Definitions

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A B C D E F G H I J K L M O N P Q R S T U V W X Y Z

Accounting Unit

Means a unit, participating area, or lease which constitutes a single production, financial management and reporting entity.

Acreage

Land leased for oil and gas exploration and/or land containing underlying oil and gas or mineral rights.

Appraisal Well

A well drilled as part of an exploration drilling program which is carried out to determine the physical extent, reserves and likely production rate of a field.

Assignments

When an individual or company wants to transfer or receive an interest in an existing oil and gas license, an "assignment of interest" application must be completed in triplicate and submitted to the Division with a $150 filing fee. Both the assignor and the assignee must be "qualified" before the application can be approved.

Associated Substances

Means all substances produced in association with oil or gas and not defined herein as oil or gas. 11 AAC 88.185 (39)

Barrel (BBL)

A unit of volume measurement used for petroleum and its products or water used or produced by the industry (1 barrel = 42 gallons).

Best Interest Finding

After considering all submitted proposals and public comment on those proposals, the commissioner will issue a written finding determining whether granting the exploration license is in the state's best interests. The finding must describe the limitations, conditions, stipulations or changes from the initiating proposal or competing proposals that are required to make the issuance of the license conform to the best interests of the state. If only one proposal was submitted, the finding must also identify the prospective licensee. If the finding concludes that an exploration license should be awarded and there has only been a single applicant, that applicant will have 30 days after issuance of the finding to execute the license. If competing proposals are submitted and the commissioner determines that an exploration license should be awarded, the successful licensee will be determined by a sealed bid process, with the license awarded to the applicant who has committed the most dollars to an exploration program.

Best Interest Findings

Before the Division of Oil and Gas sells, leases, or otherwise disposes of state land, resources, property, or interests in them, the director must first determine in a written finding that the interests of the state will be best served. The written finding, known as a best interest finding, considers and discusses relevant information, reflecting the hard look and reasoned approach that the division takes in making its determination whether a particular action is in the state's best interest.

Blow-out preventers (BOPs)

High pressure wellhead valves designed to prevent the uncontrolled flow of hydrocarbons from an oil or gas well.

BOED

Barrels of oil equivalent per day.

Borehole

The hole in the earth created when drilling a well.

Brine

Naturally-occurring salt water often found in oil and gas reservoirs that is produced along with hydrocarbons after fracturing a well. Brine may also contain metals such as barium or stronium as well as radionuclides and must be treasted or disposed of as contaminated waste water.

Casing

Tubing or pipe (typically steel) emplaced and cemented in the well to seal off formation fluids or keep the borehole from caving in.

Casing string

A long section of steel tubing or pipe that lines a well after it has been drilled. It is formed from sections of steel tube welded or threaded together and often cemented in place.

Cementing

To prepare and pump cement into a wellbore to seal the annulus after a casing string has been run, to seal a lost circulation zone, to set a plug in an existing well, or to plug a well so that it may be properly sealed and abandoned.

Christmas tree

The assembly of fittings and valves on the top of the casing which control the production rate of natural gas or oil.

Commissioner

Means the commissioner of the Department of Natural Resources or the commissioner's designee.

Competitive Bid or Negotiated Contract?

Royalty oil must be sold by competitive bid (AS 38.05.183(a)). The commissioner may negotiate a royalty oil sale agreement with a single buyer if (a) he finds that a negotiated sale is in the state's best interest or (b) no competition exists for the royalty oil.

Completion

The process which takes place after drilling is complete. This involves the setting of casing, tubing, other down hole equipment, hydraulic fracturing, etc.

Completion or workover rig

Usually a truck-mounted unit somewhat like a very small drilling rig, with a derrick or mast and hoisting equipment, brought to a new well after casing is set to install and manipulate tubing or other downhole equipment during completion operations. Also used during future workover or recompletion operations.

Condensates

Hydrocarbons which are in the gaseous state under reservoir conditions and which become liquid when temperature or pressure is reduced and is typically a mixture of pentanes and higher hydrocarbons.

Conventional resources

Discrete accumulations of hydrocarbons contained in rocks with relatively high matrix permeability, which normally have relatively high recovery factors.

