Even seasoned investors in other fields can be a intimidated by the very specific terminology involved in oil and gas investments. Many investors with appropriate investment income have heard about how lucrative oil and gas can be, and there is truth to the claims. However, prior to seriously considering investing in oil and gas drilling, it is important to get a basic understanding of common terms and concepts used in the industry.
Eights Terms in Oil and Gas Investment You Should Know
“Can’t Miss” Wells: A calling card for oil and gas company scams. Never trust an oil and gas drilling company that claims “guaranteed” wells. All drilling operations carry some degree of reserve and mechanical risk.
Exploration Investment: As opposed to development, oil and gas companies in the business of exploration look for new reservoirs to drill for new resources. Although these carry a fairly high risk, the payouts are also quite high if they successfully strike oil.
Intangible Drilling Costs: Also known as IDC’s. These costs include all resources required to drill, except for the drilling materials. For example, mud, labor, grease, and chemicals. IDC’s are a tax benefit: you can claim 100% of the costs of IDC’s as a tax deduction.
Mineral Rights Lease: The land that the oil and gas investment company is drilling on has two types of rights: surface rights and mineral rights. Mineral rights refers to the rights to exploit the material underneath the ground, including oil and gas. Exploration companies need to purchase a lease from the mineral rights owners in order to drill for the oil.
Oil Well: The oil well itself is the hole that was dug into the ground. The oil well does not include the machinery or the drill, it refers exclusively to the hole that was drilled, and it is considered a true “oil well” if oil can be extracted from it.
Reserve Risk: This is the risk inherent in all exploration drilling operations- the risk that the well will not produce. Just because the oil and gas company struck oil, it does not mean that the reserve will produce for a long time.
Tangible Drilling Costs: These costs refer to the direct costs of the all of the drilling equipment. Even if they are 100% deductible on taxes, you cannot claim the deduction all at once. You have to write it off over the course of a seven year schedule.
Come to Terms and Agreements with an Oil and Gas Investment Company
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