit after the
unit is already established.

Transportation or to Transport - The movement of any crude petroleum oil or

products of crude petroleum oil or the products of either from any receptacle in
which any such crude petroleum or products of crude petroleum oil or the products
of either has been stored to any other receptacle by any means or method
whatsoever, including the movement by any pipeline, railway, truck, motor vehicle,
barge, boat, or railway tank car. It is the purpose of this definition to include the
movement or transportation of crude petroleum oil and products of crude petroleum

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oil and the products of either by any means whatsoever from any receptacle
containing the same to any other receptacle anywhere within or from the State of
Texas, regardless of whether or not possession or control or ownership change. (See
gatherer in general terms section and transmission line in section pertaining to oil
and gas well production reporting)

Transporter or transporting agency - Includes any common carrier by pipeline,

railway, truck, motor vehicle, boat, or barge, and/or any person transporting oil or a
product by pipeline, railway, truck, motor vehicle, boat, or barge.

Tubing - String of pipe set inside the well casing, through which the oil or gas is
produced.

Underground Hydrocarbon Storage -- The use of sub-surface geologic formations

for storing liquid, liquefied or gaseous hydrocarbons, such as natural gasoline,
propane and natural gas.

Underproduction - Production that is less than the allowable assigned to a proration

unit.

Unitization - Joint operations to maximize recovery among separate operators

within a common reservoir.

Unitization Tract - Land subject to a unitization agreement.

Waterflood - Injecting water in one well causing oil not recovered

by primary production to migrate to an adjacent well.

Wells

 Development Well -- A well drilled to a known producing

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 formation in a previously discovered field.

Exploratory Well - Any well drilled for the purpose of securing

geological or geophysical information to be used in the exploration

or development of oil, gas, geothermal, or other mineral resources,

except coal and uranium, and includes what is commonly referred

to in the industry as "slim hole tests," "core hole test," or "seismic holes".

 Wildcat Well - A well drilled for the purose of discovering a new field or
reservoir.

Zone - Interval of subsurface formation.

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 Other common industry terms

ACIDIZING

A technique for increasing the flow of oil and/or gas into a well. Hydrochloric acid is
pumped into the oil-bearing rock. The acid dissolves limestone in the producing zone
enlarging pores and flow into the well bore with less restrictions.

BARREL OF OIL

42 U.S. gallons of oil at 60 degrees Fahrenheit.

BIT

A bit is the drilling tool that bores or cuts into the earth. There are two basic types: the
cable tool bit which moves up and down the hole, striking the bottom, chipping away
the rock, and the rotary bit which revolves to grind the rock. The rotary is the modern
technique used in most drilling operations.

BLOWOUT

An unexpected violent eruption of oil and gas from a well during the drilling phase of
operation. This happens when high pressure gas is encountered and the proper
precautions have not been taken. The initial eruption is followed by an uncontrolled
flow of fluids from the well.

BLOWOUT PREVENTER

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A "BOP" is a large, specially designed valve that is mounted on top of the well during
the drilling and completion stages of operation. The operator can close this valve to
stop the flow of oil or gas in case of emergency.

BOTTOM HOLE PRESSURE

The reservoir pressure at the bottom of the well. When the well is flowed, a decline in
pressure occurs. The amount of decline in pressure related to the amount of oil
production will give an engineer information regarding the reserves of the well.

C&E

Well completion and equipment cost.

CASING

Steel pipe which screws together and is lowered into the hole after drilling is complete.
It is used to seal off fluids and keeps the hole from caving in.

CASING POINT

When the well has been drilled to its objective depth, the operator is faced with a very
important decision, whether to commit additional dollars to "setting pipe" and attempt a
completion or to abandon the well as noncommercial. The success or failure of many
companies has been dependent on these decisions.

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CEMENT OR "SET PIPE"

A process whereby cement is pumped into the hole between the walls of the hole and
the outside of the casing. Upon hardening, the cement holds the pipe in place and
prevents fluid movement in the hole.