Crude Oil

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

Crude Valuation

In general, the value of crude produced on the Alaska North Slope can be reasonably assessed according to a netback method:

Value at the lease = ANS West Coast DV - marine transportation costs - pipeline transportation costs +/- quality bank adjustment

The determination of value for royalty purposes will be made according to specific lease provisions, settlement agreements, or statutes, which can affect individual elements in the foregoing formula. The TAPS quality bank is used to ensure that producers are appropriately compensated for the fact that crude of different qualities and thus value are commingled on TAPS; as well, the presence of refineries on TAPS ensures that the quality that a producer delivers into the System is different than the quality of crude received at its terminus. The methodology that determine quality bank adjustments is determined by the Federal Energy Regulatory Commission; key quality bank decisions can be found here. The quality bank adjustment for any particular crude in a given month is generally confidential.

Cuttings

Rock chips from the bedrock formation that are cut by the drill bit during borehole drilling and brought to the surface with drilling fluids or air.

Directional drilling

The application of special tools and techniques to drill a wellbore at a predetermined angle. Horizontal drilling is a form of directional drilling where the wellbore is ultimately drilled at +/- 90 degrees to the vertical direction.

Division

Means the state division of oil and gas in the Department of Natural Resources.

DL-1 Leases

(usually under a Royalty Settlement Agreement) To determine the "highest-of" value for these leases, the Division compares three different measures of value. (Of the four in the lease agreement, one is currently not relevant). DL-1 Leases are usually under a Royalty Settlement Agreement, but if they are not, the language in the lease agreement determines the valuation method.

Paragraph 15 Value: "[T]he field market price or value at the well of all royalty oil and/or gas"
Paragraph 16(1) Value: The "price actually paid or agreed to be paid to Lessee at the well." This value captures the actual value received. This is the "proceeds" value, and generally the one reported by producers on royalty reports.
Paragraph 16(2) Value: This paragraph talks about "posted price of Lessee in the field" and is not currently relevant, since there are no posted prices in Alaska.
Paragraph 16(3) Value: The "prevailing price received by other producers in the field at the well for oil of like grade and gravity or gas of like kind and quality."

Drill or Drilling

The using of a drilling rig and crew for deepening and advancing a borehole into the Earth's subsurface.

Drilling Mud/Fluid

Specially formulated fluids used to aid the drilling of boreholes into the earth that lubricate the drill bit and to counteract the natural pressure of the formation. The three main categories of drilling fluids are water-based muds (which can be dispersed and non-dispersed), non-aqueous muds, usually called oil-based mud, and gaseous drilling fluid, in which a wide range of gases can be used.

Dry Gas

Natural gas composed mainly of methane with only minor amounts of ethane, propane and butane and little or no heavier hydrocarbons in the gasoline range.

Dry hole

A well which has proved to be commercially non-productive.

Easements

Easements on the North Slope to allow access across existing oil and gas leases, often between leases with approved Plans of Operations

Exploration drilling

Drilling carried out to determine whether hydrocarbons are present in a particular area or structure.

Exploration phase

The phase of operations which covers the search for oil or gas by carrying out detailed geological and geophysical surveys followed up where appropriate by exploratory drilling.

Exploratory well

A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir. Also known as an "wildcat well."

Export or In-state Use of Royalty Oil?

Under AS 38.05.183(d), the commissioner must determine if the royalty-in-kind oil is surplus to the "present and projected intrastate domestic and industrial needs" of the state.

Farm-in

The acquisition of part or all of an oil, natural gas or mineral interest from a third party.

Farm-out

The assignment of part or all of an oil, natural gas or mineral interest to a third party.

Field

An area consisting of a single hydrocarbon reservoir or multiple geologically related reservoirs all grouped on or related to the same individual geological structure or stratigraphic condition.

Financial Valuation Metrics

The following metrics are commonly used in evaluating and comparing financial performance of potential investments.

Net Cash Flow: Is a measure of company's or assets' financial health. Equals cash receipts minus cash payments over a given period of time.

Present Value: The current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows.

Discount Rate: The discount rate takes into account the time value of money (the idea that money available now is worth more than the same amount of money available in the future) and the risk or uncertainty of the anticipated future cash flows (which might be less than expected).

