2012 in Review: A Great Year with More to Come for Oil Well Investing

[Posted on Jan 18, 2013 by Michael L. F. Slavin]

The year 2012 was great for the American energy industry. The oil and gas drilling boom of the past several years accelerated during the year and appears poised to kick into a higher gear during the coming half-decade. Thanks to a litany of tax breaks designed to encourage savvy investors to invest in oil wells, the industry has been growing at a rapid rate. The year 2013 looks to be another blockbuster year for the domestic oil and gas industry. Folks who are smart enough to support the boom with direct oil well investments stand to earn a handsome return.

Oil Investment Offers Incentives

During 2012, oil well investing produced such dramatic returns thanks to several interrelated factors. Much of the boom’s potency can be attributed to the U.S. government’s favorable taxation scheme for oil and gas investments. Those who invest in oil wells can write of the bulk of the costs associated with drilling and setting up each well.

There are two classes of drilling costs: tangible and intangible. The former includes any expenses related to well-drilling equipment and typically makes up about 10 to 20 percent of the total cost of a new well. The latter includes a wide range of other expenses, including labor, lubricant and chemical costs.

Investors Save with Write-Offs

Oil and gas well investors can write off the entire value of their wells’ intangible expenses for the tax year during which the wells are drilled within the first three months of the following year. This can save savvy investors thousands of dollars. Meanwhile, wells’ tangible expenses can be written off according to a seven-year “depreciation” schedule. This permits people who wish to invest in oil wells to deduct the amount by which the value of the actual drilling equipment declines over a seven-year period. While the effect of this tax break isn’t quite as noticeable as the initial deduction for intangible costs, it’s nevertheless a welcome addition to any oil or gas investor’s tax return.

Advancements in Drilling Technology Further Growth

The oil and gas boom can also be tied to rapid advancements in drilling technology. Thanks to directional drilling techniques, it’s now possible to drill multiple oil and gas wells without disturbing the ground directly above them. This is useful in populated areas that are rich in energy resources. To ensure that the quality-of-life impact of oil and gas drilling remains minimal, many producers choose to use directional drilling techniques to access energy stored under neighborhoods and business parks without actually setting up rigs in those areas.

Other drilling techniques have proven useful as well. For instance, the practice of hydraulic fracturing has created a booming market for once-uneconomical “shale oil” deposits in certain parts of the country. Hydraulic fracturing involves the application of high-pressure streams of drilling solution to access tough-to-reach deposits of oil locked up in dense underground rock formations

Folks who invest in oil wells are helping the communities in which these prospects are located. In energy-rich parts of the country, a genuine economic boom is supporting many thousands of jobs and enriching thousands of small-time landowners. With trillions of barrel-equivalents of energy reserves stuck in shale deposits, it’s likely that the United States will continue to ramp up its rate of hydrocarbon production in 2013 and beyond.


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