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How to Invest in Oil and Gas

There are multiple ways to invest and get exposure to the oil and gas industry. Investing can offer the potential opportunity for attractive returns and tax benefits for certain types of investing, one must also fully understand and accept the high risks associated to capture these potential attractive returns in the industry. The two primary methods of investing are purchasing stock in an oil and gas company (public), or investing through direct participation programs (private). Those new to the world of investing must first choose between these two types of investing:

  • Major Oil Stock or Other Stock Exchange
  • Commodities Trading
  • Funds: Royalty, Mutual or ETF’s
  • Royalty Interest-Mineral Rights
  • Direct Participation Programs
  • Limited Partnerships

Mineral Rights

Mineral rights include the rights to any oil and natural gas that exist beneath a property. The rights to these commodities can be sold or leased to others. In the oil and gas industry mineral rights refers to ownership of a portion of the resource or revenue that is produced. A company or person that owns a royalty interest does not bear any of the costs of the operations needed to produce the resource, yet the person or company still owns a portion of the revenue produced from the resource.

Generally there are three basic types of wells used by oil and gas companies: exploration wells, developmental wells and stripper or rework wells. Exploration or wildcat wells are used to search for oil in unchartered regions. These wells carry the higher risk, and if unsuccessful are referred to as a dry well/hole. Developmental wells, on the other hand, are typically sunk in areas with known oil reserves. The strategy of drilling in known producing areas carries less risk compared to exploration. Stripper or rework wells are aged wells that produce a minimal volume, but require rejuvenation through Secondary or Tertiary recovery techniques, such as waterflooding to increase production. These wells carry the least amount of risk compared to exploration or developmental wells.