Benefits Associated With Oil And Gas Investments

By Kristen Baird

There is a significant rise in the prices of energy in the current era. Such hike has attracted investors in the oil and gas sector. This is because of the major profits that come with it. Oil and gas investments can be approached in different ways. For instance, One may decide to purchase future contracts to invest in oil and natural gas, however, there is a risk of such contracts expiring with no value.

Widely speaking, there are 4 types of investments in such a sector including:Exploration. It involves speculating in drilling processes for energy sources. A company interested in exploration will purchase or lease a piece of land to conduct their activities. If by luck they come across oil, the risk will turn into major profits for the organization. This type of speculation is mostly suited for exploration companies who can highly tolerate risk investment.

Development. This category is much less risky. This is because the company usually initiates the drilling operations in locations where reserves were at some point present or near such areas. Having knowledge that an oil reserve existed in a specific land does not necessarily guarantee the presence of the resource but it acts as a starting point to the right direction and successful outcomes.

Stream of income. This category is almost the same as the development kind where the operations are done in different locations where a reserve was proved to have existed. The land is either leased or bought for the activities to be commenced. This type is safe and not risky. A systematic amount of income will be acquired as different reserves are explored and not just a single one. Nonetheless, this speculation has a disadvantage in that the reserve will be depleted faster.

Support services. This category of investment entails diverse organizations offering support services to oil and gas industries like drilling and logistics.

Despite of the risks associated by the different categories, there are benefits and disadvantages in any of the investment including:Major profits. Taking a risk to invest in these two resources can be the best decision an organization makes. If the operation turns out successful and oil is acquired, the profits earned would be long term. One reserve can generate 3 times as much profit. The expenses for commencing the drilling processes would be covered with a huge additional bonus.

Potential for profit. Speculating in oil and gas can be a long term source of profit. One does not have to invest in big companies to get more profit as partnering with smaller organizations would still pay off big. Drilling in a specific reserve can generate twice or thrice as much money than the cost of operation.

Tax advantages. There are several tax benefits associated with it. For example, Internal Revenue Service tends to give smaller organizations a depletion allowance that accounts for completion of oil and gas supplies in a given reserve. Another tax advantage is that 15% of the income acquired would be tax free. This offer is mostly for smaller companies which encourages them to explore and drill.

Liquidity. Shares can easily be sold to bigger companies but for smaller ones, it is hard getting a buyer for their shares.

Commissions. Investing and buying shares in a limited partnership requires an organization to give out some commission to the broker in question which is high compared to the normal amount given to the broker.

It is therefore recommended to invest oil and gas before any changes occur. For instance, uplifting of the tax advantages.

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