COMMERCIAL WELL

A well which is capable of producing enough products to pay for itself and give a profit
to its owners.

COMPLETION

A general term referring to all activities necessary to put a well on production after it
has been drilled to casing point.

CRUDE OIL

Oil in its natural state of composition. "Crude" is classified according to its physical
properties: a. Paraffin Based, b. Asphaltic Based, c. Mixed Based.

CUTTING OR SAMPLES

Pieces of rock cut out of the formation by the bit and circulated to the surface by the
mud. Geologists study this rock for signs of oil and gas as the well is drilled.

DEPLETION

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The reduction in value of mineral deposits as it is produced. Oil is a wasting asset, in
that proceeds from the well represent both income and return of capital.

DEPLETION ALLOWANCE

An allowance granted on taxable income from oil and gas by the Federal and most State
Governments. The current Federal rate is 15% of gross income. The law is rather
involved and a tax specialist should be used when computing the tax free portion of
income. This information is supplied to each partner prior to filing his income tax
returns on April 15th of each year.

DEPOSIT

An accumulation of oil, gas or other minerals which is capable of production.

DEVELOPMENTAL WELL

A well drilled to a known producing formation in an existing oil field.

DISCOVERY WELL

An exploratory well which encounters production in a previously unknown deposit.

DIVISION ORDER

A contract with a purchaser of oil and gas which directs the payments of oil and gas
revenues to the interest owners of a well.

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DRILLING

The act of boring into the earth.

DRILLING RIG

The equipment used to bore into the earth. There are two types: a. Rotary b. Cable
tools. The rotary type is more modern and efficient.

D&A

Dry and abandoned.

D&T

Drilling and well test cost.

ELECTRIC LOG

An electrical survey made on uncased holes. A special tool is lowered into the hole
which ejects an electrical current into the rock and records its resistance to the current.
The data from the survey is used by the geologist to determine the nature of the rock
and its contents.

EXPLORATION

A general term referring to all efforts made in the search for new deposits of oil and
gas.

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FLOWING WELL

A well capable of producing oil or gas by its own energy without the aid of a
mechanical pump. Normally a pump is put on the well after the pressure reduction
inhibits the rate of production.

FRACING

The process of pumping fluids into a productive formation at high rates of injection to
hydraulically break the rock. The "fractures" which are created in the rock act as flow
channels for the oil and gas to the well.

GAS WELL

A well that produces natural gas which is not associated with crude oil.

IDC

(Intangible Drilling Costs) All cost incurred in drilling a well other than equipment or
leasehold. These expenses are 100% tax deductible even if the well is productive.

IP
(Initial Production) Production from a well is generally broken down into three
categories: a. Flush or Initial b. Settled c. Stripper. It is important for investors to realize
that a well cannot maintain the flow rates it made during the first stages of its life.

LIMITED LIABILITY

Entities limiting liability

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If a taxpayer holds his working interest through any of the following entities, the entity
is considered to limit his liability, and the taxpayer's interest in the activity will not be
exempt from the passive loss rules

1. A limited partnership interest is a partnership in which the taxpayer is not a general

partner.

2. Stock in a corporation.

3. Any entity other than a limited partnership or corporation that, under applicable state
law, limits the potential liability of a holder of such interests for all obligations of the
entity to a determinable fixed amount. (e.g., the taxpayer's capital contributions).

NONCOMMERCIAL

A well that is not capable of producing enough oil to pay for the drilling.

NRI

(Net Revenue Interest) That percent of the production revenue allocated to the working
interest after first deducting proceeds allocated to royalty and overriding interest.

OIL

A liquid hydrocarbon. (see "Crude Oil")

OIL GRAVITY

26
The most widely used indicator of a crude oil's worth to the producer is its API gravity.
Normally, the price which a producer receives for his oil depends on its gravity, the less
dense oils (higher API gravity) being the most valuable. This price schedule is based on
the premise that the lighter oil contains higher percentages of the more valuable
products such as gasoline. API Gravity (degrees) = (141.5/sp.gr.) - 131.5.

