Investing In Oil Wells
For more than a century, oil has been the primary source of heat energy. During this time, significant progress has been made in the way it is used, from being used as fuel for lamps to becoming the primary source of mobility worldwide. It has become an invaluable resource during wars and harsh winters, and is used as a raw material in different industries.
Natural gas has a strong presence as a fundamental source of heating in some countries, and it is the main method used for cooking worldwide. Diesel is a direct source of electricity or fuel and is essential for the movement of large transport globally.
Despite increased investment in renewable energy, there is no indication that there will be a significant change in the main source of fuel in the world over the next 30 years or more. Hydrocarbons still have a long way to go. Therefore, they are not only a source of energy but also an attractive business. This raises the question of how to invest in this business.
There are different ways to invest in the oil and gas industry. One common method is to consider the industry as a collection of companies that offer products and services to consumers. In this case, one can invest as a service company or as an investor in the purchase of shares and futures.
Investing in Direct Oil Drilling Programs
The development of a field is directly connected to the drilling of wells. After carrying out exploration tasks and drilling the first well to prove the existence of crude oil and a reservoir, field development operations begin.
These operations include the entire drilling process in the field, and drilling operations encompass all activities carried out to leave the well in production. In other words, drilling work ends when the well is completed and the production tubing is at the bottom.
To invest directly in well-drilling programs, several options should be considered:
• ETFs and Mutual Funds: Despite their differences, mutual funds must be managed by specialists, while the administrative costs for ETFs are much lower. Their operation is the same – buying a hybrid resource, i.e., an investment fund and an action at the same time, from an operating company that is involved in the drilling process.
• Private Placements: In this case, it is about acquiring all the rights to operate an oil well and investing directly in all drilling activities. This type of investment incurs different benefits such as tax advantages, portfolio diversification, and protected tax income.
• Futures Contracts: Although this option is the riskiest, it is also one of the most lucrative. In this modality, investors seek to acquire micro-capitalization shares and limited companies, allowing them to be direct investors in a small drilling project or a small drilling company that takes charge of different activities.
• ADRs and Large-Cap Stocks: This modality is based on the purchase of shares of companies that focus on drilling wells. Currently, the oil companies that offer this option the most are dedicated to the exploration and drilling sector. With the help of an advisor, investors can acquire direct exposures through ADRs.
Buying Oil Stocks
Purchasing oil stocks is one of the quickest and most straightforward ways to enter the world of oil and gas investing. In general, it’s a secure investment because the continuous growth of world economies requires hydrocarbons as an energy source to maintain operations.
However, investing in oil stocks isn’t an easy task these days since fluctuations in demand and excess supply can affect the value of oil and consequently impact the purchase and sale price of industry-related shares. For instance, from 2014 to 2020, crude oil experienced a continuous drop in prices, and in the first quarter of 2020, excess reserves in the USA and global unemployment due to COVID-19 caused WTI to plummet to negative numbers.
Therefore, certain factors need to be considered while making this type of investment:
• Regularly review oil prices
• Understand the differences between hydrocarbon reserves
• Analyze low moments to invest in oil stocks
• Keep an eye on dividend targets
Buying Mineral Rights
Purchasing mineral rights can be a highly profitable business, provided it is certain that there are crude oil reserves in the subsoil of the area being negotiated.
To close a transaction for mineral rights, a mineral rights lawyer is typically used. During negotiation and subsequent deal-closing, certain points are made clear, such as the purchase of only the minerals in the subsoil, which indicates that only what is below ground belongs to the buyer, while the property above ground continues to belong to its usual owner.
If only the right to subsoil is purchased, there is the option of buying a small part of the property, allowing the new operator to work, or renting the land. In the latter case, the operator may choose to relinquish the rented area at the end of their operations on the site.
The ownership of minerals varies according to the laws of different countries; in some places, the minerals belong directly to the country, making negotiations much more complex. In the US, mineral rights commonly belong to the property owner.
For over 100 years, investments related to oil operations have been a popular way to increase investor profits. However, success in the oil and gas industry also depends on favorable political administration. If an administration is supportive of the industry, it can lead to increased opportunities for drilling, production, and exploration. As John D. Rockefeller once famously said, “The best business in the world is a well-run oil company. The second best business in the world is a badly run oil company.” Ultimately, profitability remains the key to success in the oil and gas industry, but a supportive political administration can certainly make a difference.