Former US Presidential candidate John McCain famously said, “Whoever controls oil controls much more than oil.”The oil and gas industry is the fuel for the global economy, both metaphorically and in real terms. Naturally, investors have long sought them due to their potential for high returns and portfolio diversification.
Investing in oil and gas wells has historically delivered good returns. Some see them as the best way to hedge against inflation. However, these investments are volatile and come with their share of risks. If you wish to know how to invest in oil wells or explore oil investment opportunities, this comprehensive guide will help.
The Basics of Oil Exploration Investment
How do you invest in oil wells? Before answering that, we must take you through some basics. Oil exploration means identifying and extracting untapped oil and gas reserves. An average oil reserve goes through five stages to produce the product and deliver the return to the investors. These stages are –
- Early Interest
- Leasing
- Geophysical Surveys
- Infrastructure and Drilling
- Production
As an investor, you must start by identifying potential oil and gas exploration regions. You must also consider the political climate and local governmental regulations while analyzing geological formations, surveys, and historical production data. For example, Venezuela has the highest known reserves in the world. Still, it doesn’t feature among the Top 10 oil-producing nations due to its political climate and the sanctions imposed on it.
Approach To Oil Drilling Investments
Once experts identify potential reserves, drilling is the next crucial step in extracting oil and gas. Oil drilling investments into exploratory drilling involve drilling wells in areas with no previous oil and gas production to determine the presence and viability of reserves. On the other hand, production drilling occurs in areas with established reserves and aims to extract oil and gas for commercial purposes. Depending on the specific needs of the projects, the oil exploration company may choose one of the following drilling techniques –
Types of Drilling Techniques
- Conventional Drilling
- Horizontal Drilling
- Hydraulic Fracturing (Fracking)
Choosing the Right Drilling Projects
Each technique has advantages and disadvantages; hence, choosing the appropriate drilling projects is crucial for successful oil and gas investments. There are two things that you as an investor must consider while choosing drilling projects –
Well Prospects
Assessing well prospects involves studying the geological data, reservoir characteristics, and production potential. While any reserve would produce oil, considering reservoir size, productivity, and well economics is the path to the profitability of a drilling project.
Drilling Costs and Risks
Drilling costs vary depending on depth, location, and drilling techniques employed. It is essential to evaluate the associated costs and potential risks, including operational risks, regulatory compliance, and environmental impacts.
Modes of Investing in Oil and Gas Wells
Investing in oil and gas wells can lead to exponential returns on your investments. Direct investments offer unique advantages to you, such as ownership and control over the assets and the potential for high returns. It allows you to participate in decision-making and potentially maximize returns. Let us explore two routes most investors take to direct oil and gas well investments.
Joint Ventures
In this ownership model, you partner with an exploration or production company to develop and operate oil and gas wells. Several investors pool their resources with the company and share the project’s risks and rewards.
Limited Partnerships
By choosing this route, you can become limited partners in a partnership formed by an operator or sponsor. Limited partners contribute capital to the partnership and receive a share of the profits while having limited liability for the project’s obligations.
Oil Investment Opportunities
When you explore oil and gas investment opportunities, you must make a call between onshore (land-based) or offshore (sea-based) oil and gas projects. Let’s break it down for you for better understanding –
Onshore Investments
As the name suggests, these are land-based projects. In this drilling, the oil rigs are moved around in an area where a reserve has been identified. Onshore investments are typically less expensive and involve fewer logistical challenges than offshore investments. They come with faster project timelines, lower production costs, and fewer regulatory hurdles. However, the potential for significant reserves might be higher in offshore projects.
Offshore Investments
These are oil reserves that are on the high seas. Offshore investments offer the potential for larger reserves and production volumes. They may also have access to untapped resources. However, they are generally more complex and expensive. Drilling oil and gas out of them involves greater technical and operational challenges, including offshore drilling and logistics.
Investing in Established Wells
A safer oil exploration investment that investors can choose is established wells. Here you acquire ownership of wells that have a history of successful production. In most cases, they also have ready infrastructure. If you opt for such a well, you must start by evaluating the production history to gain insights into the well’s productivity, decline rates, and potential remaining reserves. It will allow you to make an informed decision about the future performance of the well.
Oil and Gas Investment Opportunities
When you plunge into oil and gas investments, you must always focus on diversification. Investing in multiple oil and gas wells across different regions or projects can spread your risk and enhance potential returns. Diversifying investments can help mitigate the impact of individual well performance or fluctuations in oil and gas prices.
A well-balanced portfolio of oil and gas investments involves considering various factors, such as geographical diversification, investment size, risk tolerance, etc. You must seek professional advice to design a portfolio strategy aligned with your goals. Here are a few diversification options you can explore –
Pipeline Infrastructure Investments
Investing in pipeline infrastructure involves participating in the transportation and storage of oil and gas. These investments can provide you with steady income streams through long-term contracts and fees associated with the movement of resources.
Refining and Distribution Investments
You are putting your money into refining and distribution facilities in this investment mode.You will be investing in processing, refining, and marketing petroleum products. Increasing demand for refined products offers you potential profit margins in the long run.
How to Invest in Oil and Gas Wells?
Now we come to the most important part of this guide. As we have discussed, oil and gas investments come with their risks, and as an investor, you need to make an informed call. Here are a few tips that will help your money in rewarding projects –
Define Investment Goals
Defining investment goals helps you align expectations, risk tolerance, and investment time horizon. Whether you seek long-term capital appreciation or regular income, these goals form the bedrock of your investment strategy.
Set a Realistic Budget
While everyone wants to own a Chevron or Exxon, setting a realistic budget is vital! It involves determining the amount of capital available for investment. When allocating funds, you must consider your risk tolerance, liquidity needs, and diversification requirements.
Engage With Industry Professionals
You must build a strong relationship with industry professionals. When you engage with geologists, landmen, and brokers, you can gain valuable insights and access to potential investment opportunities. These professionals keep track of available projects and can assist in evaluating the viability of investments.
Utilize Online Investment Platforms
Like the equity markets, you can invest in oil and gas on online investment platforms. These platforms dedicated to oil and gas investments can offer access to various investment opportunities. They provide information on projects, operator profiles, and investment terms, allowing investors to explore options and make informed decisions.
Analyze Geological Data
It is important to thoroughly review geological data, including seismic surveys, well logs, and reservoir models. You may lack the technical expertise in these fields, so engaging with industry professionals is crucial. This data analysis helps you understand a particular investment opportunity’s geological characteristics, reservoir potential, and risks.
Evaluate Operator Expertise
You don’t want to put your hard-earned money in the hands of a rookie, do you? Evaluating the experience and track record of the project’s operator is essential. You must have a detailed understanding of their technical capabilities, financial stability, and past performance, as they can provide insights into their ability to maximize the potential of the investment.
Partner with Oil and Gas Consultants
Partnering with oil and gas consultants or advisory firms is one of the best ways of mitigating risk. They provide specialized knowledge, due diligence support, and technical expertise to assess investment opportunities and manage associated risks.
Consult Financial Advisors
Lastly, you must consult financial advisors specializing in oil and gas investments. They will help you develop a suitable investment strategy, evaluate risks, and make informed decisions aligned with your financial goals.
Final Thoughts
Investing in Oil and Gas Wells is one of the most rewarding opportunities. This industry has paid investors exponential returns for over a century and shall continue to do so. It is important to engage with experts in this industry to understand the true potential of individual projects before you make your investments.
