A Beginner’s Guide to Investing in Oil and Gas

[Posted on Feb 25, 2013 by Michael L. F. Slavin]

Investing in oil and gas can be intimidating, especially for newcomers. However, when investing in oil and gas it is important to focus on proper financial distribution and any potential for risk. It is also good to learn the process of obtaining and distributing both oil and gas. The following is a beginner’s guide to navigating the ins and outs of oil and gas in order to make a sound investment.

Finding the Right Company

One of the most important areas of investing in oil and gas is choosing the right company, and this is especially important for oil and gas joint ventures. Make sure the company you choose has a verifiably good history and has been in business for many years. They should also score highly with third party references, such as the Better Business Bureau and Dun and Bradstreet. It will also help to find out the types of wells they drill to see if this suits your risk preference. Advancing technologies in project generation and drilling is also an important factor to consider when researching oil and gas. Finding a company that employ these technologies can help to greatly increase your chances of success.

Tax Benefits

Regardless of the return you receive upon your investment, there is security to be had in the tax benefits of oil and gas exploration. Oil and gas joint ventures are 100% tax deductible, and 15% of the income off the well is tax free under the small producer’s exemption allowance. The tax benefits can make your well a much less risky proposition, since a significant portion of your investment is returned simply through your taxes in the form of a deduction. This also helps to reduce the time it takes to reach the break-even point, allowing you to make a larger profit in a shorter amount of time.

Potential Risks

There is no such thing as a guaranteed return regardless of which company you choose to invest in. Every investment is accompanied by potential risk, and this is no different for oil and gas. If a company claims to offer a guaranteed return upon investment, you should definitely run the other way. While it is true technology has come a long way in helping to reduce the risks, it is far from perfect and drilling for oil and gas will always carry some degree of risk. The good news is many developmental wells have a success rate that may exceed 80%, and when you add in proven undeveloped formations (PUDs) or 3D seismic, the success rate can be even higher. Lastly, making sure you invest in the right company and the right project can put you on the track for success, and greatly reduce your potential risk.

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