Oil Well Investment: 101

[Posted on February 17th, 2015 by Michael L. F. Slavin]

 

You may have heard about the worldwide need to transition to renewable sources of energy; however, oil wells are in as high a demand as ever. This is because of the increasing technical capacity that allows previously unrecoverable oil to become economically viable, as well as the fact that hydrocarbons are also used to make plastics and as lubricants in the industrial and automotive industries. Knowing how to invest in oil can be vital to those interested in entering the industry.

Because of these realities, oil well investment is a highly-competent option for speculators and investors. Even in the currently down market, knowing how to invest in oil can provide an opportunity for investment that can position a judicious person for future gains – when the price inevitably goes back up. Additionally, there are tax breaks associated with drilling, which help cover the costs and bolsters your investment.

Types of Oil Investing for Beginners

There are several options beyond straightforward investing in particular wells, which is a better option – in general – than investing in an oil company because of the associated overhead of the latter. With that said, breaking down the support peripherals of an oil well reveals multiple avenues for investing, which can be tailored to different investment portfolios.

Dividend-Driven Oil Investments

These, as the title hints, provide share-holders with regularly-scheduled payments for the term of their investment – or until the reserves of oil/gas are depleted. Often touted as one of the safer investment routes, this income-driven option appeals to people more interested in steady, short-term gains than a hold-and-see strategy.

Developmental and Exploratory Operations

Of the two aspects that comprise this approach, the developmental one is the more assured. Of course, there’s still some risk involved, because the company is drilling unproven land – even though it’s next to proven reserves. The chances tend to be at least fair that they’ll recoup something; but exactly how much, is unknown.

Exploratory research is, by definition, more speculative. The potential returns are far greater than any other method – but so is the risk if nothing is recovered. But you can rest assured that the company has done everything they reasonably could to ensure the project reaps dividends, since they have to repay their financiers – but there are no guarantees.

Investing in Auxiliary Oil and Gas Properties

These properties include services that support the industry, such as logistics management, transportation, pipeline construction, etc. Since they are tied to the actual well, it’s easy to see that the performance of the end product usually has some influence in the success of such investments. For an oil speculator, the main problem here is that you don’t stand to make much money on big finds, for the most part – the success of your investment depends primarily on demand for the service the company provides to oil wells.

What You Can Expect

When you invest in an oil well or associated properties, your expectations should be tailored to the specifics of that vertical. If it’s the well itself, then you have a chance to reap large dividends with increased risk. If it’s one of the parallel services, then the risk decreases – but your success isn’t as smoothly-tied to the success of the speculation.

The most important part begins in the planning stages, during which you take steps to ensure you aren’t being scammed. Oil well investing is becoming larger and larger, and historically, this gives rise to scam artists and unscrupulous businesspersons. Research is the best way to make sure you’re well-positioned to take advantage of the myriad of opportunities in oil investing.

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