ACID JOB

AFE

This means Authority for Expenditures and is prepared by American United Petroleum Inc., the operator, for our projects in Illinois. The AFE estimates the costs to be incurred in conducting a turnkey or cost  operation under the terms of this Agreement. An AFE and 24-48 month expense projections are included. Production estimates are declined by 20%-30% for 2 months and then 10% each month thereafter until settled production begins. American United Petroleum applies  a contingency fee of 5%, as metal prices are rising at this time.

BEHIND THE PIPE

This is a term used in connection with zones that were discovered when drilled but not initially developed. Most of the time we work on zones from the bottom up and plug them off after they deplete.

BENTONITE

The clay or mud used in drilling which lifts the particles you are cutting, up and out of the well and into a pit. The mud is then recirculated back down the well bore to pick up more particles of rock.

BIT

The rock-cutting tool used in drilling. A tricone bit is commonly used in rotary drilling.

BLOWOUT PREVENTER STACK

A series of rams mounted vertically on top of the well, below the drill floor. They close it off when drilling. AUP once re-entered a well in the Illinois Basin in the mid 80's that had been abandoned by a promoter who double sold the well and later plugged it. As we drilled through the cement plug, the drill bit fell creating a spark. So much gas had accumulated under the plug that the well became a blowtorch and proceeded to melt the rig. The driller hit the tri-state news network with that accident. If he had used Blowout preventers he would have saved his rig. BOP's should be used on workovers in some instances, depending on the application, regardless of cost.

BWPD

Barrels of Water per day - Salt-Water production determines, if the well is economic or un-economic. 2 barrels of oil and 80 barrels of water, might be cost effective if you have your own salt-water disposal well. If you don't, one pulling job to fix a pump or a rod or replace tubing at $5000.00 may eat up 5 months of production.

COMPLETION

Shall mean a series of tasks intended to complete a well as a producer of Oil. Completing a well includes, but is not limited to, the setting of production casing, perforating the zone, stimulating the well with acid and fracking the well with acid and sand (sand acts as a propping agent so the oil can flow).

CONTRACT AREA

Shall mean all of the Oil and Gas Leases, intended to be developed and operated for Oil Purposes under this Agreement. The Oil and Gas Leases are described as the NE quarter of the SW quarter of section 29, Township 4S, Range 8E, White County, Illinois.

DEEPEN

Shall mean a single operation whereby a well is drilled to an objective Zone below the deepest Zone in which the well was previously drilled, or below the Deepest Zone proposed in the associated AFE. The target zone in the Salem Project will be reached by drilling a new well, not by deepening an exiting well.

DRILLING PARTY and CONSENTING PARTY

Shall mean a party who agrees to pay his share of the cost of the project conducted under the provisions of the Agreement.

DRILLING UNIT

Shall mean the area fixed for the drilling of one well by order or rule of any state or federal body having authority. If a Drilling Unit is not fixed by any rule or order, a Drilling Unit shall be the drilling unit as established by the Drilling Parties.

DRILLSITE

Shall mean the Oil and Gas Lease on which the proposed well is to be located.

DRY HOLE

No commercial quantities of oil and driller did not set casing which is part of the completion process.

DUPLEX PUMP

Used in a disposal well operation. The duplex will pressure up to force salt water down a disposal well and into a wet and hopefully highly porous and permeable formation.

FRAC JOB

A well stimulation method in which high pressure liquid is pumped down a well to fracture the reservoir rock adjacent to the well-bore. Propping agents (sand) are suspended in the liquid and used to keep the fractures open. If the formation doesn't breakdown taking the acid, it can channel up the side of the casing if the cement between the wall and the casing is old and or weak. In addition, if the packer leaks under the pressure of the frack, the acid will move past the packer and begin to eat the casing. Also if fracturing more than one set of perfs at the same time, the acid will go to the point of least resistance and therefore your other set of perfs may not get any acid at all.  In addition, there are staged fracks. After the acid is put into an area that has multiple perfs over a wide expanse, one may drop Teflon perf balls into the well bore which will float to the perf holes taking the acid most easily, plugging them off and forcing the acid to go to the second area needing acid. However, sometimes the retrievable plug used to isolate the acid can be difficult to retrieve if perf balls work their way under the retrievable's hook.

IMPRESSION BLOCK

This is a wax block that is dropped by wire line down casing to see what is blocking the well bore. The block will take an impression of the top of a packer or tubing or plug or a tool. However, if your tubing is slightly collapsed it will never get to the point of blockage but hang up on a collar. The wax block should be cut to a smaller size and dropped again or use a camera that will not get hung.(Stuck)

INTITAL WELL

Shall mean the well required to be drilled by the parties.

LOSS OF CIRCULATION

This happens when you hit an open cavernous or highly porous zone or when drilling on a major fracture. If one is are unable to plug off this area, with loss of circulation material, such as wheat hulls, your drilling mud will flow out into that loss area and without drilling mud circulating around the drill pipe, it may stop.

