The Risk in the Crude Oil Drilling Game

When considering whether or not to invest a portion of your assets into American crude oil, you must come to an understanding of risk inherent in this type of endeavor. As I have said before, if you are not a high networth or accredited investor limit your exposure to sector mutual funds and the like. If you are an accredited investor, take a closer look at direct participation oil & gas deals.

Typically, there are two types of crude oil drilling deals, from a broad sense. Wildcats & Developmental Deals. Wildcats are the most aggressive types of drilling programs where oil has not been found within 1 mile of the drilling location, but the geologist might feel based on characteristics of the underlying lease that it is attractive to test for a producing well. Developmental Wells, which are the only kind I have ever invested in, are wells within 1 mile of known crude oil production.

Many times when I have invested in these deals, I would see the adjacent leases' pumpjacks moving up and down just a few thousand feet away. The concept of a tangible investment is very reassuring in the wake of the Dot Com bubble, thus the ability to physically see a producing field adjacent to your prospect is very exciting. The fact that there are wells adjacent to your prospect does not guarantee success, but it is a great comfort.

I believe that crude oil will continue to be in high demand based on the growth of Asia and India. I tend to take a simplistic, common sense approach to the issue of Peak crude Oil. If most of the "Easy" finds or holes have been poked in the ground the last 100 years, new production will continue to gain in value. Crude oil will fluctuate in the short run, but the long term value seems clear ... UP! The oil wells we drill, when successful, will typically pay out for 15-20 years. Production will peak in the first few years and steadily decline, but 10 years from now oil should be higher.

Know what you own is a common refrain in investing, but it is very important in oil well investing. It is important that you meet the individuals that you are entrusting your hard earned money to. I will never invest in an oil deal without meeting the principals face to face. I want to see their operation in person. Independants vary in the amount of talent, machinery, and know-how, therefore it is important that you assess each company before giving them a dime.

I have decided to invest one third of my investable assets into the natural resource arena. The choices are not limited to oil & gas investing, but that is what I feel comfortable with. I have come to accept the fact that we will have many dry holes and unsuccessful wells over the years, but I view my investment process similiar to dollar cost averaging in mutual funds. By consistently investing in wells, I can remove the inevitable hiccups along the way. If I had quit investing in wells because my first well was a failure (true story), how could I now take pleasure every time I fill my tank!