Chapter 8: Gas and Oil Well Fraud – Be Aware

Though many legitimate gas and oil investment opportunities exist, there are also scams that trick people out of thousands and thousands of dollars. Take steps to avoid crooked deals, and look for warning signs that an investment is fraudulent.

Whenever there is a lot of money around, there will also be people trying to steal it. The gas and oil industry is no exception. Investment in oil and gas is a big business. In fact, in the United States, fraud in these fields is among the top 10 greatest dangers for all investors. Here is a peek into one common scam.

Limited Partnership Con

A deal promoter focuses on collecting money for a limited partnership — working interest — in an oil well. However, the sponsor is not concentrating on one important thing: finding land to develop. Invested money should be used to lease land, explore potential fields and drill wells. The work many never get that far. If it does, wells are soon abandoned. Most of the money goes into the promoter’s pockets.

Anyone considering investing in oil and gas will, of course, want to avoid frauds. Certain practices provide clues that investment deals are not everything they seem to be. Again: Avoid any offers to participate in these opportunities.

Warning Signs

Gas and oil prices have been in the news, often because of their volatility. Be suspicious of the following:

The volatility issue is the basis for the investment. People are encouraged to sign on and take advantage of price fluctuations. However, the proposal is not thoroughly developed. There is a lot of excitement and hype — but little substance.

The investment is described as “no-risk.” This red flag is waving fast and furiously. There’s no getting around it: Gas and oil investments are inherently risky.Producers with good history and records might be a safer bet, but nothing is certain. No legitimate investment guarantees returns.



Also, if the rate of return for your investment seems too good to be true, it probably is. Revenue from gas and oil investments is usually similar to strong stock indexes. If you are promised far more, be skeptical of the deal.

Also, if the rate of return for your investment seems too good to be true, it probably is. Revenue from gas and oil investments is usually similar to strong stock indexes. If you are promised far more, be skeptical of the deal. If you are offered a gas or oil investment opportunity unexpectedly, it’s probably a scam. Authentic producers of gas or oil wells do not send out mass letters, faxes or emails. This bogus contact may arrive through certified or overnight mail, which increases its sense of importance. The next step is a phone follow-up.



The salesperson on the line usually has little or no experience in the gas or oil industry. However, that does not stop the caller from bombarding the target with a scripted, high-pressure call. Credible deal sponsors do not use telephone banks to make unsolicited contact.

The salesperson on the line usually has little or no experience in the gas or oil industry. However, that does not stop the caller from bombarding the target with a scripted, high-pressure call. Credible deal sponsors do not use telephone banks to make unsolicited contact. Because so much can go wrong, gas or oil deals take time to set up. Sponsors want to do everything possible to support success. A true investment opportunity will allow you ample time to explore and investigate. If you are being forced to act quickly, the emphasis is on getting your money — not on developing a successful drilling project.

Genuine deals are not secrets. You should feel free to discuss them with family, friends and legal counsel and mineral experts. If you are pressured to keep an investment under your hat, do not open your wallet.

Be wary of an out-of-state investment. If the drill site is far from you, the producers may assume you will not stop in to check out the work. If you do not have easy access to the well, it will be harder to tell if you are being defrauded.

Avoiding Oil and Gas Scams

Now you know potential investment danger signs. If you want to try investing in gas or oil investments, delve into a potential deal thoroughly.

Collect information. Ask the sponsor questions, and be wary if answers are not forthcoming. Get details. Examine the geologist’s report. Look at the leasing details and royalty structure. Are any oil or gas investment tax deductions or benefits specified? Do not simply take a producer’s word when claims are made.If the deal is a sham, you will not get honest answers. Look for ways to confirm assertions. Recommendations handed over by the sponsor are not enough.



States have regulatory agencies that handle gas and oil drilling. Check to see if they are aware of the company and the proposed project. Does the company have a good record?

States have regulatory agencies that handle gas and oil drilling. Check to see if they are aware of the company and the proposed project. Does the company have a good record? Projects should also be filed with the state’s securities commission. Contact the appropriate office to check out claims. If sponsors claim their project is exempt, do not take their word for it. Check with the commission to see if the supposed dispensation exists.

Familiarize yourself with the sales agent. This person should be licensed to work in your state and have experience with these types of deals. Find out how the agent is being compensated. Is it based on commission? If so, signing up lots of investors increases earnings. That may be an incentive to exaggerate or lie.

Investigate the flow of money. How much needs to be raised, and where will it be placed? Development funds should be kept in a dedicated escrow account. Will additional money be expected in the future? Also, find the specifics of how the investment will be used. Advertising? Salaries? Sales commissions?



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