South Florida Arbitration & Litigation Lawyer Blog
Boca Raton and South Florida Oil and Gas Investment Fraud and Misrepresentation Litigation and Arbitration Attorney
Oil and Gas Investment Programs:
Most oil and gas investment opportunities, while involving varying degrees of risks to the investor, are legitimate in their marketing and responsible in their operations. However, as in many other investment opportunities, it is not unusual for unscrupulous promoters to attempt to take advantage of investors by engaging in fraudulent practices.
Types of Oil and Gas Investment Programs:
Oil and gas investments take many forms, including limited partnership interests, ownership of fractional undivided interests in leases, and general partnerships. Tax consequences and investor liability vary according to the type of program. True general partnerships in which investors actively participate in the operations of the venture are not securities. A general partner, however, is personally liable for partnership debts.
In a drilling limited partnership, an oil or gas company sells partnership units to investors and uses the money it raises to lease property and drill wells. In return for managing the project, the sponsor company usually takes an upfront fee that averages about 15-16% of one’s investment (commonly referred to as tangible and intangible drilling costs) and also shares in a percentage of any revenue generated. In return, the promoter offers the investor the prospect of a substantial first year tax write-off and quarterly cash distributions from the sale of any oil and gas the partnership finds until the wells run dry.
Drilling partnerships have always been a gamble, but recently, they have proven somewhat riskier than usual. This type of investment is very speculative, is a highly illiquid investment and can have a long holding period.
Other types of oil and gas investments vehicles include:
• Working & Producing Interests
• Combination of Working Interests and Drilling
• Rework Programs, which may be combined with other programs
• Royalty Programs
• Notes or Other structures whose underlying assets are oil & gas
Working Interest programs with producing wells are chosen by investors who desire cash flow immediately. Obviously, the tax benefits from the drilling are not present, but the immediate cash flows can be and the depletion allowance is.
Rework Offerings are sometimes found as a program by themselves or in combination with working interests or drilling. Reworking the wells usually means cleaning, flushing or repairing an existing well to bring better functionality and production, and hence more income.
Royalty programs used to be more common, but the prices to acquire them and to make them work for investor cash flow expectations has become more difficult. There are few pure royalty programs these days.
With each of the above referenced type of offerings, there are numerous risks associated with each. Consequently, it is important that the potential investor have someone with the appropriate degree on knowledge and experience review the investment so that it can be properly explained to the investor and the investor will be in a position to make an intelligent decision.
It always makes sense for the investor to verify as much of the information as the investor or his or hers investment advisor can. By way of example, we recently handled a case where the promotor of the venture actually took the investors to look at “their well” that was going to be reworked. Unfortunately, the well that the investors were shown was not even owned by the promotor. A fact that could have been easily verified. Of course, the promotor took the investor’s money and the investor had to sue to get it back.
With extensive courtroom, arbitration and mediation experience and an in-depth understanding of elder abuse, exploitation and securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.
At the Boca Raton Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.