How Different Oil Well Formations Affect Oil and Gas Investing

In terms of oil and gas drilling, there are 4 primary types of well categories: exploratory wells, developmental wells, production wells, and multi wells. Each type of well category has an inherently different level of risk and potential return on investment. It is important for investors to realize that each of these different well categories has different and associated risks and rewards.

All oil and gas drilling has risk, and no matter what type of drilling is done, that risk cannot be completely eliminated. Here, we'll look at each of these four types of wells in order of least risk to highest risk. Generally, lower risk wells tend to have a lower return on investment for oil and gas investing purposes while higher risk wells yield a higher ROI.

Production Wells:
Production wells are oil and gas wells that are currently producing oil. Though most of the risk is eliminated once the oil has been found and is producing, there is still some risk associated with the amount of prospective oil in the reserve.

Multi Wells:
Often, oil and gas collect underground in bowl-like geological formations. Where oil exists in one location, there is a probability that there are also other pockets of oil nearby. When more than one well is part of the same project, these wells are called multi wells. There may be as few as one other well in the same venture or as many as 200. Multi well prospects seek to lower the risk of a dry hole by drilling many wells in the same prospect. The reasoning being that some of wells should be good producers.

Developmental Wells:
Developmental wells are drilled in close proximity to wells with known resources. The goal of drilling developmental wells is to extract the oil and natural gas along around the perimeter of existing wells to collect what could not be siphoned up from the main well. Development wells seek to lower drilling risks and the risk of a dry hole by being drilled close to production wells or drilled into areas where oil and gas are known to exist.

Exploratory Wells:
These types of wells are called exploratory for a reason - the oil and gas exploration teams drilling these wells do more exploring by drilling as opposed to developing known reserves. This process of drilling exploratory wells is called "wildcatting". Although excellent tools are available in the search for oil and gas, exploratory wells are among the riskier oil and gas investments. Generally, along with the increased risk of exploratory wells comes the possibility of greater returns on investment when oil is discovered.

Things To Know Before Investing:
Regardless of the type of well, oil and gas investing can return a higher and faster return than many other types of investment vehicles. Oil and gas investing isn't the right choice for every investor, but can be an extremely lucrative investment opportunity.

In today's market, oil and gas are commodities that are in high demand and relatively short supply. Even when supply is sufficient, the need for more oil and gas is ever present. However, before you decide to try your hand at oil and gas investing, it's important to become educated in details of the market to ensure you make the decision that is right for you.

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