Experienced investors often seek diversification strategies to assist in minimizing the risk of loss among various financial instruments, industries, and other categories. This can include a variety of private sectors such as Real Estate, Life Sciences, Technology, Healthcare, and Energy.
Some investors choose to invest in the oil and gas industry to diversify their investment portfolio because the demand for energy has remained strong for decades. Most countries around the world still heavily rely on oil and gas to run their businesses, transportation, manufacturing, and more. Oil and gas consumption has been correlated to economic growth; countries that use more energy per capita tend to have a higher GDP per capita.
According to data taken from BP Statistical Review of World Energy 2019, the countries with most of the earth’s natural gas are:
- Russia (38.9 trillion cubic meters – 19.8% of world total)
- Iran (31.9 trillion cubic meters – 16.2% of world total)
- Qatar (27.7 trillion cubic meters – 12.5% of world total)
- Turkmenistan (19.5 trillion cubic meters – 9.9% of world total)
- United States of America (11.9 trillion cubic meters – 6.0% of world total)
- United Arab Emirates (5.9 trillion cubic meters – 3.0% of world total)
- Saudi Arabia (5.9 trillion cubic meters – 3.0% of world total)
And the countries with most of the earth’s oil reserves are:
- Venezuela (303.3 billion barrels – 17.5% of world total)
- Saudi Arabia (297.7 billion barrels – 17.2% of world total)
- Canada (167.8 billion barrels – 9.7% of world total)
- Iran (155.6 billion barrels – 9.0% of world total)
- Iraq (147.2 billion barrels – 8.5% of world total)
- Russia (106.2 billion barrels – 6.1% of world total)
- Kuwait (101.5 billion barrels – 5.9% of world total)
From 2008 to 2018, U.S. oil consumption increased from 19.4 to 20.4 million barrels of oil per day. During this period, the same report noted that U.S oil production increased from 6.78 to 15.31 million barrels of oil per day. Oil and gas are national priorities, most industries rely on these commodities to fuel growth. Furthermore, the U.S. government has stimulated oil and gas investing by incentivizing investors with beneficial tax advantages.
With the recent instability of the public markets, many investors understand the importance of investments with low correlation to publicly traded stocks. Asset correlation is a vital measure for investors when making diversification decisions. When analyzing alternative investments such as oil and gas, investors should consider investments that provide low correlation to the market, passive income, tax advantages, and/or a strong return on investment (ROI) potential.
Types of Oil & Gas Investment
There are various vehicles with which one can invest in oil and gas. Most oil and gas investment strategies can be split into five categories:
Investing in companies that are buying or leasing land to drill with the intent of hopefully extracting oil or natural gas from unproven reserve sites.
- This may be more suitable for investors that are comfortable with taking on a great deal of risk as these investments are highly speculative.
Investing in projects that are drilling for oil, near proven reserves, with the intent of generating future value.
- These investments can be slightly less speculative than Exploration since developmental exploration as development efforts are taking place near proven oil reserves, however, there are never any guarantees that oil will be found at the new development.
Investing in the acquisition of plots of land, through lease or purchase, that sit above proven oil and gas reserves with the intent to provide investors with a steady stream of income.
- This may be desirable for investors looking to get involved in the industry and are seeking a passive income stream, the risk here is that the oil and gas will deplete faster than expected.
4. Services and Support
Investing in business-to-business (B2B) services that assist oil and gas companies with logistics, technology, and other support services.
- Service firms are often less reliant on the fluctuations of oil prices. Support firms can be less speculative investments than Exploration, Development, or Income investments, especially if the firms have established relationships in the industry.
Investing in companies that are manufacturing and installing infrastructure for oil wells in proven reserves and during exploration efforts.
- These firms are building robust infrastructure systems to help lower the cost of supplying oil, natural gas, and other petroleum-based products to consumers. This can include the building of sophisticated pipelines to oil fields that do not have a pre-existing pipeline. The goals of new pipelines often include reducing congestion, maximizing efficiency, and improving safety.
Population Growth Has Created Greater Demand
Oil and gas production are necessary as they provide the majority of the energy that Americans consume. As of 2018, 67% of U.S energy consumption by energy source consisted of petroleum and natural gas. Our current energy infrastructure consists of pipelines, railroads, waterways, and ports. Our energy infrastructure has thus far been adequate for our nation’s demand. However, as the population continues to rise, there may be greater demand for energy.
U.S based oil and gas investments can:
- Boost employment, as they tend to create many well-paying jobs,
- Provide investors with means of diversification,
- Provide revenues for local, state, and federal governments.
The U.S. is a global leader in the production of oil and gas, and the growth of the industry has created opportunities for investors seeking alternative investments. Oil and gas investments can provide strong ROI potential, long-term passive income, and a hedge against inflation.
There are also various tax-advantages associated with investing in oil and gas. These can include:
- Intangible drilling costs tax deductions,
- Tangible drilling costs (Capitalized and depreciated over a 7-year period),
- Intangible completion costs (Deducted in the year they incurred),
- Depreciation (Depreciation over a 7-year period),
- Depletion allowance (Shelter 15% of well’s annual production from income tax),
- Lease operating expense tax deduction.
Oil and gas are traded on global commodity exchanges. Companies in the industry can face fierce competition for capital and growing pressure from investors to foster growth. In the private markets, private joint ventures have opened the doors for accredited investors to source passive income-driven investments that allow access to tax-advantages.
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This publication is a service to our clients and friends. It is designed only to give general information on the developments actually covered. It is not intended to be a comprehensive summary of recent developments in the law, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. It does not provide that necessary customization of advice, tailored to a client, which would be provided by an accountant or tax lawyer. The views and opinions expressed in this article are those of the author’s and do not necessarily reflect the official policy or position of VENTURE.co Holdings, Inc.