OIL & GAS LEASES

A contract between an oil operator and a landowner which gives the operator the right
to drill for oil and gas on his property for a consideration. It is simply a "ticket to hunt".

ON THE PUMP

An expression that means a well is incapable of flowing and that the oil is being
pumped to the surface by a "pumping unit".

OPERATING EXPENSE

The expenses incurred through the operation of producing properties.

PAYOUT

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

PERMEABILITY

A measure of the resistance of rock to the movement of fluids. Rocks may have holes or

27
void spaces in them (porosity), but if these holes do not connect, the permeability can
be drastically reduced.

POROSITY

A measure of the relative volume of void space in rock to the total rock volume. These
spaces or pores are where oil and gas accumulate; therefore, a formation containing a
high percentage of porosity can contain more hydrocarbons.

PROVEN RESERVES

Oil and gas which has not been produced but has been located and is recoverable.

PUMPER

An employee of an operator who is responsible for gauging the oil and gas sold off the
leases he has been assigned and who is also responsible for maintaining and reporting
the daily production.

REAL ESTATE INVESTMENT TRUSTS (REITs)

A trust or association that invests in a variety of real estate. REITs are managed by one
or more trustees, like a mutual fund, and trade like a stock. No federal income tax needs
to be paid by the trust if 75% of the income is real-estate related and 95% of the income
is distributed to investors. Individual investors can be taxed.

REWORK OPERATIONS

28
Any major operation performed on a well after its completion in an attempt to restore or
improve its ability to produce.

SALT WATER DISPOSAL WELL

Many wells produce salt water while producing oil. The disposal of this water is a
problem to an operator because of pollution. The best solution to the problem is to
pump the waste back into a formation that is deep enough not to pollute shallow water
sands. Many stripper wells which are no longer commercial are converted for this
purpose.

SECONDARY RECOVERY

A broad term encompassing any method of extracting oil from a reservoir after a well
or field has exhausted its primary production.

SEDIMENTARY ROCKS

Rock is generally classified in one of three categories: a. Sedimentary; b. Igneous; c.

Metamorphic.

SETTLED PRODUCTION

The second phase of production in the producing life of a well. (see IP).

STRIPPER WELL

The final state in the life of a producing well.

29
STRUCTURAL TRAP

A fold or break (or both) in the earth's crust which creates an impervious trap for oil and
gas. Oil will migrate underground through rock until it is "trapped".

SURFACE PIPE

Pipe which is set with cement through the shallow water sands to avoid polluting the
water and keep the sand from caving in while drilling a well.

SWAB

A tool which is lowered down the pipe on a wire line. The "swab" is then pulled out of
the hole. As it travels up the pipe, rubber elements expand so that the fluid in the pipe is
trapped above the swab and pushed to the surface. This operation is necessary when the
formation pressure is not high enough to blow the fluids in the pipe to the surface.

TANK BATTERY

A group of tanks at a well site used to store oil prior to sale to a pipeline company.

TESTING

When each new well is competed, a series of tests are run on the well. The various tests
are used to estimate the daily deliverability, pay out, and reserves.

30
TUBING

Small diameter pipe which is installed in the casing. Oil is produced through tubing
because it increases the viscosity of fluid and a well's flow capabilities.

TURNKEY CONTRACT

A contract in which an operator or drilling contractor agrees to furnish all labor and
materials necessary to drill a well to a certain depth or stage of completion for a
specified sum of money. The operator or contractor assumes all of the responsibility
and risks involved in completing the operation.

VISCOSITY

The resistance of fluid to flow. A high viscosity fluid will not flow as easily as a low
viscosity fluid (Mud will not move as easily as water).

