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RICHARD GENT, Gent Machine

Oil and Gas Investing - In Ohio?

ray onderisinBy Ray Onderisin, CPA

Natural gas and oil production has a long history in the State of Ohio dating back to the 1800s.  Ohio is blessed with numerous reservoirs located in nearly every county.  There have been over 273,000 wells drilled in the state of Ohio, including 431 new wells drilled in 2010, alone.  These wells (with a combined production market value of approximately $700 million) produced approximately 5 million barrels of crude oil and 78 billion cubic feet of natural gas in 2010.  The industry currently supports a total of 14,400 Ohio jobs, which represents $730 million per year in salaries. (Source: 222.OOGEP.org)

This abundance of oil and gas hidden underground coupled with our country’s dependence on oil and gas growing exponentially each year, has made it evident that Ohio oil and gas exploration and production is here to stay for a while.  Include the massive tax breaks afforded to those who have the risk tolerance for this type of investment and there emerges a pretty interesting alternative to earning a few dollars in a typical savings account.  You may think that oil and gas industry investing is just for rich Texans who wear ten gallon hats, but think again.  Your own neighbors may have already begun to stake their claims in this ever-growing local industry!

There are several different ways for you to participate in the oil and gas drilling and/or ownership industry, but land ownership (selling your mineral rights) and investing in a well drilling venture or partnership are two of the most notable oil and gas investment options for Ohioans.

To be a land-owner participant, you simply have to own enough land and be willing to sell your rights to the minerals beneath the surface.  Selling your rights to an oil and gas well drilling company can net you some royalty cash and some tax benefits.  In order for your land to qualify, there is an acreage requirement and other requirements on where the well head must be placed in relation to surrounding structures, property lines, other wells, etc.

Land owner benefits from a company drilling an oil and gas well on your property could include free gas (amount varies), monthly revenue in the form of royalty payments, and potential spud fee bonuses.  Land owner participants usually have no financial risk for the cost of the well drilling.

If you don’t have the available land or would rather invest cash, you could seek out a company that is looking for investors in a well drilling joint venture or partnership.  This type of investment involves a partial ownership in the actual well itself.  Oil and gas companies seek investors to share the costs of drilling and maintaining the well through joint ventures or partnerships.

An average oil and gas well in Ohio typically costs approximately $300,000 depending on several factors, including topography, drilling depth needed, rock formations, etc.  Because these wells are so costly to drill, often oil companies look for investors to share the cost (and rewards).   Your proportionate share of the income from the well is taxable, but there are certain tax benefits that make investing directly in a well venture or partnership attractive.  These benefits include accelerated tax write offs – Under current tax law, the majority of the cost of drilling a well can be written off on your tax return in the first year and also under current tax law, losses from this type of investment may be fully deductible and not subject to the passive activity loss limitations.  Joint venture or partnership investors have risk in the cost of the well drilling, but the rewards can be substantial!

If either of these oil and gas investment types seems attractive to you or you’ve noticed that your neighbor is starting to wear a ten gallon hat and you’re wondering why, please contact us to further discuss the specific details and possibilities of oil and gas industry investing.  Our Oil and Gas Industry Practice Group currently has clients in various areas of the oil and gas investing spectrum, from land owners to oil and gas drilling companies.  Not only can we give you more specific oil and gas investing pros and cons, but we can also explain in detail the myriad of intricate tax benefits and ramifications inherent with this type of investment.