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:
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| 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:
- Provide cash distributions from operations
- Provide increased tax benefits
- 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.
