What are the considerations before investing in oil and gas

Oil and gas are two of the most essential commodities and the largest energy sources used to propel vehicles, heat buildings, and produce electricity. Investing in oil and gas can possibly provide high potential returns. But they are also volatile and risky.

Before venturing into this industry, you need to execute due diligence and in-depth planning. Some of the major considerations before engaging into the oil and gas industry are presented below.

1.              Segments of Oil and Gas Industry you Can Invest Into

a.               Upstream businesses are companies involved in the exploration and production of oil and gas by searching the world of raw material reservoirs. Then drill to extract. Also known as E&P for "exploration and production." This is the riskiest and can be a hit-and-miss business venture.

b.               Midstream businesses focused on transportation that depend on the success of upstream firms. They are responsible for bringing the extracted raw materials to refineries to process the oil and gas. And are characterized by shipping, trucking, pipelines, and storing raw materials. The midstream segment is a low capital risk yet marked by high regulation, especially on pipeline transmission.

c.               Downstream businesses are the refineries. They are responsible for removing impurities and converting the oil and gas to products for the general public, such as gasoline, jet fuel, heating oil, and asphalt.

2.           Hiring of Drilling and Service Companies

a.              Upstream businesses does not usually own their drilling equipment or employ a drilling rig staff. Instead, they hire drilling companies to drill wells. Contract drilling companies charge for their services based on the amount of time they work.

b.               Service Company or well servicing is involved once a well is drilled. They are responsible for generating and maintaining the production over time. These activities include logging, cementing, casing, perforating, fracturing, and maintenance. The revenue of service companies depends on the activity level in the oil and gas industry.

3.           Price Risk

There is a high price volatility in oil and gas investments, which can cause significant financial losses. Further, demand for oil during the Covid 19 pandemic crisis initially dried up. The entire sector has suffered from lower commodity prices, not just those companies engaged in the exploration and production of oil.

Also, the price of oil and gas can be influenced by the Organization of Petroleum Exporting Countries' (OPEC) decisions. And like any commodity, the law of supply and demand influences prices. Natural disasters and political unrest in oil-producing countries also disrupt the volume of production that impacts pricing.

d.          Oil Spills, Fire and Gas Accidents

The risk of having an accidental oil spill, fire, or mishandling of the gas should be considered. These accidents can cause significant liability issues and prices go into free fall.

e.           Tax Deductions

Oils and gas ventures have tax deductions benefits. The US tax code allows tax deductions for oil and gas investors because of the gradual depletion of minerals and resources. It can offset any losses incurred in oil and gas production against wages, interest, capital gains, and other forms of income.

f.            Securing a Futures Contract

In selling oil and gas, securing a futures contract is a must. It is a legal agreement to sell at a predetermined price at a specified time in the future. Given the volatility of oil prices, you can lock in a price to sell. You will deliver the oil and gas to the buyer when the futures contract expires.

Having studied the above mentioned considerations, you can now make an informed decision before investing in oil and gas ventures. There are oil and gas financial templates offered by eFinancialModels you can use in assessing the financial viability of your project. It will save you time and resources than starting from scratch.