Net Present Value (NPV): A financial metric which is calculated as a present value of net cash flows

IRR: The discount rate at which the cash inflow on an investment equals its cash outflow. That is, the internal rate of return is the return necessary to make net present value equal to zero.

Return on Capital Invested (ROCI): There are multiple definitions of ROCI but it is typically some measure of income or cash flow divided by capital invested. In laymen's terms it's a measure of bang per buck. One way to calculate it would be would be to take the sum of NPV of cash flows and NPV of capital invested and divide it by NPV of capital invested.

Gas

Includes all natural gas and all hydrocarbons produced at the wellhead not defined as oil. AS 31.05.170 (6)

Gathering Lines

Natural gas pipelines that move gas from the well to the larger diameter transmission lines.

Geothermal Resources

Means the natural heat of the earth at temperatures greater than 120 degrees Celsius, measured at the point where the highest-temperature resources encountered enter or contact a well or other resource extraction device, and includes (A) the energy, including pressure, in whatever form present in, resulting from, created by, or that may be extracted from that natural heat; (B) the material medium, including the geothermal fluid naturally present, as well as substances artificially introduced to serve as a heat transfer medium; and (C) all dissolved or entrained minerals and gases that may be obtained from the material medium, but excluding hydrocarbon substances and helium. AS 38.05.965 (6)

Higher-of Value Audits

To value production that is not covered by a Royalty Settlement Agreement, the royalty audit section uses "higher-of" value audits to determine on what value of the oil and gas produced the computation of the state's royalty share should be based. This is a brief summary of how most "higher-of" values are determined. There are several different lease agreement forms. Most have four measures of value. The state is entitled to using the highest of these four values as a basis for determine the royalty value. The primary valuation provisions are DL-1 Leases and New Form Leases

Horizontal Drilling

A well of which a portion is drilled horizontally to expose more of the formation surface area to the well bore.

Injection well

A well used for pumping fluids or gas into the earth for either disposal, recovery or storage.

Land Agent/Land Man

Individual who acts as a direct employee or subcontractor on behalf of an exploration and production company to negotiate the terms of an oil, gas, and/or mineral lease agreement.

Lease

A legal document executed between a mineral owner and a company or individual that conveys the right to explore for and develop hydrocarbons and/or other products for a specified period of time over a given area.

Lease Administration

Following an oil and gas lease sale, leases are assigned an ADL (Alaska Division of Lands) number. To research information about a particular lease, the ADL or legal description will be needed. Lease information is available on-line through DNR's Land Administration System. Case files are located in the Division's office Lease Administration Responsibilities

Issue leases
Maintain lease ownership records
Process one time lease extension applications
Provide reports regarding lease activity, unit participation, ownership, acreage, etc.
Ensure that lessees do not exceed acreage limitations (chargeability) under AS 38.05.140(c)
Process assignments of interest in a lease
Maintain qualification files for all entities acquiring an oil and gas lease
Ensure fees, rental payments, and minimum royalty payments are made
Prepare decision letters amending/modifying existing leases
Prepare notices on actions which close (terminations, relinquishments, and expirations), extend or reinstate oil and gas leases
Prepare lease action notices for unit decisions affecting oil and gas leases
Verify Exploration Incentive Credits as they apply to rental payments (11 AAC 83.800)
Provide reports for sale to the public regarding lease activity, unit participation, ownership, acreage etc.
Respond to requests for oil and gas lease information and statistical data
Manage the ongoing archival storage of division lease documents

The Unit also maintains a list of all noncompetitive and competitive lease sales held, indicating the sale number, the sale location, lease effective dates, and lease forms used. Oil and Gas regulations to which Lease Administration refers are mostly contained in Title 11 of the Administrative Code, Chapters 3, 5, 82, 83, and 88.

Lease Administration Reports

Lease Administration compiles reports of activities that occur on its leases. Each month the information is updated. The following reports are available:

Monthly Lease Activity Reports (lease ownership and lease status changes)
Lease Information Reports (sorted by ADL number, owner, chargeable acreage, location, etc.)
Active Oil and Gas Lease Inventory (summary of number, type, and acreage of all active oil and gas leases)

Lease Bonus

The cash consideration that is paid by a lessee to a mineral owner for an oil and gaslease. It is usually based on a per acre payment.

