Monday, July 7, 2008

Part 2: How To Choose A Specific Oil and Gas Drilling Venture To Invest In

Second article in the series:
This is the second article in this series about how to make the choice on a specific oil/gas well drilling project to invest in. Click here to read the first article.

Understand there are many ways to invest in oil and gas:
There are so many different types of investments out there today. A few include:

-- Simply purchasing stocks in oil and gas related companies. Your investment loss is limited to the amount you invest so the risk is manageable. You do need to watch these stocks over time to make sure the underlying company isn’t doing things that may cause it to go into bankruptcy or other problems. Also, the stocks tend to fluctuate with whether oil and gas are in or out of favor at the time.

-- Purchasing an oil Exchange Traded Fund (ETF). You can invest in a fund that buys and sells oil or gas. This way you are not dependent on the underlying company, but only on what direction the price of oil and gas moves. Therefore, these ETF will also fluctuate with whether oil and gas are in or out of favor at the time. However, you only have the risk of price movement from the oil and gas and not from a company as you do with stocks.

-- Trade commodities futures contracts. Here you buy contracts on oil or gas in the futures market. You can put very little money down in order to control a significant amount of oil and gas. If the price moves only a little, you stand to either gain or lose many multiples of that movement. Since the risk of loss is much more than your investment, these are extremely risky investments. Professionals know tricks to control these risks, but most individual investors do not. As a result, these investor have to watch these prices, at a very minimum, once per day to consider readjusting their positions. Again, if the price moves in the opposite direction the investor bets, then the losses can be very large, very quickly. Many times the price of oil and gas moves very big overnight in foreign markets and opens in U.S. markets sharply higher or lower. You will not have control to sell your position (in many cases) and may wake up to a significant loss. You must be very careful when playing the futures market. There are many professionals in the market who trade them all day, every day. They can drive the price against you very quickly.

-- Purchase of land where oil or gas may be drilled. The hope is that oil or gas will be drilled and productive on the land to provide a portion of the revenues back to you as the land owner. However, if you buy land in an area that is known to have productive wells, then the price of the land may already be inflated to a point the revenues may not be that significant after paying payments on the land. Be careful.

-- Purchase of a lease that covers the right to drill on a specific piece of land. In this case, since you are not the land owner, you don’t have to worry about covering payments on the land. You can receive a portion of the revenues from the wells, but will also share revenues with the land owner, the developer, others involved in drilling and servicing of the well, and with investors in the wells that are drilled on the leased land. For a small fee to lease the land, the revenues from productive wells can be significant, while the risk is only the funds you pay for the lease. The lease purchaser should secure land that is known to be productive or has a high probability of being productive. The lease should provide the rights to conduct seismic and other studies of the land to verify the potential for good wells. Also, leases usually cover the right to drill several wells on the land, which reduces the risk to the investor/owner of the lease since hopefully not all wells will be dry (bad or non productive). Smart leases are low risk and have the potential for huge returns. For these reasons, most leases are only offered to large institutional investors and not to individual investors. Many large oil companies like Exxon will own these leases while, in some cases, letting small oil producers with their associated individual investors fund the drilling of each well.

-- Participation in drilling one or more oil and gas wells. As a participant, you are usually a general partner with all the associated tax advantages granted by congress for domestic wells to reduce our dependence on importing foreign oil. However, the oil producer and investors in the well take the risk of the well either being productive or dry. However, with all the associated tax advantages (tax free income, writeoff of invested funds against all income types, reduction of up to 40% of your alternative minimum tax income, etc.), and with most of the revenues generated form a well going to these investors, the overall returns can be very significant for good productive wells. However, due to the high risks that go with the potentially high rewards, investors should only consider investing in wells with a high probability of returning all invested funds in 6 to 18 months. That makes the risk to reward ratio reasonable against the risk assumed with drilling oil and gas wells. The probabilities for a productive well can be increased by using the latest seismic technologies, conducting thorough research on other wells in the same area, using reputable oil producers and well operators, etc. Most of the articles posted on this blog are centered around these investors in specific oil and gas projects. Visit the blog site for additional articles.

-- Participate in funding the transportation of oil and gas. Some companies offer partnerships to fund placement of a pipeline to oil and gas wells for transporting the oil or gas to a buyer. As an investor, you usually receive a percentage of revenues resulting from the oil or gas flowing through your funded pipeline.

-- Participation on a off-shore oil platform. These types of investments usually involve tens or hundreds of millions of dollars. Due the the significant funds required, these investments are almost always only offered to very high net investors and/or institutional investors. Once a platform is placed, there can be many wells drilled from one platform. The result is increasing revenues from multiple wells without the additional significant investment of a new platform each time a well is drilled. The revenues generated from a platform can be significant if many productive wells are drilled from it.

Next article in this series:
The next article in this series will continue thoughts on what an investor needs to do when considering investing in an oil/gas drilling venture.

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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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