As a perk, the government offers favorable tax credits to incentivize energy investment. The Google-ble term is “Indiscressionary Drilling Costs.”
Drilling funds have the Intangible Drilling Cost which are expenses which can be written off in the first year as long as you are a General Partner. So when you go into one of these deals even as Passive investors you get put in the GP so you can write off these expenses and then you get moved over to the LP in year two. This is after you take the tax benefits. The x-factor on with oil and gas is you can take these losses off W2 income.
Of course, you have to be mindful of the extra liability of being in the GP and one way you can mitigate this is making sure the operators have adequate insurance.
There are some income funds where is a mix of IDC (good tax benefits) is combined with income (performing funds).
In the end, just hearing from a few people about their experience the returns in the very very end after a lot of volatility is mid-single digit returns but getting the tax benefits. Cash calls are common. And promotes are really big.
Another side business is salt water facilities the support the oil business. This one gets low teen returns but no IDC tax benefits.
Warning – This is a high-risk high reward asset class with a lot of shady players.
Ways to play in oil and gas:
Salt Water Disposal Wells – Every producing oil well pulls up a certain amount of salt water along with the oil and gas. A Saltwater disposal (SWD) well is a disposal site for water collected as a byproduct of oil and gas production. Drilling for oil sounds really cool but its a high-risk high return venture (tax benefits make it a good risk-adjusted return). Sale Water wells are seen as an ancillary industry.