Direct investments in oil & gas can provide potential returns, cash flow and tax benefits which exceed traditional investments. However before making direct investments in oil & gas wells, investors need to assess and control the risks involved, to the extent possible. The person you are investing with should carefully explain and fully disclose the potential risk factors. However a few items to consider, among other things, are the following:

• Are the wells developmental wells
  or exploration wells?
• What is the past performance
  of the wells in the area?
• What do the geological and/or engineering
  reports say?
• How diversified is the investment?
• What are the bios
  of the producer/operators?
• How are you going to hold the investment
  in the case of working interests?
• NASAA's warning against oil and gas investment fraud.

Note: This is not intended to be a complete list of due diligence procedures as each investment is different. There are many details regarding a potential investment which should be addressed, which may include but are not limited to: transportation, sharing arrangements, deal terms, potential liabilities, further development, etc. Investors are responsible for their own due diligence procedures. These procedures do not represent all the procedures and checks you should consider before investing and are intended only as certain suggested considerations you might consider before making an oil and gas investment.

Are the wells developmental wells or exploration wells?

Exploration wells are typically used to describe wells in areas where there are no proven economic oil or gas wells. Certain of these types of wells may be called 'wildcat' wells. Exploration wells involve a high amount of risk as well as potentially high returns. The risk that investors may not find oil and/or gas is 'geological' risk. Most of the wells drilled today are development wells.

Development wells are wells drilled in areas of known reserves. As a result, the risks involved are considerably lower. Typically with developmental wells the risk is not geological (e.g. whether natural gas or oil will be found), but mechanical risks. Mechanical risks are things that may go wrong in the drilling process, like a section of pipe is dropped down the hole which then has to be 'fished' out. However over the past decade or so, with advances in technology, the mechanical risks have dropped considerably. As a result, with most wells drilled being developmental wells and advances in technology, the successful completion rate of wells today has been reported to be significantly higher compared to the successful completion rates from the 80s and early 90s. Note: successful completion doesn’t necessarily mean economically viable.

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What is the past performance of the wells in the area?

The performance of other wells in the area is another good indicator of the potential returns. If the other wells in the area are doing well either with your operator or others, then this should provide some level of comfort with the wells being proposed. Most producers will be familiar with how well others wells in the area are performing. As a side note, investors should not forget to take into account the tax benefits which will be derived from the investment. Of course the particular tax aspects vary according to an investors particular tax circumstance and investors should consult with their tax advisors on what these benefits may be.

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What does the geological and engineering reports say?

Typically the sponsor will have geological or engineering work done on the prospects. Investors will want to ask for a copy of these reports and gain an understanding of the potential of the reserves of the prospect.

These reports may be difficult to understand for someone who doesn’t have the proper understanding of geology and engineering. As a result, an investor may want to have an advisor who can help interpret the findings.

However approaching the geological and engineering information with a little common sense and research and in context of some of the other cursory inquiries mentioned within, the investor may have enough comfort level with the prospect.

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