Lease Issuance

The Lease Administration Unit collects the bonus bids and first year's lease rentals and sets up the lease terms in the department's Revenue and Billing system, ensuring that all payments are properly accounted for and that the lessees are billed for their rental amounts accordingly. The lease is then issued with an effective date. Each lease is assigned an ADL (Alaska Division of Land) number. A case file is then established. To research information about a particular lease, the legal description or the ADL number will be needed. Case files are located in Suite 800 of the Atwood Building, 550 West 7th Ave. Access to lease information is also available via the Web at Lease Administration System (ADNR).

Lease Ownership Records

The Lease Administration Unit maintains ownership records for each lease. The state tracks two kinds of ownership: working interest (WI) and royalty interest (RI). A lease may have one or more working interest and royalty interest owners in varying percentages. The total of both WI and total RI percentages must equal 100 percent. The "RI" includes overriding interest, royalty separated from the associated working interest, and the state's royalty interest. The unit also maintains and tracks the notification lessee for each lease, which is the entity designated by the lessee(s) to receive official notices from the state on behalf of all the parties.

Lease Sale Program

The Division of Oil and Gas conducts a program of regularly scheduled competitive oil and gas lease sales on state lands in the North Slope, Beaufort Sea, Cook Inlet, and Alaska Peninsula areas. A new Five-Year Oil and Gas Leasing Program is submitted to the Alaska State Legislature each January. The program outlines a stable and predictable schedule of proposed lease sales, which could result in the further development of Alaska's petroleum resources.

Lessee

Means an individual or individuals, a corporation, or, collectively, two or more corporations or individuals, that hold a working interest in a lease. 11 AAC 83.295 (17)

Lessor

The party who grants an oil, gas, and mineral lease.

Licensing and Leasing an Exploration Area

The recipient of a license must post a bond in the amount of the work commitment and pay a $1 per acre license fee. There are no additional charges during the term of the license, which can be up to 10 years. During its term, and following satisfaction of the required work commitment, any portion of the licensed area may be converted to oil and gas leases. The term of the leases can extend beyond the original term of the license. If converted, annual lease rentals are set at $3 per acre.

Mineral rights

Legal rights that allow for search and removal of minerals on a particular parcel of land.

Miscellaneous Land Use Permits

Miscellaneous Land Use Permits for geophysical and seismic acquisition for an applicant to utilize state land for acquiring data to determine subsurface geologic characteristics and prospectivity.

Oil

A mixture of liquid hydrocarbons of different molecular weights.

Oil in place

An estimated measure of the total amount of oil contained in a reservoir, of which only a percentage can be recovered, known as recoverable resources.

Oilfield Service Company

A business that provides any of a wide variety of services or goods for the oil and gas industry, i.e. perforators, dirt contractors, truckers, cementers, testers, etc.

One-Time Lease Extensions

Under provisions of AS 38.05.180(m), state oil and gas leases may receive a one-time lease extension under certain circumstances.

Operator

The company that has legal authority to drill wells and undertake the production of hydrocarbons that are found. The Operator is often part of a consortium and acts on behalf of this consortium.

Overpayment

Means an amount greater than the amount due that is identified at any time through routine accounting or audit procedures

Overriding Royalty, ORRI

A royalty in excess of the royalty provided in the oil and gas lease,usually added on during an intervening assignment.

Owner

Means the person who has the right to drill into and produce from a pool and to appropriate the oil and gas the person produces from a pool for that person and others. AS 31.05.170 (9)

Net Profit Share Leases

Net profit share leases(NPSLs) are leases whose terms include the requirement that the State receive a percentage share of net production income in addition to royalty. The lessee is allowed to recover allowable development and operating costs before the lease enters "payout" and begins remitting a share of income to the State. There are currently 10 NPS leases that have reached payout status.

New Form Leases

(usually not under a Royalty Settlement Agreement) For these leases, two of the four measures of value determined in the lease agreement involve "posted prices" and can be disregarded as posted prices are not currently used in Alaska. The other two measures are:

Paragraph 36(a)(1): "the field price received by the lessee" which is the same value as paragraph 16(1) for a DL-1 lease)"
Paragraph 36(a)(2):"the volume-weighted average of the three highest field prices received by other producers in the same field or area.."

