Q. Who exports the most crude oil to the United States?
A. Probably not who you think! Saudi Arabia is the best known and worlds largest exporter of crude. The OPEC Countries and Persian Gulf Countries combined represent 66.5% of crude imports. However, many people are surprised to learn that Canada supplies more crude oil to the U.S.A. than any other nation. The rest of the top five in order are #2 Saudi Arabia, #3 Mexico, #4 Venezuela, #5 Norway.
Source: DOE (Department Of Energy), Petroleum Supply Monthly, January-April 2002
Q. Are oil and natural gas investments risky?
A. All oil and natural gas investments are risky. Exploratory or Wildcat drills carry the highest risk and most potential for above average reward. Developmental Drills have a lower level of risk but usually don’t possess the potential for high rewards. However, the use of technologically advanced 2D or 3D seismic reports reduce the level of risk in exploratory wells and enhances the potential for returns in Developmental wells.
Q. What are the tax benefits with an oil and gas investment and why does the U.S. Government give them preferential treatment?
A. Investors in qualified domestic oil and gas projects are allowed to write-off 100% of all monies spent on intangible drilling and developmental cost. Investors also depreciate equipment purchases, usually over a 5 to 7 year time period. Up to 75% of the total investment amount quite often can be written off in the first year. This write-off may be taken in the first year or amortized over 60 months. The amortization option is especially useful to investors who are in the AMT (alternative minimum tax) brackets. (See your accountant or tax attorney for clarification.) The available Depletion Allowance of 15% to 20% is figured on income received. Simply stated this means 15 to 20 cents of every dollar of revenue is tax free.
This special tax treatment is afforded only to domestic oil and gas projects because they are national security issues. This is a way the government encourages development of domestic oil and gas resources and thereby helps to reduce our dependence on foreign crude and natural gas. These laws have been on the books for many years with occasional modifications by congress.
Private placement investments, such as Oil and Gas Direct Participation Programs, are a proven method for balancing portfolios. Such investments have the potential to work as a hedge against inflationary pressures, provide income and add tax shelter to your portfolio.
Q. Who owns the land and mineral rights?
A. The landowner is typically referred to as the “surface owner”. He or she may or may not also own the mineral rights. On rare occasions Investors Energy could be both surface and mineral rights owner. In most cases, Investors Energy leases the mineral rights from one entity and negotiates access rights with the surface owner who is quite often a totally different person or entity. One of Investors Energy’s most important responsibilities is securing clear title to mineral rights and maintaining good relations with surface owners.
Q. How do investors make money?
A. Unfortunately many oil and gas programs amount to nothing more than high priced tax write-offs. This can be due to many factors such as to drilling risk, inaccurate geology, volatility of commodity prices or unscrupulous actions of managers and/or operators. When involved in these types of programs, heavy emphasis is placed on the tax write-off aspect of those offerings. Typically, those type companies will never provide complete production history on offsetting or surrounding wells. Occasionally, they will provide limited or cherry-picked well reports, but not total project production or revenue reports. Those reports are a splendid example of smoke and mirrors accounting.
An Investor should expect to receive a profit when projects hit their minimum targeted levels of production, production costs and commodity price levels assumed in the Financal Pro-Forma in their offerings. The mechanics of the process begin when an investor purchases a certain percentage or units of ownership in a project. When the project goes into production, crude oil is gathered in storage tanks awaiting pickup by tanker trucks. The natural gas passes through meters, which record the amounts purchased. The oil and gas company receives payment from the purchaser usually 60 to 90 days after the initial shipment. In turn, a monthly, detailed accounting of those purchases are sent to investors along with a distribution of revenue based on participants level of investment minus expenses and royalties.