WATER FLOODING

A secondary recovery method for the production of oil from a formation. Oil will float
on water. When water is injected into some formations, the oil will float or be washed
to the surface, thereby, increasing the amount of production from a well or field. Some
formations will not react to this type of stimulation.

WILDCAT

A well that is drained one or more miles from a proven well.

WORKING INTEREST

31
Oil and Gas Working Interests.
A working interest in an oil or gas property held by the taxpayer directly or through an
entity that does not limit the liability of the taxpayer is not treated as a passive activity,
whether or not the taxpayer materially participates in the activity. Thus, an owner of a
working interest in oil or gas property is permitted to deduct otherwise allowable losses
attributable to the working interest against other income without limitation under the
passive loss rule.

A working interest in an oil or gas property is one that is burdened with the cost of
development and operation of the property, such as the responsibility to share expenses
of drilling completed or operating oil and gas property, according to working or
operating mineral interest in any tract or parcel of land. Rights to overriding royalties,
production payments, and the like do not constitute working interests because they are
not burdened with the responsibility to share expenses of drilling, completing, or
operating oil and gas property. Likewise, contract rights to extract or share in oil and
gas, or in the profits from extraction, without liability to share in the costs of production
do not constitute working interests. Income from such interests is generally considered
to be portfolio income.

A special rule applies in any case where, for a prior tax year, net losses from a working
interest in a property were treated by the taxpayer as non passive losses by reason of the
working interest exception. In such case, any net income realized by the taxpayer from
the property (or any substituted basis property) in a subsequent year also is treated as
active income. For example, suppose a taxpayer clams losses with regard to a working
interest that starts to generate net income. If he transfers the interest to an S corporation
in which he is a shareholder or to a partnership in which he is a limited partner, the
income will continue to be non passive. The income from that interest may not be offset
by other passive activity deductions.

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IN GENERAL -- The term "passive activity" shall not include any working interest in
any oil or gas property which the taxpayer holds directly or through any entity which
does not limit the liability of the taxpayer with respect to such interest.

INCOME IN SUBSEQUENT YEARS -- If any taxpayer has any loss for any taxable year
from a working interest in any oil or gas property which is treated as a loss and is not
from a passive activity, then any net income such as property (or any property the basis
of which is determined in whole or in part by reference to the basis of such property)
for any succeeding taxable year shall be treated as income of the taxpayer which is not
from a passive activity. If the preceding sentence applies to the net income from any
property for any taxable year, any credits allowable under subpart B (other than section
27(a) or D of part IV of subchapter A for such taxable year which are attributable to
such property shall be treated as credits not from a passive activity to the extent that the
amount of such credits does not exceed the regular tax liability of the taxpayer for the
taxable year which is allocable to such net income.

WRITE-OFFS

That portion of an oil investment which is deductible for tax purposes. All intangibles
are deductible

33
 GLOSSARY

The following is a list of words and phrases used in the oil and gas
production industry. Some of the words in the list are considered slang
-others common - and their usage as applied to the production of oil and
gas often differs from normal usage. The definitions may vary from work
area to work area. The list is not to be considered all inclusive, nor as
covering all the variations in word meaning.

~A~

34
Abandon - To cease efforts to produce oil or gas from a well , and to plug
a depleted formation and salvage all material and equipment.

Absorption - To soak up as a sponge takes water.

Acidizing - The treatment of formations with hydrochloric or other type

acids in order to increase production or injection.

Adsorption -The attraction exhibited by the surface of a solid for a liquid

or a gas when they are in contact.

API - Abbreviation for American Petroleum Institute

API Gravity - The standard adopted by API for measuring the density of
a liquid, expressed in degrees.

Associated Gas - Natural gas which is in contact with crude oil in the
reservoir.

Aquifer - A water-bearing rock strata. In a water-drive field the aquifer is

the water zone of the reservoir underlying the oil zone.