P&A

Plugging and abandoning a well. After a well's productive life, it is usually plugged and abandoned with cement and heavy mud. The wellhead is removed, and the casing cut off 3-6 feet underground, and a steel plate welded over the top.

Pay Zone

The interval of a rock formation in which oil and gas are found in exploitable quantities.

Paying Quantities for Leases

Means quantities sufficient to yield a return in excess of operating costs, even if drilling and equipment costs may never be repaid and the undertaking considered as a whole may ultimately result in a loss; quantities are insufficient to yield a return in excess of operating costs unless those quantities, not considering the costs of transportation and marketing, will produce sufficient revenue to induce a prudent operator to produce those quantities. 11 AAC 83.395 (4). Production in paying quantities means production in such quantity as to enable the operator to realize a profit. For purposes of the habendum clause of a lease, that is, for the purpose of keeping the lease in force after the expiration of the primary term, paying quantities means production in quantities sufficient to yield a return in excess of operating costs, even though drilling and equipment costs may never be repaid and the undertaking considered as a whole may ultimately result in a loss. 11 AAC 83.105

Paying Quantities for Unit Purposes

Paying quantities means quantities sufficient to yield a return in excess of operating costs, even if drilling and equipment costs may never be repaid and the undertaking considered as a whole may ultimately result in a loss; quantities are insufficient to yield a return in excess of operating costs unless those quantities, not considering the costs of transportation and marketing, will produce sufficient revenue to induce a prudent operator to produce those quantities. 11 AAC 83.395

Perforate

To pierce holes through well casing with an oil or gas-bearing formation by means of a perforating gun lowered down the hole on wireline and fired from the surface. The perforations permit production from a formation which has been cased off.

Permeability

The property of a formation which quantifies the flow of a fluid through the pore spaces and into the wellbore. High permeability means fluid passes through the rock easily

PIG (Smart Pig and Dumb Pig)

A unit that performs various maintenance functions in a pipeline including "Dumb PIGs" that do mechanical works such as pipeline cleaning or segmenting flow and "Smart PIGs" that do pipeline inspection, and/or recording information about the pipeline.

Pipeline

Underground or surface tubing or piping that is installed across states, countries and continents to deliver fuel.

Plan of Operations

An application submitted in order for the Commissioner to determine the surface use requirements and impacts directly associated with the proposed operations in the lease or unit area. The Plan of Operations (for License, Lease, and Unit areas) for the proposed activities and operations and to ensure that the state's interests are protected. The plan identifies the surface use requirements, sequence, and schedule of operations projected use requirements and the lease mitigation compliance methods. Land use activities on state oil and gas leases are regulated by 11 AAC 83.158 and paragraphs 9 and 10 of the lease contract. These require the lessee to prepare a plan of operations that must be approved by ADNR through DO&G and by any other interest holder, if ownership is shared, before the lessee may commence any activities on the lease. Except for equipment uses exempted under 11 AAC 96.020, the lessee must prepare a plan of operations and obtain all required approvals and permits for each phase of exploration, development, or production prior to implementation of that activity. All permit applications and plans are available for public review. An application for approval of a plan of operations must contain sufficient information, based on data reasonably available at the time the plan is submitted in order for the Commissioner to determine the surface use requirements and impacts directly associated with the proposed operations. An application must include statements and maps or drawings setting out the following: the sequence and schedule of the operations to be conducted on the leased area, including the date operations are proposed to begin and their proposed duration;projected use requirements directly associated with the proposed operations, including but not limited to the location and design of well sites, material sites, water supplies, solid waste sites, buildings, roads, utilities, airstrips, and all other facilities and equipment necessary to conduct the proposed operations;plans for rehabilitation of the affected lease area after completion of operations or phases of those operations; and a description of operating procedures designed to prevent or minimize adverse effects on other natural resources and other uses of the leased area and adjacent areas, including fish and wildlife habitats, historic and archaeological sites, and public use areas. Other stipulations, in addition to the mitigation measures already developed at the lease sale stage, may be required at the plan of operations approval stage. These will address site-specific concerns directly associated with the proposed project. The stipulations and the terms and conditions of the lease are attached to the plan of operations approval and are binding on the lessee. Lease activities are field monitored by ADNR, ADEC, ADF&G, and AOGCC to ensure compliance with each agency's respective permit terms. Paragraph 16 of the lease contract requires that the lessee keep the area of activity open for inspection by authorized state officials. The lessee must post a $500,000 statewide bond to cover a drill site. Lease operations approvals are generally granted for three years.

