What Are Joint Ventures in Oil Investing?

[Posted on February 20th, 2015 by Michael L. F. Slavin]

 

Oil investing can be unpredictable, but it can be ultimately rewarding. A mineral resource that is used for several applications-from fueling automobiles to production of consumer products-oil is an ideal catalyst for the formation of certain business enterprises. One of the most common ones in oil investing is the joint venture.

Joint Venture Investment

A joint venture, also known as a JV, is a business agreement between two or more parties to share expenses and profit of a particular project. Some joint ventures are sealed with little more than a handshake. However, with arrangements as complex as oil investing, with larger corporations involved, a JV requires a much more formal setting and agreement. Formulating a joint venture requires coming up with its objectives, structure, and projected form, including the amount of investment and debt. JVs in oil investing usually have a defined timeframe, and expenses are usually accrued during the oil well exploration and drilling phase.

Purpose

In most cases, oil investors enter into joint ventures to save money. It is similar to small neighborhood stores getting together to advertise their products and services jointly in the weekly paper. Another attraction of JVs is the ability of companies to share both risks and costs.

Legal Structure and Implications

Governing joint ventures in oil investing are the legal agreements responsible for their existence in the first place. In some cases, the parties involved create a new company solely dedicated to the JV. However, the most common legal arrangements are JV agreements that do not require the formation of a new entity. Joint ventures are not legal entities. They are not corporations, partnerships or sole proprietorships, so the accompanying laws do not apply to them. Rather, the JV is operated through the existing legal statuses of the parties. However, the geographical locations of the partners and target markets must be considered. If all parties are in the United States, at least one document, a joint venture agreement, must be prepared and signed. However, if at least one partner is outside the U.S., additional documents like a New Legal Entity form will need to be signed.

Risks

Like any business agreement, joint ventures in oil investing have their share of risks. JVs have a high rate of failure for several reasons. A chief cause is the incompatibility of the involved parties. Partners may have divergent goals, lack complete trust in each other or culturally object to each other’s business practices. A more common risk, however, is the subject of profit. There’s little guarantee that an oil well is profitable, and payment is usually dependent on the results of oil prospecting. So, with investment of one’s finances or resources, there’s always the risk of losing money.

Benefits

On the other hand, joint ventures yield several benefits. In the event that a prospected oil well hits a critical deposit, the JV can earn millions out of an initial investment of only a few thousand dollars. The benefits of a JV goes beyond just monetary, however; it gives the smaller companies-and, in some cases, individuals-the opportunity to work with large, experienced oil corporations in developing, manufacturing, and marketing new products. Smaller companies can also increase sales, access wider markets, and enhance their technological capabilities.

Bookmark and Share

admin