How Oil and Gas Joint Ventures Work for Investors

Drilling partners

How do oil and gas joint ventures work?

An oil and gas joint venture pools investors' money to drill and operate wells. Each investor usually buys a working interest. A working interest pays a share of drilling and operating costs and receives a share of the oil and gas sold.

A sponsor, often called the managing venturer, chooses the wells and hires or acts as the operator. The sponsor pays investors their share of revenue after royalties and costs.

Investors receive a Schedule K-1 each year with their share of income, intangible drilling costs and depletion.

Oil and gas joint ventures are the one Relli Learn topic that is not about real estate. Relli has listed energy joint ventures, and their tax and risk rules need their own page. Oil company stocks and energy funds are a separate, liquid way into the sector. This guide covers direct interests in wells.

Interest types

What is the difference between a working interest, a royalty interest and mineral rights?

A working interest pays costs and shares revenue, a royalty interest shares revenue without paying costs, and mineral rights are ownership of the minerals themselves. A working interest pays its share of drilling and operating costs and receives its share of production revenue.

A royalty interest receives a share of production or revenue without paying those costs. The owner of mineral rights usually leases them to an operator for a royalty.

Treasury regulations list "working interests or operating interests, royalties, overriding royalties, net profits interests" as interests in a mineral deposit.

Your net revenue interest is your share of revenue after royalties and other burdens. It is always smaller than your working interest share. The North American Securities Administrators Association (NASAA) tells investors to check for "any overriding royalty or landowner's royalty or other leasehold burden being paid" before they invest.

Why do many oil and gas joint ventures use general partner interests?

Many oil and gas joint ventures use general partner interests because the tax code treats a working interest held without limited liability as non-passive. Investors hold working interests directly or as general partners, so drilling losses can offset wages and other active income. The same structure can make you personally liable for the venture's obligations. NASAA puts it plainly: "A general partner, however, is personally liable for partnership debts."

Insurance or an indemnity does not count as limited liability for tax purposes (Treas. Reg. 1.469-1T(e)(4)(v)). Ask what insurance the venture carries and whether your interest converts to a limited interest after drilling. Also ask what liability you keep after it converts. The guide to general and limited partner interests covers how the roles work in real estate.

Drilling costs

How are intangible drilling costs deducted?

Intangible drilling costs (IDC) are drilling and well-preparation costs with no salvage value, such as wages, fuel, repairs, hauling and supplies. An operator holding a working interest may elect to deduct them instead of capitalizing them, under Internal Revenue Code (IRC) section 263(c). In a partnership, the partnership makes the election. Equipment, the tangible part, is depreciated instead.

No IRS rule sets a fixed share of an investment that is deductible. In many drilling programs a large share of first-year costs may be deductible. The share depends on the deal's structure and costs, and on your own tax situation.

Two drivers are how much of each well's cost is intangible and when drilling happens. The offering documents explain the expected treatment; confirm it with your CPA before you invest.

• Integrated oil companies must cut the IDC deduction by 30% (IRC 291(b)); individuals and independent producers do not.
• Any taxpayer may elect to amortize IDC over 60 months instead (IRC 59(e)).
• Excess IDC is an alternative minimum tax preference only to the extent it would cut alternative minimum taxable income by more than 40% (IRC 57(a)(2)(E)). That rule applies to taxpayers that are not integrated oil companies.
• The 2026 excess business loss limit ($256,000 single, $512,000 joint) and the at-risk rules still apply.
• Prepaid IDC in a tax shelter counts in that year only if drilling starts within 90 days after year end (IRC 461(i)(2)).
• When the interest is sold, IDC and depletion previously deducted are recaptured as ordinary income (IRC 1254).

The 2025 tax law changed how IDC counts for the corporate minimum tax (IRC 56A) from 2026. The individual rules for IDC, depletion and the passive-loss exception did not change. IDC is a drilling deduction with its own rules; the guide to cost segregation and bonus depreciation covers the separate rules for buildings.

Passive rules

Are intangible drilling costs passive?

Intangible drilling cost deductions are not passive if they come from a working interest held directly or through an entity that does not limit liability.

The code says a passive activity "shall not include any working interest in any oil or gas property which the taxpayer holds directly or through an entity which does not limit the liability of the taxpayer" (IRC 469(c)(3)(A)). That holds whether or not you materially participate (469(c)(4)).

A limited partner interest, corporate stock or an interest in most LLCs limits liability, so losses through them stay passive.

The rule has a second half. Once a working-interest loss is treated as non-passive, net income from that property in later years is non-passive too (469(c)(3)(B)). Those wells' income cannot later absorb passive losses from other investments, such as losses on a real estate syndication's K-1s.

What is percentage depletion for oil and gas?

