There are many associated risks with oil investments, so it is absolutely necessary to do your due diligence as a potential individual investor to protect yourself. This is true especially if you are new to the industry and desiring to make money while you sleep. There is a reason for the old cliché about the oil man who goes to Vegas for a little rest and relaxation. Oil investments present a risky opportunity, but if done correctly can yield high profits and ongoing liquid cash flow. Consider, therefore, the following risks:
1. Scammers: It is absolutely vital and not an insult for you to question the integrity of the person you are about to do business with, so if he or she is insulted go somewhere else. Minimum oil investments can range from $15,000 to $45,000 per unit, all of which can be lost if you give your money to a con artist. Do your research on the company’s history, successes, the personal character of the well operator, licensing, insurance, and of course failures. Don’t go with someone just getting into the business. Let them learn from their mistakes with other investors.
2. Mechanics: Drilling a hole into the earth to extract hydrocarbon resources, oil and gas, is a complicated process and it should not be assumed that everything is going to go perfectly. There may be problems, poor cementing jobs, striking salt water, and numerous other difficulties that amount to financial loss. That’s another reason you want a company that has decades of experience, if possible.
3. Dry Well: If you are going to make oil investments for wildcatting companies, your risk increases. The chances of hitting oil soon may not be that great, depending on the company and the best educated evaluations of the geologist and others in its employ. If you do strike oil but it isn’t a huge reserve, your payoff may not even reach 5:1, and what you would really like, of course, is 20:1. If you are hitting 7:1, however, you are doing pretty well.
4. Emotional: As an investor, you may be called upon to assist in making decisions along the way, which means educating yourself and learning to be objective rather than emotional. Is it time to put casing on the well? Whenever that decision is made more or less determines the volume of productivity. Your own ability to hold it together and make wise decisions comes into play at these junctures.
Individuals who make oil investments with a full understanding of risk usually make wise decisions, and are the investors who usually yield the most profit.