Annular Space - The space around a pipe (casing or tubing) suspended

in a wellbore is often termed the ANNULUS, and its outer wall may be
either the wall of the borehole or the casing.

Automation -The automatic, self regulating control of equipment,

systems, or processes

~B~

35
Back Off - To unscrew one threaded piece (such as a section of pipe)
from another.

Back Pressure - The pressure resulting from restriction of full natural

flow of oil or gas.

Back Up - To hold one section of an object, such as a pipe or a nut, while

another is being screwed into or out of it. A BACK UP WRENCH refers
to any wrench being used to hold the pipe or bolt.

Bad Oil - Oil not acceptable for delivery to the pipeline purchaser
because of too high BS&W; oil requiring additional treating.

Baffles - Plates or obstructions built into a tank or other vessel to change

the direction of fluid flow.

Ball and Seat - Parts of the valves in a plunger type oil well pump.

Basic Sediment and Water (BS&W) -The water and other extraneous
material present in crude oil.

Batch - A definite amount of oil, mud, chemicals, cement, or other

material in a treatment or operation.

Battery (Tank Battery) - The production handling equipment on the

lease.

B/D - The abbreviation for barrels per day. Other related abbreviations
are: BPD for barrels per day; BOPD for barrels of oil per day; BWPD for
barrels of water per day; BLPD for barrels a of liquid per day

Beam - The walking beam of a pumping unit.

36
Beam Well - A well whose fluid is being lifted by rods and pump
actuated by a beam pump rig unit.

Bean - A type of choke used to regulate the flow of fluid from a well.
Different sizes of beans are used for different producing rates.

Bell Hole - A bell-shaped hole dug beneath a pipeline to provide room for
use of tools by workers,

Blank liner - A liner without perforations or slots,

Blank Off - To close off by sealing or plugging.

Bleed - To drain off liquid or gas, generally slowly, through a valve called
a bleeder. To BLEED DOWN, or BLEED OFF, means to slowly release
the pressure of a well or of pressurized equipment.

Bleeder Valve - A small valve on a pipeline, pump, or tank from which

samples are drawn or to vent air or oil; sample valve.

Blind - To close a line to prevent flow.

Blind Flange - (Also a BLANK FLANGE) - A solid disc used to dead

end a companion flange.

Blowout - An uncontrolled flow of gas, oil or other fluids from a well.

Blowout Preventer (BOP) - The equipment installed at the wellhead for

the purpose of controlling rig pressures in the annular space between the
casing and drill pipe (or tubing) during drilling, completion and certain
workover operations.

37
Boilerhouse - To make up or fake a report without actually doing the
work.

Bonnet - The part of a valve that packs off and encloses the valve stem.

Boot - A tall section of large-size pipe used as a surge column on a

vessel.

Bottom-Hole - The lowest or deepest part of a well.

Bottom Water - Water occurring below the oil and gas in a production
formation

Bowl - A device that fits in the rotary table or wellhead to hold the
wedges or slips that support a string of drill pipe casing or tubing while
tripping in or out of the hole

Break Out - To unscrew one section of pipe from another section

Brine - Water that has a large quantity of salt, especially sodium chloride,
dissolved in it. Salt water.

Bring In A Well - To complete a well and put it on production.

BTU (British Thermal Unit) - A measure of the heating value of a fuel .

Buck Up - To tighten a threaded connection.

Bump A Well (Bump Down) -To lower a sucker-rod string on a pumping

unit so that the pump hits bottom on the downstroke.

Seismogram - a record produced by a seismographic survey

38
Seismograph - a device that records vibrations from the earth or which
records shock waves set off by explosions in shot holes and picked up by
geophones.

Seismographic survey - geophysical information on subsurface rock

formations gathered by means of a seismograph. The investigation of
underground strata by recording and analyzing shock waves artificially
produced and reflected from subsurface bodies of rock.

Seismometer - a device for receiving and recording shock waves set off
by an explosion and reflected by underground rock formations.