Pool

Means an underground reservoir containing, or appearing to contain, a common accumulation of oil or gas. Each zone of a general structure which is completely separated from any other zone in the structure is covered by the term 'pool'. AS 31.05.170 (11)

Porosity

The percentage of void in a porous rock compared to the solid formation.

Possible reserves

Those reserves which at present cannot be regarded as ‘probable’ but are estimated to have a significant but less than 50% chance of being technically and economically producible.

Primary Term

Means the initial term of an oil and gas lease and any extension of it. 11 AAC 88.185 (24)

Produced fluids

Water or brine generated from a well in conjunction with oil and natural gas production.

Producer

Means the owner of a well or wells capable of producing oil or gas or both. AS 31.05.170 (12)

Production well

A well that is capable of producing hydrocarbons in sufficient quantities to justify commercial exploitation.

Proppant

Sand or man-made, sand-sized particles pumped into a formation during a hydraulic fracturing treatment to keep fractures open so that oil and natural gas can flow through the fractures to the wellbore.

Proven field

An oil and/or gas field whose physical extent and estimated reserves have been determined.

Proven reserves

Those reserves which on the available evidence are virtually certain to be technically and economically producible (i.e. having a better than 90% chance of being produced).

Public Records

Means books, papers, files, accounts, writings, including drafts and memorializations of conversations, and other items, regardless of format or physical characteristics, that are developed or received by a public agency, or by a private contractor for a public agency, and that are preserved for their informational value or as evidence of the organization or operation of the public agency; 'public records' does not include proprietary software programs. AS 09.25.220 (6)

Purchaser

Means a person who purchases oil in the state. AS 31.15.050 (5

Qualification Files

Any person or entity wishing to acquire an oil and gas lease must be qualified with the Division of Oil and Gas. There are separate qualification requirements for individuals, companies or corporations, and partnerships. The Lease Administration Unit maintains a list of all qualified lease holders, plus an historical record of all prior qualified entities.

Qualified To Do Business In Alaska

Means holding the state certificates necessary to lawfully conduct business within the state. 11 AAC 88.185 (33)

Recoverable Reserves

That proportion of the oil and/gas in a reservoir that can be removed using currently available techniques.

Relinquishment of Lands

If by the fourth anniversary of the exploration license the licensee has completed less than 25 percent of the total work commitment the license will be terminated, with the remainder of the security forfeited to the state. If the licensee has completed less than 50 percent of the total work, then 25 percent of the licensed area will be relinquished, with an additional 10 percent relinquished each successive year until half of the original acreage has been relinquished.

Reserve Pit

Lined pit used to collect spent drilling fluids and formation cuttings during drilling.

Reserves

Estimated remaining quantities of oil and gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in production, installed means of delivering oil and gas or related substances to market and all permits and financing required to implement the project.

Reservoir

The underground formation where oil and gas has accumulated. It consists of a porous rock to hold the oil or gas, and a cap rock that prevents its escape.

Resources

Quantities of oil and gas estimated to exist in naturally occurring accumulations. A portion of the resources maybe estimated to be recoverable, and another portion may be considered to be unrecoverable. Resources include both discovered and undiscovered accumulations.

Rig Down

Disassembling oil and gas field equipment for transportation or storage.

Rig Up

Assembling oil and gas field equipment to make ready for use.

ROW

Right Of Way

Royalty Audit

The Division's Audit Section is tasked with making sure the state receives the full value associated with royalty payments. This section conducts audits under a number of different authoritative rules including Royalty Settlement Agreements, Lease Agreements, Statutes and the Alaska Administrative Code. Audits examine volumes, values, Net Profit Share Leases and costs claimed as deductions such as marine tanker and tariffs. The Royalty Audit section also does federal audits through a contract with the Office of Natural Resource Revenue. These audits are conducted under the authoritative guidelines and standards for federal leases such as, Government Auditing Standards and the Code of Federal Regulations. This program ensures that lessees correctly pay the royalties due from oil and gas development on federal leases where the state has a revenue share.

