5 Common Oil And Gas Investment Mistakes And How To Avoid Them

5 Common Oil And Gas Investment Mistakes And How To Avoid Them

By Adam Smith | Finance Contributor on December 26, 2018
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Investing in an oil and gas well is worth the effort, time and money. After all, oil has been—and still is—a commodity the world cannot do without. Most automobiles generate energy from fossil fuels and the plastic industry is heavily reliant on crude oil. Oil pretty much rules the world.

So how do investors go about investing in oil wells?

Investors can choose how to invest in oil wells from the variety of options available. First, you can establish an oil servicing company that provides equipment, supplies or services to other stakeholders in the oil and gas industry. Secondly, you can lease or purchase wells and drill the oil by yourself. In this case, you can sell unrefined crude or sell refined crude as kerosene, gasoline, diesel, and other by-products.

Obviously, there is a lot of money to be made from the oil and gas well. But before you jump in, pause and consider the following vital facts. Investing in an oil well requires a lot of expertise, experience and paperwork. It is no different from other huge, long-term investments.

Any business mogul can handle all the research and legwork involved. However, it is safer and smarter to hire a licensed financial consultant or oil broker to handle your oil and gas investment. But before you choose a financial advisor, it is important that you learn all you can about the business and all the common investment mistakes to avoid.

In this article, we will outline and enumerate the top 5 mistakes oil well investors make. We will also give tips on how to avoid them.

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Mistake #1: Consulting to the Wrong Financial Consultant or Broker

Depending on the size of your oil and gas well investment, you will need to consult a financial expert or broker at some point. And this decision will either make or mar your chances of profiting from this lucrative business. Most investors make the mistake of rushing into contracts with financial brokers only to regret their decision afterwards.

Before you share your business idea, model or plan with an investment manager or broker, take time to interview them. Find out how much experience they have in the industry. Are they passionate about the business? Do they have good track-records? You might want to speak to their previous clients to be sure that your potential financial consultant can be relied upon to increase the profit margins of your oil and gas well investment.

Make sure you employ a broker that can do an excellent job for you. The job of such a consultant or broker is to go through your portfolio of assets and to assist in the decision-making process. If you aren’t sure of the specific amount of money to invest, you should definitely confide in your investment manager or broker. He or she will help you. Oil well investments cost anywhere from $100,000 to one or more million dollars. It will be foolhardy of anyone to put such a huge investment in the hands of a quack.

How to spot a professional financial consultant:

  • He/she specializes in the purchase and sale of oil wells.
  • The financial consultant will be registered with the Securities and Exchange Commission, (SEC).
  • He or she must be registered with the Financial Industry Regulatory Authority, or FINRA. Ask for licenses and verify via https://brokercheck.finra.org/.

Mistake #2: Failing To Do Adequate Research Before Making A Purchase

When you find a lucrative oil well, you’d like to invest in, take some time to do a full background check on the company. Thanks to the internet. Finding information is easy. If you have a broker, work with him or her. If you’re finding and investing in deals on your own, take time to pore through news features , annual reports, SEC filings, and litigation histories. Do not leave anything to chance. Ask to see sales or investor brochures.

Invite an oil and gas lawyer to help you investigate the company too. A good lawyer will advise you well and help you avoid costly mistakes.

Before you invest in that oil well, do all the important research to help you make an informed decision about which investment is best for you.

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Mistake #3: Failing To Visit The Physical Oil Well

So you’re satisfied with the company, the data room and the staff on the site. Great. But you must make out time to see the well.

Don’t assume that the documents have painted a clear picture of your investment. See it for yourself and decide if it is exactly what you hoped it would be. If you can afford it, geological evaluation of the location to be certain that oil exists on the site.

Here are a few things to look out for at the site of the well.

  • Is there any existing infrastructure at and around the oil well?
  • Are there any current operations at the well?
  • Are things in order or uncoordinated?.

The purpose of a physical visit is to help you see how serious the company is. Avoid investing in oil wells that aren’t properly operated.

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Mistake #4: Failing To Negotiate For Lower Prices

Most investors are reluctant to negotiate for lower purchasing prices. This is a huge mistake. Successful business owners often find ways to save money on investments. They understand that frugality is one way to grow the profit margins of the business.

Before you finalise the investment deal, ensure that the price you have been offered is fair and reasonable. Don’t forget that you are in the business to make a profit. It makes sense to suggest a lower rate than the asking price.

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Mistake #5: Failing To Properly Finalise The Oil Well Purchase

Immediately you decide that the oil well is worth investing in and the price is fair enough, invite your lawyers and or broker. Have them transfer funds to the oil well sellers.

Some investors make the mistake of leaving loose ends at the end of the deal. Either they procrastinate about transferring the money or they transfer only a percentage of the agreed fee. Doing this can give a bad impression about you or ruin the deal altogether.

Do things properly. Read and sign the contract (after your attorney has explained and approved it). Finalise the deal properly.

In conclusion, purchasing an oil well is easy and uncomplicated if you follow the right steps.

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