Myths or Reality? 8 Misconceptions about Oil Well Investment
There are several myths about Oil Well Investment which are supposed to be risky. The myths are sometimes true and sometimes false, that is why a thorough study is always a pre-requisite when it comes to investing in oil wells. So let us check out the numerous myths which are as follows:
Myth 1: Offer came too easy
It’s a Scam this myth is not true. The truth lies in the following explanation:
It’s not necessary that if a deal came to you easily it’s a scam. If you are asked to invest in a private oil and gas offering, you should first consider and investigate who exactly is asking you to invest and think carefully about whether the investment is appropriate for you. Remember, it is your money and you shouldn’t let anyone pressurize you into purchasing an oil investment that you don’t understand. Fraudsters rely on the sad truth that many people simply don’t bother to investigate before they make any oil Investment. It’s not enough to ask a promoter for more information or for references – fraudsters have no incentive to set you straight. Savvy investors take the time to do their own independent research.
Myth 2: “Can’t Miss” Wells
Every investment carries some degree of risk so you should be skeptical of any oil and gas investment opportunity pitched as completely safe. Fraudsters often spend a lot of time trying to convince you that extremely high returns are “guaranteed” or “can’t miss.” Don’t believe it.
Myth-3: Most oil wells are a dry hole
Truth:Drilling a hole in the earth thousands of feet deep, cementing steel casing in it, perforating it precisely in the right spot (err. not where the salt water is), and outfitting it to bring that precious hydrocarbon to the surface is no walk in the park. Sure it’s done every day, but often with expensive hiccups along the way. A poor cementing job can allow channeling of oil, natural gas or water behind the casing, instead of inside where it belongs. Sometimes reservoir attributes demand sand screens, and even specialized chemicals, which often aren’t friendly to steel pipe – especially when combined with temperatures exceeding 200 degrees Fahrenheit.
In short, there is plenty that can go wrong mechanically between the start of drilling and putting the first cheque in the bank. Reality is that the layman has no way to mitigate mechanical risk once the project is underway. You’ll be relying on the expertise of the operator and his chosen drilling contract
Myth-4: “They” own the oil companies.
Truth: To gain popular favor, many politicians, frequently joined by the media, assert that oil companies are vague and distant entities owned by “they” and it becomes “they” versus “you.” The oil industry is a favourite whipping boy for politicians seeking to gain votes. Because the average citizen is not well informed on these matters, political rhetoric often reinforces prejudices against the oil industry rather than dealing in realities.
Myth-5: Eliminating subsidies to the oil and gas industry will hamstring domestic oil production.
Truth: Variations in gas prices are driven by the world market, and are not dependent on one particular government policy. Eliminating subsidies will have little effect on the world supply and price of oil. Consequently, consumer demand for petroleum products, like gasoline, would not change. On the supply side, removing oil and gas subsidies is estimated to increase costs of finding and producing oil by less than 2 percent.
Myth-6: More the profit more the Tax
Truth: Oil investment helps in deduction of tax. Here are some tax advantages to oil and gas investing. For instance, the IRS allows companies to deduct for depletion – an allowance similar to that for depreciation in rental real estate, which is a way of accounting for the gradual exhaustion of mineral supplies in a given plot of land. If you buy shares in a publicly traded stock, this benefit will be largely invisible to you, since publicly traded stocks are C-corporations and don’t pass their gains and losses to shareholders returns. However, if you buy a membership in a limited partnership, this could be a very important consideration. Depletion could be the difference between a property that’s cash flow positive and one that loses money.
Myth-7: You can lose all of your money.
Truth: Are you able to manage yourself that is your internal emotions? A drilling project often demands decisions from you along the way. For instance: Do you agree to set casing on the well? This is usually the first and most fundamental of questions. You are making a call as to the estimated productivity of the well – electing either to continue spending more money to complete the well, or declaring it a duster. Other possible emotional strains can come in the form of decisions about going forward in light of lost items in the hole requiring expensive “fishing” procedures, or “squeeze” jobs to cut off unwanted water, or long waits for pipeline hookups, or. -You get the picture.
Bottom line – Go in with your eyes open. Be sure you understand the scope of decisions you may have to make.
Myth-8: Oil wells don’t have a very long life span.
Truth: Oil wells have a very long life span. So don’t really worry about it running dry for at least more than a couple of years easy.
According to me by taking into consideration the above- mentioned facts, it can be concluded that it is not as risky as is presumed, to invest in oil producing companies. Oil companies can give you long term returns. It is not true that oil companies are a risky avenue for investment.
Levi Herris is an online consultant. He likes to blog on various investment opportunities.