Royalty Interest

An interest in an oil or natural gas lease that gives the owner of the interest the right to receive a portion of the proceeds of the sale of the production from the leased acreage, but does not require the owner to pay any portion of the cost of drilling or operating.

Royalty or Royalty Interest

Means a basic royalty or overriding royalty in the production of oil and gas. 11 AAC 83.295 (27)

Royalty Payment

The cash or kind paid to the owner of mineral rights.

Royalty Rate

The royalty rate varies, according to the terms of the lease agreement, from 5% to 60% but is most often 12.5%. Some leases receive royalty rate reductions for new discoveries or economic considerations. Royalty is paid based on the value of the oil or gas removed from the lease, the volume removed and the lease's royalty rate. Large lease owners have agreements with the state as to what expenses can be deducted from the sales value to calculate royalty due. Royalty payments are made the month after the production has occurred. Lessee reporting of royalty information must follow established regulations and procedures.

Royalty-in-Kind

The state receives a royalty share of oil and gas produced from the land the state has leased to the oil producers. By statute, regulation, and the terms of the oil and gas leases the state has the choice to take its royalty "in-kind" or "in-value." When it takes its royalty in-kind, the state takes possession of its royalty share of the oil and gas produced by the lessee and sells it. When the state takes its royalty in-value, the lessee takes possession of the royalty share and pays the state for it. The conditions for the sale of royalty in kind must adhere to state regulation and statutes.

Seal

A geologic feature that inhibits the mixing or migration of fluids and gases between adjacent geologic units. A seal is typically a rock unit or a fault; it can be a top seal, inhibiting upward flow of buoyant fluids, or a lateral seal, inhibiting the lateral flow of buoyant fluids.

Secondary/Tertiary Recovery

Enhanced recovery of oil and gas from a reservoir beyond the oil and gas that can be recovered by normal flowing and pumping operations. Such techniques involve maintaining or enhancing reservoir pressure by injecting water, gas, CO2 or other substances into the formation.

Shale

A very fine-grained sedimentary rock that is formed by the consolidation of clay, mud or silt and that usually has a finely stratified or laminated structure. Certain shale formations which are high in organic carbon content, such as the Eagle Ford and the Barnett, contain large amounts of oil and natural gas.

Shale Gas

Shale gas refers to natural gas that can be generated and trapped within shale units.

Shale Oil

Shale oil refers to liquid petroleum that can be generated and trapped within shale units.

Shut In Well

A well which is capable of producing but is not presently producing. Reasons for a well being shut in may be lack of equipment, market or other.

Sidetrack

A wellbore segment extending from a wellbore intersection along a wellbore path to a different wellbore bottomhole from any previously existing wellbore bottomholes.

Source Rock

Rocks containing relatively large amounts of organic matter that is transformed into hydrocarbons.

Spacing

The distance between wells producing from the same reservoir, often expressed in terms of acres and is often established by regulatory agencies.

Spud-In

The operation of drilling the first part of a new well.

State Lease

Means an oil and gas lease on state land. AS 38.06.080 (2)

Surface Location

The location of a well or facility/measurement point.

Surface Reclamation

Restoration of the land surface that had been used for drilling or production which involves regrading and re-vegetating the area.

TD

Total Depth.

The Decision Process for the Sale of State Royalty Oil

Royalty-in-Kind or Royalty-in-Value? Alaska law under AS 38.05.182 compels the Commissioner of Natural Resources to take oil and gas royalty in-kind unless he determines that taking royalty in-value is in the best interests of the state. Conversely, the law also requires that he must determine that taking royalty in-kind is in the best interest of the state.

Trap

A geologic feature that permits the accumulation and prevents the escape of accumulated fluids (hydrocarbons) or injected carbon dioxide from the reservoir.

TVD

Total Vertical Depth

Unconventional Reservoirs

Reservoirs with permeability so low (generally less than 0.1 millidarcy) that horizontal hydraulically fractured wells or other advanced stimulation or completion techniques must be utilized to extract hydrocarbons at commercial rates. Shale reservoirs such as the Eagle Ford and Marcellus are examples of unconventional reservoirs.