Percentage depletion is a deduction of 15% of gross income from the property for independent producers and royalty owners. It applies to up to 1,000 barrels of oil a day, or the gas equivalent (IRC 613A). It cannot exceed 65% of the taxpayer's taxable income and is not available to large retailers or refiners. Marginal wells can qualify for a higher rate, capped at 25%.

These are general federal rules for tax year 2026, not tax advice. Whether any deduction applies depends on the program and your own return.

Well economics

Is oil and gas a good investment in 2026?

Oil and gas can pay well when prices are high, but a well's income rides on prices no one controls and fast-falling production. West Texas Intermediate (WTI) crude traded around $95 to $102 a barrel in the first half of October 2026. It was $101.91 on October 14, according to the U.S. Energy Information Administration (EIA).

EIA's October outlook describes Middle East flows as "constrained through the fourth quarter of 2026." It expects Brent to fall from about $105 in late 2026 to about $84 in 2027. Gas has already swung: Henry Hub averaged $7.72 in January 2026, and EIA expects $3.48 for the year.

Production falls fast. Shale wells in the most prolific plays "tend to see decline rates of more than 50% in their first year, and another 30% in their second," according to the Journal of Petroleum Technology. Distributions usually start high and fall, so a 15-year hold is not 15 years of level income. You can lose your entire investment.

Form D data

What do oil and gas offerings look like on Form D?

Oil and gas offerings start smaller, use Rule 506(c) more often and report sales commissions more often than real estate offerings. Rule 506(c) is the part of Rule 506 that allows advertising. The figures come from Relli's analysis of 307 new oil and gas Form D notices filed with the SEC between October 1, 2025 and September 30, 2026.

Forty notices had "Joint Venture" in the name, and 181 of the 307 issuers listed Texas. Commissions on Form D are only part of a program's costs; the offering documents show the rest. Relli's analysis of SEC Form D minimums explains the method.

Fraud signs

How do you spot an oil and gas investment scam?

Oil and gas investment scams follow patterns the SEC lists in its investor alert on private oil and gas offerings. The SEC notes that its cases "averaged more than 20 per year" since 2006:

• Pitches tied to "recent news events like high oil or gas prices." With oil near $100 a barrel in October 2026, this pattern is current.
• "'Can't miss' wells and 'guaranteed' returns," or "abnormally high rates of return."
• Unsolicited materials, pressure to decide quickly, or a promoter who does not disclose that it owns the drilling company.
• Claims NASAA flags, such as "The promoter has 'hit' on every well drilled so far" and "Only a few interests remain."

NASAA suggests keeping investor funds "in a separate escrow account until used." It also suggests asking a neutral expert to review the program, and calling your state securities regulator with questions.

How much does the promoter make if the well is dry?

A promoter can make money even when a well is dry, so ask how much before you invest. The SEC alert warns that "the promoter makes money from you even if the well comes up dry." It suggests asking, "How much is the promoter going to make even if we drill a dry hole?" Get the answer in writing and check it against the offering documents.

Some programs price drilling under a turnkey contract. Investors pay a fixed price, and the sponsor keeps the difference between that price and actual cost. A turnkey price is not a red flag by itself, but it is a conflict to understand. Ask what the sponsor earns on a dry or under-budget well and how much of its own money is in.

Checking a sponsor

Has Relli listed oil and gas joint ventures?

Relli has listed oil and gas joint ventures from Optimum Energy Partners, a Dallas-based oil and gas sponsor. All of them are funded and closed to new investors as of October 20, 2026. Each was set up as a Texas joint venture in which investors hold working interests.

Relli reviews and underwrites every sponsor before it can list, and a review is not a guarantee of performance. Most offerings on Relli are for accredited investors, and the sponsor confirms eligibility before you invest.

How do you evaluate an oil and gas operator?

An oil and gas operator should be judged on its record in the same basin, the independence of its forecasts and how it gets paid. Start with the standard background checks on a sponsor (Form D, BrokerCheck, the SEC's adviser search, your state regulator), then ask:

1. Who operates the wells day to day, and what is each operator's record in this basin?
2. Are the reserve and production forecasts from an independent petroleum engineer, and can you read the full report?
3. What decline rate does the forecast assume, and how did the operator's past wells compare with their own forecasts?
4. What oil and gas prices does the forecast use, and what happens at $60 oil and $2.50 gas?
5. How is drilling priced, turnkey or cost-plus, and what does the sponsor earn if a well is dry or under budget?
6. Is your interest a general partner or direct working interest, what insurance covers the venture, and does it convert to limited liability later?
7. How are royalties, operating expenses and severance taxes deducted before distributions?

If you plan to use retirement money, read the guide to IRAs and solo 401(k)s first. An energy working interest can create unrelated business taxable income in an IRA even without debt.