Oil is one of the leading and most lucrative industries in the world, specifically, in the United States. In fact, the U.S. is the largest oil-consuming country. In 2017, it consumed about 913.3 million metric tons of oil. The current price of crude oil is around $47 per barrel, and the global oil trade business makes $2.5 trillion per year. The U.S. and Saudia Arabia are the world’s leading oil producers, and each country is responsible for about 13% of the total global oil production. Russia is the third largest producer, putting out 12% of the oil.
Having said that, it probably comes as no surprise that there are a number of ways to invest in the oil industry including futures contracts, exchange-traded funds, mutual funds, and the stock market. One of the ways that many people are hoping to get in on this cash cow is by investing in the wells themselves. They want to make more of a direct investment and may be willing to take a little bit more risk than the average investor. They also have the funds to do so.
If you want to learn how to invest in oil wells – which can greatly boost your portfolio and lead to high returns – here are five things you need to know.
1. The Oil Industry Dates Back to 1859
To understand how to invest in oil wells, you should know the history of the oil industry.
Societies have been producing and utilizing oil for thousands of years, in places like ancient Babylonia, Persia, and China. People would use oil to build towers, fuel lights, and practice medicine. In 1859, Edwin Drake dug the first commercial oil well in Titusville, Pennsylvania. Since people needed kerosene and oil for lamps, and later on the internal combustion engine, the need for oil grew and grew.
2. The Price of Oil is Based on Many Factors
Now that you know the history, you should figure out where the industry stands today when discovering how to invest in oil wells.
As of 2015, there were 1.7 million oil wells in the United States alone. In 2018, International Energy Agency (IEA) predicted that the worldwide demand for oil would be nearly 100 million gallons per day, with the U.S. consuming 20% of it.
The price of oil will go up or down depending on a few factors. Of course, there is always supply and demand. As supply goes up, demand goes down, and so do prices. If you’re going to learn how to invest in oil wells, you need to know about the current supply and demand, and price forecasting for the future.
For instance, Saudi Arabia made the choice to keep drilling for oil in 2014 and produced record high levels of it. Other drillers around the world were doing the same. Prices fell. The Organization of the Petroleum Exporting Countries, or OPEC, which includes Saudi Arabia, Qatar, Indonesia, Iraq, Iran, and others were blamed for the fall in prices. OPEC then blamed the U.S. shale drillers.
Demand may go up for oil in times of natural or geopolitical crises, when production is forced to slow down. It also goes up as nations’ economies are the world get stronger. Demand may go down as renewable energy becomes mainstream, or when economies tank and are forced to scale back on production.
When you choose oil wells to invest in, you should do your research to determine the best places to invest as well. The U.S. may be producing a lot of oil, but will that slow down in the future? Saudi Arabia is a major player, but are they irresponsible with their oil production? Research not only the oil wells you want to invest in, but the country’s practices as well.
3. There Are Different Ways to Drill for Oil
When it comes to educating yourself about how to invest in oil wells, you need to understand the various methods of excavating oil. The best oil well drillers will have maximum output with minimal costs.
The most popular type of well that’s currently drilled is a conventional well. Oil companies will pick a location above a reservoir and then drill vertically downward. Wells that do not deviate in their path from the vertical are also deemed conventional. Conventional wells are considered inexpensive in terms of drilling costs.
When conventional wells are not enough, drillers will turn to horizontal wells instead. They will enter the deposit horizontally and stimulate reservoirs in ways that vertical wells fail to do. Sometimes, drillers will use horizontal wells and hydraulic fracturing to mine for shale or tight gas as well.
There are also offshore wells, which are drilled in the water. Drilling tools are made to withstand rough sea conditions, which may include strong seabed currents and freezing water temperatures.
Drilling for oil offshore is much more expensive than onshore drilling. When U.S. producers want to drill oil wells on land, they will typically pay around $18 million to $25 million for a rig, while the average cost of an offshore rig is about $650 million. If you’re looking into how to invest in oil wells offshore and on, keep those costs in mind.
4. You Can Choose a Director Indirect Investment When Learning How to Invest in Oil Wells
There are two ways you can go about investing in oil wells: directly and indirectly.
If you want to determine how to invest in oil wells directly, you need to look into direct participation programs (DPPs). The price of a DPP depends on the degree of management you will be funding and the size and scope of the project. Sometimes, you can invest in oil wells with only $5,000, if the company is on the smaller side. On the higher end, you may need to invest $100,000, and will only receive 1% working interest in the well.
With a DPP, you can either have a working interest partnership or a limited partnership ownership. In a working interest partnership, you own a piece of a well. In a limited partnership ownership, working interests are wrapped inside of them. The general partner has more control and backend revenue and management fees are added after payouts occur.
To invest in a DPP, you will receive a private or prospectus placement memorandum, or a PPM. The PPM will go over the project’s details including the pumper fee, state filing fees, administration costs, pumper fee, operator fee, and other upkeep expenses. The PPM will also outline what you are purchasing, like a 5% working interest and a 1% net revenue interest (NRI), for example. Once the well begins producing, you will receive payment from the sale of the oil less the NRI and monthly upkeep costs.
Not anyone can learn how to invest in oil wells and actually do it, though. You need to have a joint net worth with your spouse or individual net worth that is more than $1 million or have made more than $200,000 per year for the past two years.
If you want to research where and how to invest in oil wells, look up oil companies and platforms online that allow you to get in on these wells. For example, Royale Energy, Inc. allows you to get into oil well investing, and you can also use the CrudeFunders platform to own a piece of a well for as little as $1,000. Just make sure you check out reviews of these companies before committing.
Directly investing in oil wells can be highly risky. If you want an alternative, you can take a more traditional route and invest in oil companies in general. For example, you could invest in oil and energy companies on the stock market, trade crude oil futures, or invest in exchange-traded funds (EFTs) that track the current price of crude oil. You may find that a more stable investment in oil, on the whole, is better for you at this time.
5. You Need to Be Informed on the Latest News
As with any investment, you need to keep up with the latest oil and energy news when you’re investing in oil wells. Sites like OilPrice.com, Bloomberg, and Yahoo Finance can help you stay informed. But if you want the news delivered right to your inbox, along with advice from the top experts in oil well investing, subscribe to Energy Advantage Investor (EAI). EAI is a subscription-based service that will teach you how to invest in oil wells and valuable energy companies.
You don’t have to go searching for the best advice and updates or spend hours researching. You can simply open your inbox and see what you need to start investing through EAI. If you’re ready to give your portfolio a big boost, subscribe to EAI today