Oil and gas exploration: An investment guide for beginners

Oil and gas exploration: An investment guide for beginners post thumbnail image

As an exciting prospect, many investors usually wonder what it takes to become a successful investor in the oil and gas industry. They are usually attracted by the possibility to make a lot of money ad other benefits but are wary of the risks involved. This collection of the main Oil Investment FAQs helps to unearth all the grey areas in the industry.

How do new investors get into oil and gas exploration?

New investors can get into oil and gas investment through a joint venture with an established explorer. The explorers have various wells which are parts of the joint venture contracts. Each joint venture agreement gives the investors direct access to own a part of the revenue that is generated from oil and gas production activities from specific wells. Despite the various rewards and risk profiles of the industry, investors will also benefit from tax deductions while there is also a huge possibility to earn a lot of revenue depending on the successful production of the wells.

What are the risks that investors face in oil and gas investment?

With oil and gas, investors face a range of risks, which includes total or partial loss of money invested. This is a huge reality that a majority of businesses of today face. Direct investments in oil and gas are also faced with their risks and challenges. There is the risk of encountering dry holes after excess exploration activities. Dry holes are risks that can happen to both big and small oil and gas explorers. Many explorers will usually have a well-documented plan to help them mitigate and avoid these risks. The explorers usually allow eligible investors to become a part of their joint venture programmes. Eligible investors are chosen to take part in joint venture deals. They are then given a confidential document that explicitly spells out all the terms and conditions of the agreement. As soon as they get their documents, the investors are recommended to carefully read through the part of the document that is titled, “Risk factors.” Furthermore, they will also need to consult their financial, tax, and legal advisors before they fully commit to investing in any oil and gas scheme.

Are there any associated tax rewards for people with oil and gas investments?

Some important tax rewards are created especially for oil and gas investors and companies. These are specific rewards that are only created for the companies ad the investors in the industry. Regardless of the outcome, an investor that puts his money into a drilling project will usually get various tax rewards. If the exploration ends in a “dry hole” situation, there is usually a write-off that is allowed for all the money that the investor put down for the drilling program. The write off is only valid for the tax year at which the investor invested. Many tax benefits are related to tangible costs, intangible costs, lease operating costs, and all other expenses that are excluded over certain periods.

At what time should investors begin to anticipate rewards?

Many oil and gas companies have a specific period that they usually pay back investors. Generally, investors start to get their money back about 30 and 60 days after the start of production. This is also referred to as the “initial payout” of the money you invested. Based on how productive the well is, investors can get a profitable initial payout period that is within the first 18 to 24 months.


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