Investors couldn’t be happier with the long-term economics of oil and gas as supply-and-demand of global energy tips to the “demand” side of the scales. Smart and sophisticated individuals, prestigious U.S. and foreign investment houses both here and abroad, pension and government funds, major industrial companies and banks and looking increasingly to oil and gas to deliver consistent profits and guaranteed growth.
As former Communist countries enter a world of free market enterprise, emerging markets, powered by a low-cost workforce and ever-increasing consumer demand, look to oil to fuel GDP growth. In the light of predicted life expectancy increase and global population rise, consider the unstoppable demand to fire the factories, fuel the cars, light the new houses spark the home entertainment systems and launder the clothes in Southeast Asia and Eastern Europe – which in turn will feed countless new business opportunities in the oil industry.
But it’s not just growing demand for the product that makes investment in oil and gas a no-brainer. Oil and gas fields boast a high intrinsic value, one that, as tried and true as an exceptional red wine, increases with age. Field production is expanded regularly as new wells are completed, as production techniques are refined, as secondary recovery options are improved. Productive zones previously bypassed are often redeveloped. The advent of new technologies is paving the way to guarantee supplemental yield to gradually replace that from primary reserves which, having been actively producing for decades, are now slowly depleting. Tech giants like IBM exploring “smart”-field approaches through improved data integration and business analytics are well on their way to creating systems linking a field’s business functions into one smooth system. The outcome: upstream oil and gas producers can look in the coming years to raise production levels, recovery rates and cost efficiencies.
As the field value increases, so does the product value. The steadily climbing value of the gas and oil industry will come as no surprise to anyone who experiences first-hand – at the gas pump or when paying their home heating bill – the rising cost of petroleum and gas products.
And the value remains safe for the life – often decades — of an optimally-yielding field. Reservoirs embedded in rock thousands of feet underground remain untouched by the elements. Impenetrable by all except the owners, these reserves are secure and will remain so for decades. No high-security bank vaults needed. And, as political and social turmoil elsewhere in the world boil and bubble, the physical security of U.S. oil and gas fields is ever more underlined by a political security: onshore properties and reserves in the United States harbor one of the world’s most valuable assets in one of the world’s safest places.
Owning just a little oil and natural gas can be worth a lot of money. Oil and natural gas, as easily-valued commodities, have proven time and time again to be one of the most essential basic commodities of the worlds’ growing industrial societies. So great is the economic power of oil that it has propelled relatively small countries to commercial and financial preeminence. Oil and gas are the largest business in the world. Of the top five Fortune 500 companies, three of them are oil companies. Exxon’s net income alone was greater than the sales of more than half of the Fortune 500. As worldwide energy prices continue to rise, “black-gold” and gas owners are seeing a surge in profits. Today, the person who owns a relatively small natural gas well or two with recoverable reserves (500,000 Mcf) of natural gas is a multi-millionaire.
Oil and gas investing is a particularly attractive medium to guarantee an ongoing cash stream. Revenue checks are issued on a regular basis once production starts. Let those profits grow organically with auto-reinvest, and enjoy the income tax benefits today. With appropriate professional advice and foresighted, pre-investment research into properties, their geology, production history, drilling company and deal structure, investors can assure themselves of the quality and look at projected return on their specific investment choice. All types of investments, of course, carry a certain risk factor – look to lower your own risk in oil and gas by doing your homework.
Unlike other industries, oil and gas drilling boasts a huge upside potential. The exciting opportunity of discovering high-yield new field wells sets oil and gas investments apart from all other investment types. Look at a theoretical potential return in this example: A natural gas field with 100 billion cubic feet of reserves has $300 million of un-discounted reserves at $3 per Mcf (thousand cubic feet). A single well in a field may have reserves of 3 to 15 billion cubic feet of gas. Do the math, and marvel at the gross undiscounted value of $9 million – $45 million for one single well! All subsequent drilling in this field is no longer high-risk exploration, but rather a low-risk developmental activity. This is when the real profits start to roll in – when drilling low-risk offset development wells in a known, high $$-valued reservoir.
Let’s get back to the tax breaks. While share ownership in oil and natural gas is not a tax shelter, there are some taxation benefits associated with owning oil and natural gas properties. For example, intangible drilling costs, including e.g. labor and other unrecoverable expenses, can comprise up to 65% of the investment, and typically can be written off. Over time, remaining costs may be written off, at most over the time period of life of the well. (In some cases, write-offs can even reduce an investor’s tax bracket.) And, if a well turns out to be dry, the entire investment is a write-off.
Not to forget, fifteen percent (15%) of the tangible oil and gas income generated from successful wells is deductible from federal taxable income. As with all investments, each investor is urged to consult their own advisors as to the benefits an investment in oil and natural gas may have regarding the federal income tax consequences and how it may apply to their individual tax situation. However, the tax benefits of oil and gas investment are undeniable.
We can expect our politicians to support tax benefits and incentives well into the future. Eager to achieve energy–independence in a world seeing constant shifts in economic and political power and influence, the U.S. is now looking to tackle its own its own supply-and-demand conundrum:
The demand for power, both consumer- and industry-driven, is escalating as the rate of our technological advancements accelerates. An increasing use of electronic devices – along with our need for cozy warm houses in winter and refreshing air conditioning in summer – pressures utility companies to increase output. Electricity suppliers throughout the country, for example, are building new gas-fired combined cycle turbine generator power plants to meet consumer expectations. Supply of natural gas is forced to increase to meet suppliers’ demand just as those same suppliers adapt to increase their output to satiate an ever-growing and ever-hungrier U.S. consumer population.
The United States consumes around 20 million barrels of oil daily. Of the crude oil is consumes, 70% is imported. As demand continues to rise and the push toward energy independence intensifies, it is a no-brainer that domestic oil production must increase, particularly in the area of land-based fields. Currently, onshore production accounts for just 5% of our national oil – and the door of opportunity is wide open, inviting investment in an exciting and durable industry supporting America’s soaring energy demand.
Remember, the sooner you invest, the sooner you see profits. The longer you hold your investment in oil and gas, the more you compound your profit. Make an appointment with your advisor today, and find out how you can be part of one of the world’s largest and most profitable growth industries: oil and natural gas.