Over the past couple of months, I have been looking into oil and gas investments, mainly for two reasons:  First, because I am bullish on the long term price of oil, and secondly, because of the tax credits.  I have had alot of capital gains this past year, and like everyone, would much rather keep the money rather than give it to Uncle Sam.

Thus the focus on oil and gas investments.  Beginning in the Summer, I began looking through Memorandums for private placements in oil and gas funds that can be deducted in the year they were made.  The way the deduction works, is that instead of being a deducion, which means only your tax rate is truly the deductible part, the credit allows the percentage of the investment that goes towards Intangible Drilling Costs to be deducted dollar for dollar against your tax liability.  From what I have seen, the IDC's are around 90% of the investment, which is very significant.

In other words, if you owe taxes of $10,000, and you make an investment of $10,000, with an IDC of 90%, you would deduct $9,000 from the amount you owe in taxes, so your new liability would be $1,000.

It's pretty obvious why the US Government would encourage a program like this.  With problems in the Middle East, higher oil prices, and what looks to be a decreasing supply of oil, in order for economies to move forward, energy is needed.  Thus the incentive to invest in this area.

But just like in every industry, you have to do some research.  Currently I'm invested in 2 different funds offered by one company(BV 1&2), and 1 fund offered by another company(TE 1) in an effort to diversify my risk.  I originally had invested in BV 1 in September, and just received my first check from the producing wells.  BV 2 and TE 1 are my most recent investments, which I made last week.  Since I cannot talk as much about them because there has been no performance yet, I can only discuss BV 1.

Production started in Late October for the BV1 Fund.  So the check I received, which was a little less than 1% of my investment, only has production for about 2 weeks, from one of the wells at about $53 a barrel.  I'm actually pretty excited about this, because there are three wells in the fund.  Even with just this 1 well, I can expect about a 12% annual return, which is more than a great return for a investment that allows you to take such a generous tax deduction.  I believe drilling for the second well has already started, so hopefully it will be done within a month or two.

So far I am impressed with this first fund's performance, as it is on pace to earn approximately 11% per well per year.  I will be keeping a close eye on the performance of these wells, as obviously, regardless of the tax deduction, I want to be putting my money into sound investments first.  Depending upon the performance of these funds this year, I will decide what to do, if anything, next year.