Shot charge - the explosive charge put in a seismic shot hole.

Shot hole - a small diameter hole, usually drilled with a portable truck
mounted drill, for planting explosive charges sued in seismic operations.

Drilling

39
 Drilling for heavy oil
involves many people, each
with their area of expertise,
using ever evolving
technology to solve the
many problems associated
with producing heavy oil.

Drilling

From the cable tool rigs of the pioneers,

through the rotary rigs which dominated
from the 1940's to the 1980's,
to today's slant and directional drilling,
the object is the same -
get at that heavy oil,
~ 650 meters below

It's hard work (they don't call them "roughnecks" for nothing). It's an
evolving, exacting science. It's an art - an experienced driller has a
"feel" for what's happening hundreds of meters below.
For some, it's a way of life.
With the rig running 24 hours a day,
through summer's heat or winter's minus 40°,

40
there's pride in making a good hole and bringing in a paying producer.

41
 Jobs on a Drilling Rig

Drilling Contractor:

Business person who specializes in drilling. Companies who wish

wells drilled call for bids to drill well(s) to certain depths and other
specifics. A good record as a responsible, competent contractor will
help win bids.

Toolpusher:

Hired by the drilling contractor to supervise a drilling rig and its crews.
Since the rig operates 24 hours a day, seven days a week, this usually
means supervising three crews, supervising the drilling operation, and
working with the contractor. While the rig is operating, the "toolpush"
is always on call.

Driller:

The driller is directly responsible for the drilling of the hole:

supervising the rig crew, controlling what happens on the rig floor, and
running the controls which drill the well.

Derrickhand:

When the pipe must be taken out (tripping out) to change bits or for
other reasons, the derrickhand handles the top end of the pipe rack.
Working on the "monkey board" high overhead, the derrickhand helps
stack the pipe and then when the pipe is tripped in, guides the top end
of each pipe as it is rejoined to the drill string. In between trips, the
derrickhand usually operates the mud system, making sure it is meeting
the specifications for drilling a particular part of the hole.

Roughnecks:

Usually two per drilling crew, the roughnecks handle the lower end of
the pipe when it is tripping out or in. They also attach each length of
42
new drill pipe as it is needed as the well gets deeper. This is heavy,
exacting work and requires precise timing and teamwork. Roughnecks
 Transportation and Storage

Once produced, oil must be collected and transported to a refining

point

One of the most common sights

in this areas oil fields are the
storage tanks that dot out
landscape. Each producing well
Photo by Don Whiting
has its companion storage tank
containing the production of
several days pumping. Typically, trucks visit these storage tanks on a
regular basis and off-load oil from the storage tank into the truck.

The truck delivers the oil directly to a refinery or to a "battery". A

"battery" is located in the field and provides facilities to remove sand
and water, and treat it in other ways to ready it for the refinery. From a
battery, oil usually moves by pipeline to the refinery or upgrader.

The production of the upgrader also moves on via pipeline; most

entering the system of pipelines which supplies oil to Eastern Canadian
and Mid-Western United States' markets.

********

This section contains information on field storage, batteries, pipelines

and trucking- all with special reference to Heavy Oil.

43
 Pipelines

Pipelines are the major means of transporting crude oils

In some fields, "flowlines" carry crude oil to the battery for cleaning.
After cleaning and treating, oil moves by pipeline to the upgrader or
refinery.

Much of our heavy oil is below the minimum pipelining standard of

21.2° API. Therefore, a diluent must be added. The most common
additive in this area is the liquid gas component of natural gas, called
"condensate". Condensate is easily removed at the refinery and is then
recycled.

Shipping pumps establish the pressure (up to 1440 psi) to move the
crude along. Periodic boost pumps are placed along the pipeline's route
to maintain this pressure.

