The concept of crowdfunding-the use of small sums of capital from a large number of investors to finance business ventures, typically via the internet-is nothing new. Also not new is the business model that allows individuals to invest their collected funds to financially back oil and gas ventures. The marriage of these two realms, however, is a relatively new idea, and one that is gaining traction in the "new normal" business environment of $50/bbl oil.
The oil patch has come to find its own online niche somewhere between the feel-good "Go Fund Me" web sites of the world, used to raise charitable contributions for life-saving operations and the like, and the entrepreneurial "Kickstarter" portals, which pool resources to get startup businesses off the ground and running full-speed ahead.
Funding for oil
Although there are currently a few thousand platforms for crowdfunding, there are only a small handful of sites that cater to independent oil and gas investors. In an interview with the cofounder of one such online marketplace, OGJ learned more about the idea of crowdfunding for oil and gas projects.
David Taylor, cofounder of Crudefunders.com, told OGJ that one of the main things that he and fellow cofounder Allan Fine agreed upon when starting up their venture was that neither liked the way that the industry raised capital. "We felt that it was not transparent and that there was a lot of fraudulence," Taylor said. "I like disruption. I like the ability to be able to bring transparency to an industry that needed it so dearly."
In early 2012, Fine recognized the potential impact of Title III of the Federal JOBS Act, which would allow nonaccredited investors to directly participate in oil and gas projects for the first time in more than 80 years.
The Crudefunders web site then details: "Fueled by Texas' decision to pass intrastate crowdfunding ahead of the federal JOBS Act, Fine relocated to Texas and began assembling a team of oil and gas industry experts to cofound the online marketplace."
Why did Fine and Taylor figure the concept would work? Taylor explained that back then when oil was fetching $106/bbl, they thought that raising capital would be a no-brainer. But then when the market began to crash, and oil prices plummeted to $26/bbl, it really proved the validity of crowdfunding as a capital-raising tool for oil and gas projects.
Taylor credits the success of the company to its "spectacular" team it has assembled. The firm has attracted reservoir engineers, geophysicists, investment bankers, and landmen to select, vet, and manage oil and gas ventures.
"We're close to 7,000 investors now and growing daily," Taylor said.
Typical projects, investors
Taylor explained that the company likes to keep investment projects in the same field, therefore ensuring proved offsetting wells. "Our prospects are shallow, conventional wells. We like [the] Permian. We like salt domes. We're doing a little shallow stuff in the Eagle Ford," he said.
Taylor notes that Crudefunders typically has three types of investors. The company has projects that make sense to everybody. "Here's what is unique about us: We split our drilling operations into three phases," he said.
The company allows accredited investors to come in and take the dry-hole risk. It then offers the completion portion of the project to nonacredited investors, providing them with a look downhole to reduce their risk. The third phase deals in the selling of the project's working interest and production from the well.
"When investors come in to look at a project, we never discuss the projects with them. That's what is unique about our crowdfunding space. They are doing the research. We get them to the portal and give them as much transparency as we can," he said.
Investors can communicate with other investors through chat functions at the portal and they can follow their prospects' progress via frequent updates. "They will always know, for example, if there's a delay in drilling or what the reserve reports look like," Taylor said.
"The risks are real, however," Taylor warns. "Investing in oil is not for everybody. We just want people to come in with their eyes wide open and really do their due diligence. It's a great thing, but you still need to know that there are associated risks. That's why the returns can be so high."