NON-CONSENT WELL

Shall mean a well in which less than all parties have agreed to conduct operations. Non-consent operations do not exist as part of our projects. All parties who have agreed to participate have also agreed to conduct operations and drill the initial well and have funded completions. Completion funds are isolated in an escrow account and refunded if the well is dry.

NON-DRILLING PARTY

Shall mean a party who elects not to participate in proposed operations. The Salem Project provides a first right of refusal, which will give the parties the right to participate in subsequent tests in Exhibit M. This will provide potential participation of initial Parties in subsequent tests in Exhibit M Lease Block. However, in the event an original party declines to participate in subsequent tests, that non-drilling party relinquishes all rights and claims to the those future tests and completions with the exception of the rebate on the seismic. The non-consent provision is non-applicable in this agreement as total drill test and completion funds are raised prior to initiating the drill and test and completion of the well. If the Salem Project test is not commercial, completion funds are refunded pro-rata to all parties.

OIL AND GAS

Shall mean oil, gas, casing head gas, gas condensate, and/or all other liquid or gaseous hydrocarbons and other produced marketable substances, unless an intent to limit the inclusiveness of this term is specifically stated.

OIL AND GAS LEASE

Shall mean the oil and gas lease farmed out from Ames Oil Corporation of Texas to the Salem Project covering only the Salem formation and extending vertically plus or minus 150 feet up hole and down hole from the Salem Zone at 4160 feet on the tract of land lying within the Contract Area, NE quarter of the SW quarter of section 29, Township 4S, Range 8E, White County, Illinois.

OPEN-HOLE COMPLETION

A well with casing extending to the top of the reservoir rock, and cemented. Later the formation is drilled out and left uncased. Why? Running cement against your formation may block the flow of oil. Depending on the porosity of the formation, the cement may go back into the formation 10 feet plugging up the little fissures that oil flows through.

PLUG BACK

Shall mean a single operation in which a deeper Zone is abandoned in order to attempt a Completion in a shallower Zone.

RECOMPLETION or RECOMPLETE

Shall mean an operation in which a Completion in one Zone is abandoned in order to attempt a Completion in a different Zone within the same existing wellbore. This term also means a completion in a different portion of the same zone within the same well-bore or even below the wellbore, in an open hole.

REWORK

Shall mean an operation conducted in the well-bore after the well is completed to secure, restore, or improve production in a zone, which is currently open to production. Rework operations include, but are not limited to, various well stimulation procedures.

RIG UP and RIG DOWN

When setting up a drilling rig there is generally a set up or mobilization charge. It can be very large. Also during the rig up and rig down and during all phases of the drilling and completion of the well, the clock starts when the crew leaves the yard, not when they arrive on location.

ROD PART

This occurs because of a number of reasons and results in a rod job. The work-over rig fishes to pull out the remaining rods in the hole. Why does a rod job occur? Rods corrode and ware against the collars on the tubing and should be examined and replaced if need be, when out of the hole. Sometimes they part because there is too much weight or they are the wrong size. Always put the 3/4 near the top going in, so the weight is resting on them and the 5/8 near the bottom. American United Petroleum uses all 3/4 inch and rod guides so they don't run up against the tubing and scrape the rod boxes. Also when putting rods back in the hole make sure the rods are not too tight as the rod boxes will have to be replaced at $8.00  a piece later. Each rod is 25 feet so on a 2500-foot well you have 100 rods and 100-rod boxes and probably 25-50 rod guides. Rod guides are rubber buffers that the crew doesn't like putting on as it slows them down. American United Petroleum encourages them  hot lunches and pizza breaks.

SECTION

There are 640 acres in a section and the 640 divides into (4) 160's and the 160 into (4) 40's quarters and the (4) 40's are divided into (4) 10-arce mineral parcels. The NE quarter of the NE quarter of the SE quarter would be described as follows: First take the SE quarter 160 acres, then take the NE quarter of the SE quarter (40) acres and then take the NE quarter of the NE. (10) acres.

SIDETRACK

Shall mean the directional control and intentional deviation of a well from vertical so as to change the bottom hole location. This is sometimes done to drill around junk in the hole or overcome other mechanical difficulties.

STRATIGRAPHIC TRAPS

This is a petroleum trap formed during the deposition of the reservoir rock. These are not blanket formations but rather appear as separate oval pods sometimes having small fingers or extensions. The trap is formed by the deformation of the reservoir rock such as a fold or fault.

WORKING INTEREST

The ownership in a well that bears 100% of the cost of production. The working interest owners receive their share of the production revenue after the royalty owners have taken their share and after expenses have been deducted.

ZONE

Shall mean a stratum of earth containing a common accumulation of Oil and Gas separately producible, from any other common accumulation of Oil and Gas.