Pipelines are closely monitored and controlled by increasingly

sophisticated electronic and computerized equipment. They move high
volumes of crudes, safely and efficiently to often distant markets in

44
 Eastern Canada and the Mid-Western United States.

Refining

The Lloydminster Refinery and the Lloydminster Upgrader convert

crude oil into useable products and feedstocks

Whether its the asphalt and road oils for which Lloydminster has long been
known, or the modern products of the upgrader including "synthetic" crude,
jet fuel, coke and sulphur - the refining and upgrading stages make outputs
that literally fuel our modern society.

45
 Refining and upgrading involves
removing the "impurities", most of
which become valuable by-products in
their own right, and breaking down the
complex hydro-carbon molecules, which
characterize heavy oil, into simpler Photo by Don Whiting

hydrocarbon molecules.

Fractionating towers break down molecules but some resist the process.
Then the opposite tack is taken in the Hydrotreater which forces carbon
atoms to accept more hydrogen atoms, also forming lighter, more useable
molecules. These, and many other processes, are introduced in this section.

In the old days, Heavy Oil was considered a disappointment and a problem.
Now it is an increasingly important part of the world's energy reserves.
Part of the difference is the improvements
in refining and the presence of the
Husky Lloydminster Upgrader.

GLOSSARY OF OIL AND GAS TERMS

46
The following are abbreviations and definitions of certain terms commonly used

in the oil and gas industry:

Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used in reference

to oil or other liquid hydrocarbons.

Bcf. One billion cubic feet of natural gas measured at standard atmospheric conditions.

Bcfe. One billion cubic feet equivalent of natural gas, calculated by converting oil to

equivalent Mcf at a ratio of 6 Mcf to 1 Bbl of oil.

Completion. The installation of permanent equipment for the production of oil or natural

gas.

Developed Acreage. The number of acres which are allocated or assignable to producing

wells or wells capable of production.

Exploitation. The continuing development of a known producing formation in

a previously discovered field. To maximize the ultimate recovery of oil or natural gas

from the field by development wells, secondary recovery equipment or other suitable

processes and technology.

Exploration. The search for natural accumulations of oil and natural gas by

any geological, geophysical or other suitable means.

47
Farmout or Farmin. An agreement where the owner of a working interest in an

oil and gas lease assigns the working interest or a portion thereof to another party

who desires to drill on the leased acreage. Generally, the assignee is required to drill

one or more wells in order to earn its interest in the acreage. The assignor usually

retains a royalty or reversionary interest in the lease. The interest received by

an assignee is a farmin while the interest transferred by the assignor is a farmout.

Fracturing. The technique of improving production or injection rates of a well by

pumping a mixture of fluids into the formation and rupturing the rock, creating

an artificial channel. As part of this technique, sand or other material may also be

injected into the formation to keep the channel open, so that fluids or gases may

flow more easily through the formation.

Gross Acres. The total acres in which we have a working interest.

Gross Wells. The total number of producing wells in which we own any amount

of working interest.

Horizontal Drilling. A drilling operation in which a portion of the well is drilled

horizontally within a productive or potentially productive formation. This operation

usually yields a well which has the ability to produce higher volumes than a vertical

48
well drilled in the same formation.

Injection Well or Injector. A well which is used to place liquids or gases into the

roducing zone during secondary/tertiary recovery operations to assist in maintaining

reservoir pressure and enhancing recoveries from the field.

Intangible Drilling Costs. Expenditures made for wages, fuel, repairs, hauling

and supplies necessary for the drilling or recompletion of an oil or gas well and the

preparation of such well for the production of oil or gas, but without any

salvage value. These expenditures are generally accepted in the oil and gas industry as being currently
federal income tax purposes. Examples of such costs include:

 ground clearing, drainage construction, location work, road making,

 temporary roads and ponds, surveying and geological works;
 drilling, completion, logging, cementing, acidizing, perforating and fracturing
 of wells;
 hauling mud and water, perforating, swabbing, supervision and overhead;
 renting horizontal tools, milling tools and bits; and
 construction of derricks, pipelines and other physical structures necessary
 or the drilling or preparation of the wells.

