Against a backdrop of limited oil and gas reserves, worldwide demand for energy continues to increase. Despite continuing efforts to develop and expand alternative sources of energy, oil is difficult to replace. Most of the items that we use on a daily basis including tires, fabrics, detergents, insulation materials, and plastics are petroleum based. Beyond this is the fact that gasoline based transportation remains the most cost effective mode despite rising oil prices. As a result investing in oil and gas drilling projects presents qualified investors with an unprecedented investment opportunities.
Investors who participate directly in oil and gas drilling projects own a part of the well and as a result receive a share of the income generated via monthly disbursements. Substantial tax benefits also accrue to these investors as the U.S. government encourages investor funded domestic gas and oil drilling programs. After the Tax Reform Act of 1986, oil and gas direct participation drilling programs remain one of the ways investors can shelter income: As much as 65 to 100 percent of an investmet may be deducted in the first year and this remains true even if the well is unsuccesful. At the same time 15 percent of income generated is tax-free (see Tax Considerations).