Why should you invest?
DEMAND: The world depends on energy in the form of Oil and Natural Gas. Without these valuable natural resources, the quality of life would decline. The importance of increasing and improving our domestic production is vital to our national security and our country’s continued position as an economic force. World demand is anticipated to increase as more pressure is placed on supply from emerging economies (China and India). These new market forces are actively acquiring more production and capitalizing more regional exploration than ever before. Since 2002, China has averaged an 8% increase for Oil used. In the U.S. alone, we import over 60% of our oil, while consuming 25% of the world’s production.
PRICE: With increased competition and no new major supplies, Oil prices will rise worldwide. Global spare capacity has declined dramatically in the last 10 years from 10 million barrels to 2 million barrels per day. Another factor is supply disruption “fears” from potential hot spots and major suppliers in the Middle East, South America, and Russia. Political instability, a weak dollar, unchecked futures traders, and natural disasters can all affect the price of oil. Natural Gas on the other hand, is our second largest natural resource and domestic production captures 98% of U.S. consumption. One solution to the Oil supply conundrum for the U.S. is to transition more transportation to Natural Gas. New discoveries of shale plays around the country, including the Marcellus in Pennsylvania, have given more momentum to pushing Natural Gas production to the forefront of our domestic energy policy thus increasing its’ value as well.
INDEPENDENT PRODUCERS: There are about 5,000 independent Oil and Natural Gas producers in the U.S. They operate in 33 states and offshore. Independents are the back bone of domestic drilling and production and annually drill 90% of the wells in the U.S.; they produce 68% of America’s Oil, and 83% of Domestic Natural Gas. Independents can be small family companies or large publicly traded companies, and everything in between.
TAX ADVANTAGES: Crude Oil and Natural Gas Developers enjoy substantial tax advantages under the Internal Revenue Code that are designed to encourage domestic production. In a nutshell, an investor can deduct approximately 80% of their investment in the first year, while the other 20% is amortized over 7 years. Also the IRS permits a 15% Depletion Allowance which exempts the first 15% of that Oil and Natural Gas revenue from taxation. (See: Tax Advantages)
RESIDUAL INCOME: Developers of Oil and Natural Gas also enjoy on-going royalty income from the drilling programs they participate in. These wells, depending on location, rock pressure, formation, and other geologic factors can produce hydrocarbons over a very long time. Flush production typically occurs in the first year with declining, but settled production to follow. In Pennsylvania, many wells will typically produce for 20-30 years. In fact, it is not uncommon to find some production exceeding 50 years.