Underground Injection Control (UIC) Well

A type of well used for storage, mining or disposal purposes as regulated under the Safe Drinking Water Act (SDWA) consisting of a steel- and concrete-encased borehole into which waste is injected under pressure. Class II UIC wells handle oil and gas waste for permanent disposal (known as Class II-D wells) or for secondary recovery (known as Class II-R wells). An applicant must demonstrate that the well has no reasonable chance of adversely affecting the quality of an underground source of drinking water before a permit is issued.

Undiscovered Resources

Resources postulated, on the basis of geologic knowledge and theory, to exist outside of known fields or accumulations. Included also are resources from undiscovered pools within known fields to the extent that they occur within separate plays.

Unit Agreement

Means an agreement or plan of development and operation for the recovery of oil and gas from a pool, field or like area, or any part of one, as a single consolidated unit without regard to separate ownerships, and for the allocation of costs and benefits on a basis as defined in the agreement or plan; 'unit agreement' also includes 'cooperative agreement' unless the context clearly requires the more restricted meaning. 11 AAC 88.185 (27)

Unit Area

Means the area described in a unit agreement as constituting the land logically subject to development under the agreement. 11 AAC 88.185 (28)

Unit Operator

Means the person, corporation or association designated under a unit agreement to conduct operations on unitized lands as specified in the agreement. 11 AAC 88.185 (29)

Unitization

Combining activities of separate operators within a common reservoir under one operator; allocating costs and revenues appropriately.

Unitized Land

Means the part of a unit area committed to a unit agreement. 11 AAC 88.185 (30)

Unitized Substance

Means deposits of oil, gas, and associated substances produced with them, recoverable by operations pursuant to a unit agreement. 11 AAC 88.185 (31)

Unproved Reserves

Unproved reserves are based on geologic and/or engineering data similar to that used in estimates of proved reserves; but technical, contractual, economic, or regulatory uncertainties preclude such reserves being classified as proved.

Well Abandonment

The proper plugging and decommissioning of a well in compliance with all applicable regulations.

Well Log

A record of geological formation penetrated during drilling, including technical details of the operation.

Wellbore

The hole drilled by a drilling rig to explore for or develop oil and/or natural gas. Also referred to as a well or borehole.

Wet Gas

Produced gas that contains natural gas liquids.

What are the state's "best interests?"

The commissioner must consider the following in evaluating proposals for the disposition of royalty oil, whether the disposition is by competitive bid or negotiated agreements (AS 38.05.183(e)):

the cash value offered;
the projected effects of the sale on the economy of the state;
the projected benefits of refining or processing the oil in the state;
the ability of the prospective buyer to provide refined products to the citizens of the state at competitive prices;
the criteria listed in AS 38.06.070(a) which are:
- the revenue needs and projected fiscal condition of the state;
- the existence and extend of present and projected local and regional needs for oil products, the effect of state or federal commodity allocation requirements which might be applicable to those products, and the priorities among competing needs;
- the desirability of localized capital investment, increased payroll, secondary development and other possible effects of the sale;
- the projected social impacts of the sale;
- the projected additional costs and responsibilities which could be imposed upon the state and affected political subdivision by developments related to the transaction;
- The existence of specific local or regional labor or consumption markets or both which should be met by the sale;
- The projected environmental effects related to the sale;
- The projected effects of the proposed sale upon existing private commercial enterprise and patterns of investment.

The Division must thoroughly document each of these decisions before a sale of royalty oil can occur. The law requires public notice and review of the royalty oil sale and the commissioner's best interest findings. As part of the public review of any royalty sale, commissioner will inform the Alaska Royalty Oil and Gas Development Advisory Board who will examine the proposed sale in a public hearing and, if necessary, recommend that the sale be approved by the Alaska Legislature. Under AS 38.06.055, legislative approval is required for long-term royalty sales, i.e., dispositions in excess on one year. The legislature approves royalty sales by enacting legislation.

Wildcat Well

A well drilled in an unproven area. Also known as an "exploration well."

Working Interest

Means the interest held in lands by virtue of a lease, operating agreement, fee title or otherwise, under which the owner of the interest is vested with the right to explore for, develop and produce minerals; the right delegated to a unit operator by a unit agreement is not a working interest. 11 AAC 88.185 (32)

Workover

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

Yard

A secure business site used by operators, drilling contractors and oilfield service companies for storing and working on equipment, may include an office.

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