Energy is one of the key areas of interest for brokers and advisors. Therefore it is common to see the brokers recommend investments in Oil and Gas. It is also a fact that the private placement of an Energy company has far more subscriptions from investors. But it does not come without risks.
Risks include but not limited to:
Securities fraud is the biggest risk for investors in oil and gas projects. Market regulator Securities and Exchange Commission (SEC) has objected to brokers marketing from including
Conflict of interest of the promoters is another major risk for the investors. In most cases, the promoters of such investment are well-drilling contractors. The promoter will make money through management fees and profit from the drilling expenses as well. The promoter can also benefit by sub-contracting the job to others at an inflated rate. Thus the promoters of the oil project make money irrespective of whether the investor receives any return and is, in reality, antagonistic to the investor's emphasis. Often times, the promoter ends up making more than the investor does, given the structure of such deals. Promoters, therefore, have incentives to make their oil and gas projects sound as appealing as possible irrespective of the real likelihood of achievement.
High transaction costs make private placements for oil and gas highly risky. Typically, the investor funds are used for paying the oil well drilling costs, management fees and the syndication costs of the broker-dealer. It is roughly estimated that 30 to 35% of the capital invested goes into all these expenses mentioned above. This means only 65 to 70% of the capital is the actual investment against which the investors may get the returns. Any investment where only 70% of your money is actually working for you may not be a good investment and could well be a recipe for wealth destruction.
Another risk in Oil & Gas investment is that there is no guarantee that the oil well will produce enough marketable fuel to cover the high cost incurred in the drilling and development of Oil wells.
The fall in fuel prices is another risk in the investment into Oil & Gas. When there is more supply of fuel in world markets there would be a serious impact on fuel prices. Also when there is not enough demand, the fuel prices might tumble down. Countries that import large quantities of oils are now slowly contemplating to switch over to Electric mode thereby replacing fuel with Electricity. This may bring down the demand for fuel in world markets.
Brokers who sell the investment in oil and gas have to ensure that the investment is appropriate for the investor and to disclose all the risks associated with the product.
If you are one of the victims to have suffered from a loss by investment into Oil & Gas, then do not hesitate to contact us. We provide free consultations on such matters and request compensation only if we can recover your lost money.