Mark S. McGrew
Buying an oil or gas producing property in America can be as simple as 1, 2, 3.
1. Pick a property.
2. Analyze the property.
3. Pay for it.
1. Pick a Property.
Oil and gas properties are “Real Property” just like any other real estate.
You will pick a property based on several criteria, such as the price of the property, the annual return it should produce, how much oil there is left in the ground, the life expectancy of the production, the condition of the pumps and other equipment, the cost of having your oil transported to a buyer, the cost of disposing of any water that comes up with the oil. Most oil wells do have water and that water must be separated from the oil before transportation to a buyer.
The most important part of picking a property is to make an on site visit to make sure the oil wells is really there. ALWAYS REMEMBER, in any business where large sums of money are generated there is a large share of scam operators and con men. Don’t ever buy a property without seeing it first. If you are unable to visit yourself, you can hire a Petroleum Geologist or Petroleum Engineer to make the visit for you.
Once you are satisfied with a property and do decide to buy it, you will need a licensed “Operator” to manage the property. Operators charge a percentage of 5 to 10% of the oil being produced or a flat fee, in the range of $500-1,000 per oil well. You can find licensed oil Operators by going to the website of the State agency that regulates the oil business. In your search bar, type in “oil regulatory agency Texas” or whatever State you are interested in. On their site you should be able to easily find a link for “Operators” in the main menu.
2. Analyze the property.
If you are experienced in the oil business, you can do most of the analysis yourself on the Internet and telephone.
If you are not experienced, look for a Petroleum Engineer on the Internet in the area of the well you have picked out. Call him up and determine if he is the kind of person you want to do business with.
Depending on the property, you will spend a few thousand dollars or many thousands of dollars for his opinions of the value of the property. Whatever he charges you will be a small portion of the total price of buying the oil well and well worth it to spend the money. There are many unscrupulous buyers and sellers of oil wells. Don’t make the mistake of trying to save 2% of the costs of buying an oil well. Find the best, most experienced advisors available.
3. Pay for it.
It sounds simple enough. But, if you are a foreign buyer, your purchase and money has to be approved by the US government. We do not want terrorist, drug dealer or any other illegal money coming here to buy assets.
Most sellers want your money in their bank account BEFORE they assign the property to you. We want cash. Not IOUs or Bank Drafts. Put CASH in the sellers account and your interest will be transferred to you. If the property is not transferred to you within 24 hours of your funds in the sellers account, your choice will be to sue for your money back. That may seem like the risk of honesty is on you and it is.
But, if the seller assigns the property to the buyer without the buyer’s money in his account and the buyer does not pay for the property, the property will still belong to the buyer and it may take the seller 2 years or more to get his property back if he even can. America is a “Buyer Beware” society.
Do your research, called “Due Diligence” and you should not have any problems. If you do not do your proper Due Diligence, and you have to sue in a Court of Law, a Judge will have little sympathy for your loss. American Courts are Courts of Law, not Courts of Justice. “Justice” in America is defined as “Just Us”. The Justice system wins, not the people.
Again, if you do your Due Diligence in a proper fashion, you will not experience any problems.
All relations are based on trust. Husband and wife, business partners, friends and even gangsters all have an element of trust in the relationships.
When you go through the motions to buy an oil property, make sure the people you are dealing with are trustworthy.
In every business, Rule Number One is: Don’t expect, what you don’t inspect.
Do your Due Diligence. Hire the best people you can find. Don’t cut corners. Large amounts of money can be made in the oil business. Deals with annual returns of 10 to 50% and more are made in the oil business every day.
And every day, large amounts are lost due to fraud and incompetence. If you do not perform your Due Diligence and lose all of your money, don’t go crying to anyone. Nobody, including a Judge, will care.
The oil business is risky as is all business. All business is a gamble.
Like in any casino, don’t ever bet more than you can afford to lose.
If you do your Due Diligence and deal with the proper people, you will stand a good chance of making a very good return on your purchase money.
The State of Texas has two laws on the books. One is called “The Promise Law” and the other is “The Handshake Law”. If you promise someone something or if you shake hands on it, without using the word “promise” you have entered into a binding contract, just as valid as any written contract put together by the best lawyers in the country.
From: http://en.wikipedia.org/wiki/Oral_contract “For example, in 1984 after Getty Oil was sold to Pennzoil in a handshake deal, [Contracts not drawn up yet] Texaco made a higher offer, and the company was sold to Texaco. Pennzoil filed a lawsuit alleging tortious interference with this oral contract, which the court upheld and awarded $11.1 billion in damages, later reduced to $9.1 billion, but increased again by interest and penalties.”
Gordon Getty, the son of J. Paul Getty who built Getty Oil Company from scratch, into a major oil company, reneged on the handshake made with Pennzoil and it cost him 10 billion dollars.
There still is honor and a man’s word in the Texas oil business.
Choose your friends carefully and you will do well.