With the skyrocketing prices at the pumps and for home delivery customers, oil and gas investments may seem quite tempting. If you know people who receive five and six figure royalty checks then you may be sold already. While there is no doubt they can be lucrative, it is essential to know the risks to oil and gas investments.
People Risk:
This should be the first and most important factor when deciding to throw your hard-earned money into a drilling project. It is essential that you find out everything you can about those who are involved. Check into the company’s integrity, honesty, reputation, professional ability, and each main player’s personal history. Ask yourself if the well operator has experience. Does that experience cover the proposed drilling area? How financially sound is the company? Are they properly insured? Is the company willing to risk any of their own money? Ensure your proposed leaders for oil and gas investments are worthy of the title, your trust, and your money.
Mechanical Risk:
It is no simple matter to drill thousands of feet down into the Earth, cement a steel casing, perforate the exact spot, and outfit the project with all needed equipment to bring this hydrocarbon treasure to the surface. Even though it is done on a daily basis, there can be some very expensive hiccups. From the start of the drilling, to depositing the first of many (hopefully!) checks from oil and gas investments, there is plenty that can go wrong mechanically.
Reserve Risk:
Whether or not a project makes economic sense in the long run will be determined by the producing characteristics and size of the tapped reservoir. Recovery reserves vary widely depending on several factors. Put simply, striking gas or oil is fine but it must be large enough to matter. You are ultimately looking to find oil and gas investments that will give you a payoff of at least 5:1. More is better of course!
Commodity Price Risk:
Let’s assume that you have managed to find a good supply of resources during drilling. Next comes the selling process. Since hydrocarbons in their raw form are commodity products, they can only be sold at the exact price on the market. Investors have no control over the factors that determine the value of market commodities. Although the aim of oil and gas investments is to make a profit, keep in mind that the market can fluctuate drastically. One day can make all the difference between a hundred thousand dollar payoff and a million dollar payoff.
“You” as a Risk:
Oil and gas investments are stressful as they progress. You need to be able to make decisions along the way and understand the consequences of your choices. You need to be able to keep your emotions and stress level on an even keel. Make sure that you go in with your eyes wide open to avoid disappointment.
