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Production of crude oil from United States reserves has been in decline by an annual average of nearly 2.4% since 1985. Production of 273 million barrels in 1985 has since been reduced to 150 million barrels in 2008 – this has been a reduction of nearly 45% in the past 24 years.

US Crude Oil Facts:

1. In the first quarter of 2007, oil drilling reached a 21 year high in the US. And, yet, overall domestic production continues to decline.
2. U.S. consumes approximately 20,500,000 barrels per day of Crude Oil & Petroleum Products.
3. US Crude oil production is 5,564,000 barrel per day.
4. US Crude oil imports are 10,031,000 barrels per day.
5. The US imports 58.2% of its total oil consumption.
6. The top two importers of oil to the US are Canada and Mexico.
7. The US gets 60% of its imports from OPEC countries.
8. The proven reserves of Crude Oil in the US are 20,972 million barrels.

Many industry experts believe that 2011 is a very good year to acquire domestic natural gas production. Breitling Royalties is buying lots of natural gas royalties currently and remains bullish on its long term pricing models.  Pricing is lower than it has been in a number of years, yet demand and supply are off slightly from the levels they have been at in the past 5 years. Low pricing is greatly affected by the uncertainty in the US economy and a slight excess in natural gas inventories. Looking at key statistical data shows that this imbalance will soon be overcome and pricing will move back to appropriate levels in the near future, especially when the US economy begins to recover. In the short term, it looks like natural gas will be priced relatively low, making it potentially one of the best times in history to buy producing natural gas assets.

Some Key Facts on Natural Gas:

1. In the last 10 years, over 90% of the new electric capacity built in the US has been from Natural Gas fired generation.
2. Natural Gas now accounts for approximately 20% of the energy used to create electricity in the US and will account for 50+% by 2035 thanks to the shale gas revolution.
3. Approximately 84% of Natural gas used in the US is produced domestically.
4. Only 2% of Natural Gas used in the US comes from overseas.
5. Natural Gas heats more homes in the US than all other energy sources combined.

Why Invest In Energy?

Increasing Demand
Currently the world produces and consumes about 85 million barrels of oil a day. The recent worldwide economic downturn has affected this demand, and supply is contracting accordingly to accommodate this decline. However, prior to this, world demand for energy has been increasing steadily at a rate averaging about 2% per year. The worldwide recession will end at some point, and then economic growth will again rely on energy and the availability of it. Even without economic growth, we still have human population growth which is increasing conservatively at a rate of 1.4% per year. This will alone have an effect on demand. To put this into context, if we just resume our rate of energy demand, growth prior to the downturn the world oil consumption alone will be over 130 barrels a day by 2030, and our need for natural gas and electricity will jump by 50%! This will still leave 50% of the world’s population with little to no energy supply.

Decreasing Supply
Depending on whose numbers you use, the world passed the peak of oil discovery between 1962 and 1964. We now find only one barrel of oil for every 3 we produce, and this ratio is only getting worse. The fields we are now discovering are progressively smaller and in more remote and geographically challenging locations. Seventy percent of our daily oil supply comes from oil fields that were discovered prior to 1970. The U.S. reserves have been in decline since 1972, thereby increasing crude oil imports by an average of more than 4.7% annually since 1985.

Domestic Security
The current administration has pledged its commitment to weaning our country off the reliance on foreign energy sources. While they may be overly optimistic with their projections on the timing of such a transition, it is evident that more reliance on domestic oil and especially natural gas will come about as a result of their initiatives and leadership. No matter what strategy is eventually used, this will put a premium on domestic oil and natural gas.

Investing in oil and gas ventures can be a rewarding process. If you’re looking for a way to diversify your portfolio, a working interest or a royalty interest in an oil or gas reserve may be a lucrative investment strategy. If you’re looking for replacement properties, the IRS considers producing oil and gas wells to be “like-kind” properties with some real estate.

If you’re new to the 1031 rules, we can help you get up to speed fast. Basically, a 1031 Exchange is a way for investors to take the money they make off of the sale of a property, and reinvest it into another property. One of the main reasons for doing this is to defer capital gains taxes from the relinquished property to the replacement property.

If you currently own real estate, and you’re looking for a replacement property, you might want to consider investing in oil and gas. The IRS has some tricky rules when it comes to exchanging oil and gas rights. For example, minerals beneath the surface are considered part of the real estate, but when they are extracted they fall into a different category. You can exchange a working or royalty interest for another working or royalty interest, as well as for a hotel, office building, shopping mall, or any other “like-kind” property.

Investors can diversify their portfolios by exchanging an apartment complex, raw land, an office building, or any other eligible investment property for an interest in oil or gas royalty production.

The term, “Royalties” is often used interchangeably and refers to:

• Mineral Interests
• Royalty Interest

Both interests involve ownership of minerals under the ground and both entitle their owner to receive a share of the mineral production of the property and to a portion of the revenue from this production.

An investor who owns Royalty Interests owns the mineral rights but has no rights or obligations in the operation of the property.
Usually, he/she does not bear any of the exploration or development costs. A Royalty Interest investor is entitled to a share of the mineral production or a share of the proceeds produced by the property. Royalty Interest should not be confused with Working Interest which bears the expense of operating the oil and gas wells on the land and receives a portion of the proceeds of the gas and oil produced.

The mechanics of completing an Oil & Gas Royalty 1031 Exchange are the same as when doing an Exchange in traditional real estate. Just as with a Tenant in Common (TIC) investment, it is important for commercial real estate investors to work with experienced sponsors. A good investment depends upon thorough engineering and an understanding of the productive life of wells. Complete analysis of this type of investment is necessary and a Qualified Intermediary who is skilled in this field should be engaged. The 45 Day and 180 Day time frame must be followed as for any other 1031 Exchange.

The amount of Royalty Interests purchased can be flexible as long as your minimum investment is sufficient to meet the 1031 requirements. A purchase of Royalty Interests may also be combined with that of traditional real estate as long as it meets the IRC requirements.

Whenever oil or gas production begins, the landowner is entitled to part of the total production. A royalty is agreed upon as a percentage of the lease, minus what was reasonably used in the Lessee’s production costs. The royalty is paid by the Lessee to the owner of the mineral rights, the Lessor in the Lease. It is based on a percentage of the gross production from the property and is free and clear of all costs, except for taxes.

Traditionally, royalty can be 1/8 of production or 12.8 percent of production; however, it can be any fraction of production, depending on the royalty clause in a lease. The landowner should negotiate for as high a royalty as can be arranged.

Previously, landowners bargained for an overriding royalty. The override was 1/16 taken from the Lessee’s interest. Today, mineral owners negotiate for a firm royalty percentage without any override.

Oil royalties may be paid in oil. The Lessor may receive oil from the Lessee and then market the oil. Unless the Lessor is wise and understands the market, electing to receive the royalty in this manner, could be a disadvantage and the landowner, electing for this arrangement, may not benefit from it. Most landowners choose to receive the royalty in cash at the posted price of the oil. A Lessor deciding to receive the oil as the royalty payment can market the oil royalty back to the Lessee for marketing and receive cash through that arrangement.

Gas royalties usually are paid in the monetary units of the country, as in dollars. Gas price is also difficult to value given the fluctuating and volatile markets. Gas royalty clauses usually state a royalty as proceeds, market value or in kind

A landowner can specify separate royalties for oil and gas production. Landowners in negotiating the lease can place a due date for receipt of royalty payments and if timely payments are not made there can be an interest charge for late payment placed in the lease.

A royalty clause in the oil and gas lease specifies the amount of royalty to be paid to the Lessor and it can include other terms and conditions of payment.