Investors always want to know what the odds of losing their capital will be. Investors want to know when they will begin making money after sending funds to participate in any investment offering. This is the development time risk. Three, Investors want to know how good the profit structure is, or more specifically, how much money will they make during the life of the investment? I would add a fourth and fifth concern which would be what tax write-offs are there, and finally, what liquidity is there going to be in the investment, or in other words…what’s the exit strategy, if any? Oil and Gas
Risk is of primary concern to anyone who is expecting to make money, and the deciding of who with, and where to invest hard earned money are the key questions. Upside, downside, and everything else in between are all factors when an intelligent investor analyses any investment, and determines how much, or little to choose to invest. There are many types of risk…I would like to list some of them based on my own experience, considerable research done during the past 24 years, and based on some failures I’ve also had over the years.
There is a people risk…finding the right people is absolutely essential, in fact I believe this to be the single most important requirement before doing any business with anyone…bad people screw-up great deals. Finding trained, experienced, and highly motivated professionals who don’t quit until the job is done right, and in a reasonable period of time can be difficult. People who can work together while finding the crews, and equipment you need to develop the leases, and fields you have so carefully selected, is not easy. It can make or break-you. Relationships based on years of working together is your best insurance of getting the necessary, and correctly accomplished development work you need done in timely fashion.
Track records are important, but hard to quantify in oil & gas, simply because like the movies, you are only as good as your last picture show. Well meaning, and extremely competent professional people, working with great teams, and putting a great deal together can lose, or not succeed with every endeavor, irregardless of their desire to do well, or regardless of their wonderful technical abilities and experience. It’s always really important to keep this in mind…however, working with incompetent people, or people who don’t know how to get the job done right, or regularly finish what they start isn’t an acceptable outcome. You need to avoid these often fairly confident sounding people when you first begin talking with them, and there are some excellent clues to look for when trying to decide who to avoid. Oil and Gas
The deal is of paramount importance of course, but how it’s structured to provide you with upside, while minimizing downside, providing diversification, and being achievable at the same time, and in a reasonable period of time is still a significant challenge…the premise of any oil & gas deal has to be supportable with good history, logic, geology, engineering, and just plain has to make good sense, for both area and the time.
Some oil & gas drilling, and developmental areas in the US are intrinsically very risky for example…the Gulf Coast is one such area, and it’s where the faint of heart should not venture…costs are extremely high, as are the technical risks of failure, of which there are many. The statistical track record for most participants in the Gulf Coast area is less than a 50% hit rate of completing commercial wells, even when finding recoverable reserves. Competition in the Gulf Coast areas is brutal, and the big boys control the lay of the land…you’ve all heard of the expression, ‘my way, or the hi-way’?
Previously drilled and developed older areas which have historically produced many millions of barrels of oil in the past, and are still doing so right now. These areas are being re-visited by large independents, and the majors, because they often have much less risk than new exploratory offshore areas. Wells can be placed into production for far less money, and much quicker than the big new fields being discovered elsewhere. Many of these older fields may not have such exciting upside, however higher prices in oil and gas now support the return to some of these areas even though they have been depleted of their primary recoverable reserves of oil & gas. Secondary drilling and recovery methods can rival, and exceed the outcomes relative to both rates of return, and upside you might get in the Gulf Coast states, or with offshore drilling programs. Actually, since the late 70’s most of the middle east oil fields are in secondary recovery, and are being water flooded, which is the principal means of recovering the last remaining reserves in place in an oil field.
Finally, there is the price risk, or volatility risk…oil & gas prices are high, particularly oil prices, which are going-up in the foreseeable future, or within the time lines we are investing, and developing new oil & gas projects being planned during the next ten years…there will be alternate energy sources, and conservation efforts, but demand will be greater than supply capabilities based on my research.