Thursday, March 27, 2008

Who makes money from selling a barrel of oil? Many times individual accredited investors receive much more than big oil companies.

Do you think big oil companies make tons of money when the price of a barrel of oil goes up? Think again. In fact, much of the money paid for a barrel of oil goes to investors who take the risk of funding the drilling of oil wells. Many of these are accredited investors, individuals who meet Securities and Exchange Commission (SEC) established minimum wealth qualifications.

Let’s look at a typical independent oil and gas well investment/project.
These investments are put together by a producer. The producer can be considered the overall project lead responsible for securing the drill location with the land and mineral rights lease owners, finding an drill operator, funding the well with investors, filing all legal paperwork, arranging sale of the oil when the well goes online, and dispersing the resulting revenues to all parties.

Once an oil producer puts together a prospective oil and gas investment, accredited investors are approached to invest most of the funds. The producer may, and should have funds invested in the investment as well. Once the well is drilled and put online, then the resulting barrels of oil are sold to a refinery, usually a big oil company. At this point, the oil company refines the oil into products that are sold to users (gasoline, heating oil, petroleum products, etc.). The big oil companies make their money by selling the end product higher than the cost of refining and distributing it.

Before a well is drilled, a lease is purchased from the land owner that grants rights to the producer to drill a number of wells on the specified area of land. The lease entitles the lease holder to get a fee for each well that is drilled, along with a percent of revenues resulting from the sale of oil from each well. Typically these leases cover thousands of acres of land so the resulting revenues can be significant once all the associated wells are drilled and put online. Usually these leases are purchased by oil companies, but sometimes are purchased by a group of investors

Typical split for oil/gas revenues from a well:
Once a well is drilled and oil begins to be sold, there are expenses related to operation of the well and transportation of the oil to a refinery. These expenses are paid first and the resulting funds paid to the various parties involved. Parties and their typical percentage of the net revenues are: Landowner 12.5%, Leaseholder (Oil company usually or a group of investors) 12.5%; oil well investors 70 -75% which may include the producer’s investment in the well. On some wells there will be a 3-5% Originators Share, usually to the geologist or developer that found and put project together, that reduces the investor’s share.

Bottom line, individual investors in independent oil and gas investments make most of the money.
So, when you see the price of oil going up, realize that there is a group of investors making most of the money. This is why rising oil doesn’t always hurt the economy. In big oil producing states, many people share the wealth when these investors spend their funds in local shops/businesses. As those people receive funds, they too start spending more.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at with any questions, thoughts, or requests for information on what projects we are invested in.

This article was posted at Accredited Investor Blog: Past articles can easily be found at This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content

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