Wednesday, September 28, 2011

What is Direct Participation in Oil and Gas?

Direct participation in oil and gas is not about buying stock in oil and gas companies or investing in public companies. Direct participation in oil and gas means that an investor or participant puts their money into a venture that is going to go out and drill a specific number of wells (these projects can consist of one or more wells) with the intent of these wells producing oil and/or gas which will then provide revenue back to the participant.  

This illustration by Swan Energy shows how direct participation in oil and gas works:
Direct Participation in Oil and Gas explained by Swan Energy

The revenue from the production goes back to the venture and dispersed out to the participants proportionate to their Working Interest (minus taxes, fees, operating cost, etc.).

Working interest refers to direct liable portion of the ongoing cost associated with exploration, drilling and production.  Working interest owners also fully participate in the profits of any successful wells.   It is important to note that when anyone looks at participating in a working interest venture then they should also make sure that the venture has a turnkey contract so that they know what their costs will be up front.  These upfront costs generally include exploration, drilling and testing.  There may also be additional investments that will vary from well project to well project.  Fracking, pump jacks, and storage tanks are all examples of common additional costs that are allocated to the participants.  Make sure that you understand the financial obligation before becoming involved in a Joint Venture.

The concept of forming partnerships or Joint Ventures to create business relationships has been around for centuries.  There are many different types of entities for direct participation in oil and gas ventures; the most common are Limited Liability Partnerships and Joint Ventures.  A video presentation comparing, Limited Liability Partnerships and Joint Ventures in relation to direct participation in oil and gas ventures can be found at Swan Energy’s website.

If the venture is a Joint Venture (the entity that Swan Energy uses), there are two main roles that are important to understand.  The first role is the investor or participant.  The participant puts up money in exchange for Working Interest in the venture.

The second role is the managing venturer.  The managing venturer runs the day to day operations of the venture which may include, but is not limited to, forming the venture, managing the drilling and operations of each well, holding conference calls, handling any issues that may come up, and managing the financial aspect of the venture including payments on oil and gas revenues back to the participants based on revenues that are received from the production of each well.

In a Joint Venture, the participants have the control and make the decisions of Joint Venture.   The Managing Venturer then implements these decisions.  In fact, the participants can replace the Managing Venture with a simple majority vote.   As an example, the participants have the control to decided whether to cap a well or go to completion on a well. A lot of investors like this kind of oversight and control with their investments.

With any direct participation in oil and gas ventures comes risk.  There is always the possibility that once a well is drilled and tested that there is no oil or gas to be found. 

Swan Energy uses the Joint Venture structure to meet the objectives of the participants in our programs to:
  1. Provide cash distributions from operations
  2. Provide increased tax benefits
  3. Place control of the operations and management of the oil and gas program in the hands of the participants. 
With oil extraction costs between $8 to $10 per barrel and each barrel selling north of $80, Swan Energy believes that it does not take an engineer to figure out that the oil market is poised to see high profits that can be made at the source for independent investors by participating in oil wells directly.

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