Oil is the lifeblood of modern civilization and has almost single-handedly made industrial civilization possible. We are more than just dependent on oil; we are addicted to it. Despite countless attempts to render it less important, no suitable energy substitute is even remotely close to being found. The roots of our dependence on oil go much deeper than our reliance on gasoline or fuel and heating oil. Petrochemicals, or substances derived from petroleum, are important in almost everything we eat, wear and use. When every barrel of oil and unit of gas being produced and sold today is already spoken for, the opportunity for investors to have personal involvement in the production of these non-renewable resources yields great potential. Not just for today, but for the future as well.

Many high net worth investors find themselves more willing than ever to vacate conventional investments in a low yield environment and seek out opportunities that have the potential to deliver higher returns. With a blend of significant tax benefits, the potential for a higher ROI and long-term income, as well as a much more diverse portfolio, Direct Participation Oil & Gas (DPOG) meets a wide variety of aggressive investment objectives. Additionally, DPOG investments may be eligible for tax-sheltered accounts such as IRAs.

Potential for Higher ROI & Long-Term Income:

Global demand for oil: With the global demand for oil and natural gas continuing to grow, it could be an ideal time to increase portfolio yields with potential energy income. With ever increasing international industrialization, it is no wonder global demand for oil continues to rise, year after year. And amidst this unquenchable thirst for more energy, the leading producers around the world are watching their production levels steadily decline. As this occurs, the basic economic rules of supply and demand take charge. This fundamental economic principal has been the primary influence over prices throughout history and remains the driving force behind rising oil prices of today.

Increased demand could increase profits: The United States is the third largest oil producer in the world. However, we are the single largest consumer, producing 8% of the world’s oil and consuming 23%. The United States consumes much more oil than it produces – a trend that is expected to continue well into the foreseeable future. As our demand continues to rise while our production simultaneously continues to decline, the ever-widening gap creates an inexhaustible rise in our dependence on foreign oil imports. The United States’ crucial dependency on foreign oil imports makes us very vulnerable. Unfortunately, there are but two viable means of reducing our dependency on foreign imports. The first is to reduce our oil consumption. So far, this one shows very little promise. The second is to increase domestic production. This one does have great potential.



Although not the main reason to participate, one of the most powerful tools for accredited investors to reduce their taxable “ordinary income,” also known as “active income,” are the tax benefits inherent in oil and gas exploration ventures. These benefits are not only real, they were purposely created by Congress in an attempt to strengthen America’s global energy position. Since the tax benefits were created to promote investment, they are designed to substantially reduce the at risk dollars of a project. For high income individuals that find themselves paying at the highest Federal income tax bracket it’s a choice to simply pay the tax bill and lose those dollars with no hope of recovery.

Here’s How It Works:

Active vs. Passive Income: The Tax Reform Act of 1986 introduced into the Tax Code the concepts of “Passive” income and “Active” income. The Act prohibits the offsetting of losses from Passive activities against income from Active activities. The Tax Code specifically states that a Working Interest in an oil and gas well is not a “Passive” Activity; therefore, deductions can be utilized to offset income from salaries, business, portfolio, capital gains, etc. (See Section 469(c)(3) of the Tax Code.)

Intangible Drilling Cost Deduction: The intangible expenditures of drilling (labor, chemicals, drilling costs, etc.), which are the combined Subscription & Acquisition Funds and the Drilling and Testing Funds, are considered “Intangible Drilling Costs (IDC)”, and are 100% deductible in the year in which incurred. For example, a $100,000 investment, of which $75,000 comprises the two installments mentioned above, could yield up to $75,000 in tax deductions during the first year of the venture. These deductions are available in the year in which the investment was made, even if the well does not start drilling until March 31 of the following year. Additional IDC dollars will be generated in the completion of a successful well (See Section 263 (c) of the Tax Code).

Tangible Drilling Cost Tax Deduction: The amount of the investment allocated to the necessary equipping of a successful well, “the Tangible Drilling Costs (TDC),” are also 100% tax deductible. In the example above, the remaining tangible costs (Completion Funds of $25,000), may also be deducted through straight line depreciation over a five to seven-year period.



As a hard asset with low correlation to stocks & bonds, energy investments could protect your portfolio from short-term market fluctuations. While no single investment strategy is suitable for everyone, exploration and/or production-based energy investments offer the potential for higher returns than many traditional investments. Direct energy investments (a portfolio with ownership in producing oil and gas properties) enjoy low correlation with other traditional asset classes and generally positive correlation with inflation. As a diversification strategy, a portfolio with ownership in such an investment may provide a buffer against fluctuating market conditions and inflation movements.


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