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The High Cost Of Investing In Oil And Gas Operations

By Anthony Parker


While the industry can often be a tempting option for investors, it is important to know that as prices rise and fall so too the value in a portfolio. In addition, it is imperative that those wishing to invest in this area be cautious of big banks and investment companies. For, there are many whom will take large amounts of money for accounting, division orders, work orders and processing out of dividends when investing in oil and gas.

In some cases, the fossil fuels industry is similar to the stock market. However, it should be noted owners and operators often have to pay high dollar invoices for operating costs. When prices rise and fall in the industry, so to the value of holdings whether a working or royalty interest. As a result, the one that profits most in this type investing is that of the oil company in charge of the lease and operations on a project.

As individuals own either royalty or working interest, most have to pay operating costs, property tax and associated fees. If the dividends an investor receives does not cover these costs, then one can lose a great deal of money rather quickly. As such, before investing in a specific well or operation, it is good to review as much history as possible before making an initial investment.

It is also important that when working with big banks, accounting and investment firms to get everything in writing as related to service fees and other costs. For, these institutions can also have a negative effect on the outcome of an investment. In some cases, big banks whom handle these type accounts have even been known to sell off items in a portfolio in order to pay in-house fees associated with an account.

When desiring to invest in this area, there are private investment firms which can provide a set price with regards to accounting fees. Whereas, most banks base this rate on a percentage of earnings, which is usually extremely high compared to others. In addition, when a bank has control of a portfolio, the owner is generally advised to sign over control so that items can be bought and sold as necessary.

While becoming an owner of a well or wells can be an exciting process, it should be noted that there are other issues which can arise. If a new well, the development and build charges for the project are quite expenses though often split amongst multiple owners. Whereas, if in an ownership with others and one decides to sell, then all must agree before the transaction can take place.

A change in the price per barrel related to oil can also have either a positive or negative effect on investors. For, often when prices rise or fall, so too the dividends for investors. As a result, the value of an operation can be high one day and low the next.

Ultimately, those looking to invest in this area need to have at least some capital. For, there can often be invoices related to operating costs that override dividends received. When this is the case, it is important the investor be able to cover these costs. Otherwise, like with other property, the interest can be repossessed and resold at the discretion of an owner or owners, the operator or the state in which the property is located.




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