It is a well-known fact that oil and gas investments have taken an unprecedented role in the world, to the extent that world peace seems to be at stake because of this issue. Humans have depended and continue to depend on these natural resources of fuel. The largest amounts of oil reserves are found in Saudi Arabia, Canada, Iran, Iraq, Kuwait, United Arab Emirates, Venezuela, Russia, Libya, and Nigeria. Countries with the largest source of natural gas are Russia, Iran, Qatar, Saudi Arabia, United Arab Emirates, United States, Algeria, Nigeria, Venezuela, and Iraq.
As more oil and natural gas deposits are discovered around the world, reserves will grow. New reserves have been located in Brazil, the Gulf of Mexico, Alaska, off the western coast of Africa, Russia, and many areas of Asia and the Pacific. And of course, how many more reserves the Middle East possesses remain a speculation and a matter of political strife.
Advancing technology has helped in developing the oil and gas industry and investments have been a major source of financing this growth. Thus oil and gas investing is a very viable option that can be considered by investors.
Different Ways to Invest in Oil and Gas
The sharp increase in oil and gas prices in 2004 and 2005 resulted in a flow of cash with the growth in the level of investments. If you are interested in investing in oil and gas, you need to look into the different ways you can invest.
• Major Oil Company Stock - Investing in the stock of major oil companies is a safe option, although the returns may not be high.
• Medium-Sized Oil and Gas Companies - Since most of these companies are still growing and developing their stocks carry more risk although there is a higher rate of return. These stocks are traded on exchanges throughout the world.
• Independent Oil and Gas Companies - Many of these companies get the investor involved in industry development projects and exploration too. These direct investment options are known as private placement and carry tax benefits and higher returns although there is an increased element of risk.
• Mutual Funds - These involve a variety of options - stock in major oil companies; stock in independent companies; exploration projects etc.
• Drilling Funds - Many small independent companies provide funds for drilling projects - exploration drilling and developmental drilling. This is yet another option for investment.
• Commodities Trading - In this type of investment, you are speculating in price movement - whether or not the price for oil or gas will move up or down. This investment carries a huge element of risk.
• Royalty Funds - This investment lasts for many years and carries a low risk factor along with low returns. The revenue results from royalty interests from different producing fields.
Safe Investments
Investing in oil and gas industries, especially when major companies are involved is the safest option, with the lowest element of risk. Of course, this is offset by the low returns. But if safety is the main objective in investing in oil and gas, then this is the best choice.
Three factors make investing in the oil and gas industry safe.
• Investment acumen - To be a safe investor, you need to ask the right questions and understand the right answer. This acumen or insight will help you to make safe investment decisions.
• Investment objectives - You need to be very clear about your investment objectives. Is it high returns or low risks? Depending on what your objectives are, you need to choose the appropriate investment option.
• Investment vehicles - Again, your investment objective will guide you to choose the most suitable investment vehicle - stocks, investment funds, drilling funds, private placements, commodities trading, or some combination of all of the above.
Advantages of Investing in Oil
Investing in oil and gas industry can be very advantageous. After analyzing the different options, their structures, and the level of risk involved, you can make a choice of a certain type of investment that can prove to be advantageous to your investment objective.
The benefits are several:
• Tax Benefits - According to Newsweek drilling is the very best tax-advantaged investment. 65% to 80% can be written off in the first year of certain investments and for certain others, it is 100% tax deductible. The investor's share of expenses in intangible drilling costs, intangible completion costs, tangible completion expenses, and depreciation costs, along with depletion allowance, and alternative minimum tax make these investments tax-advantageous to the investor.
• High Financial Rewards - Certain investment options afford a return of capital within a year; returns that are better than 10 to 1; more than 50% annual rate of return.
• Low Risk Potential - With advanced technology, the risk factor has been minimized. Several projects have a 90% chance of success rate.
• Availability of Drilling Prospects and Low Drilling Costs- There is a wider choice of small drilling prospects available now than in the past. Moreover drilling costs are at an all-time low with a decreasing rig activity.
• Higher Demand and Consumption - The demand and consumption of petroleum are doubling every ten years. So, at the present stage where there is no viable alternative fuel resources, investing in oil and natural gas are really advantageous.
• Lacks of Conservative Sources of Finance - Since the traditional sources of money are no longer available, the capital of individual investors are in demand, and so they stand to gain from these investments.
• Government Support - Governments recognize the value of oil and gas investments for the economy of their countries. So they encourage domestic drilling with special tax concessions. Investors in oil and gas have a distinct advantage in this.
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