Lease. An instrument which grants to another (the lessee) the exclusive right
o explore for, drill for, produce, store and remove oil and natural gas on the
mineral interest, in consideration for which the lessor is entitled to certain rents
and royalties payable under the terms of the lease. Typically, the duration of
the lessee’s authorization is for a stated term of years and “for so long thereafter”

49
as minerals are producing.

Mbbl. One thousand barrels of oil or other liquid hydrocarbons.

Mcf. One thousand cubic feet of natural gas measured at standard atmospheric

conditions.

Mcfe. One thousand cubic feet equivalent of natural gas, calculated by converting

oil to equivalent Mcf at a ratio of 6 Mcf to 1 Bbl of oil.

Mmbbl. One million barrels of oil or other liquid hydrocarbons.

Mmcf. One million cubic feet of natural gas measured at standard atmospheric

conditions.

Mmcfe. One million cubic feet equivalent of natural gas, calculated by converting

oil to equivalent Mcf at a ratio of 6 Mcf to 1 Bbl of oil.

Net Acres. Gross acres multiplied by the percentage working interest owned by Warren.

PV-10 Value. The present value of estimated future revenues to be generated

from the production of proved reserves calculated in accordance with SEC guidelines,

net of estimated lease operating expense, production taxes and future development

costs, using prices and costs as of the date of estimation without future escalation,

without giving effect to non-property related expenses such as general and

administrative expenses, debt service and depreciation, depletion and amortization

50
or Federal income taxes and discounted using an annual discount rate of 10%.

Net Wells. The sum of all the complete and partial well ownership interests

(i.e., if we own 25% percent of the working interest in eight producing wells,

the subtotal of this interest to the total net producing well count would be

two net producing wells).

Net Production. Production that is owned by Warren less royalties and

production due others.

NYMEX. New York Mercantile Exchange.

Operator. The individual or company responsible for the exploration,

exploitation and production of an oil or natural gas well or lease.

Permeability. The capacity of a geologic formation to allow water, natural gas

or oil to pass through it.

Porosity. The ratio of the volume of all the pore spaces in a geologic formation

to the volume of the whole formation.

Royalty. An interest in an oil and natural gas lease that gives the owner of

he interest the right to receive a portion of the production from the leased acreage,

or of the proceeds of the sale thereof, but generally does not require the owner

51
to pay any portion of the costs of drilling or operating the wells on the leased acreage.

Royalties may be either landowner’s royalties, which are reserved by the owner

of the leased acreage at the time the lease is granted, or overriding royalties,

which are usually reserved by an owner of the leasehold in connection with

a transfer to a subsequent owner.

Secondary Recovery. An artificial method or process used to restore or increase

production from a reservoir after the primary production by the natural prod

Gas injection and waterflooding are examples of this technique.

Tangible Drilling Costs. Expenditures necessary to develop oil or gas wells,

including acquisition, transportation and storage costs, which typically

are capitalized and depreciated for federal income tax purposes.

Examples of such expenditures include:

 well casings;
 wellhead equipment;
 water disposal facilities;
 metering equipment;
 pumps;
 gathering lines; and
 Storage tanks.

52
3-D Seismic. The method by which a three dimensional image of the earth’s

subsurface is created through the interpretation of the reflection of seismic data

collected over a surface grid. 3-D seismic surveys allow for a more detailed

understanding of the subsurface than do conventional surveys and contribute

significantly to field appraisal, exploitation and production.

Waterflood. A secondary recovery operation in which water is injected into

the producing formation in order to maintain reservoir pressure and force oil

towards the producing wells.

Working Interest. An interest in an oil and natural gas lease that gives the owner of the

interest the right to drill for and produce oil and natural gas on the leased acreage and

requires the owner to pay a share of the costs of drilling and production operations.

53