Oil and gas industry is interesting to a lot of people. There are many entrepreneurs and investors who would like to get into the oil and gas business. One of the questions I receive constantly is, Joe, how could one start an oil and gas company from scratch?
Being able to get money to fund your entrepreneurial journey is one of the biggest obstacles you will face. It does not have to be that way.
Getting the right option is half the battle.
Convincing another person to believe in your dream takes resilience, planning and strong presentation skills. The truth is you will be turned down, and this will hurt.
Now, in order to help you get into the oil and gas industry, I have undertaken research to find out how you can raise funds or capital as a beginner in the oil business.
To start an oil and gas company from scratch takes courage and involves taking a few steps to ensure you succeed in the venture.
17 Tips on How to Start an Oil and Gas Company from Scratch
The following are tips and ideas you can use to start an oil and gas company from scratch.
- Self – funding
- Crowd-funding
- Angel investors.
- Friends and family
- Taking a bank loan
- Start-up competitions.
- Venture traffic.
- Use your network for recommendations
- SAB – Small Business Administration
- List on the stock market.
- Utilize supplier financing.
- Lease financing.
- Research and get data.
- Reserve based lending.
- Get government approval
- Build a team.
- Have a plan.
Starting an oil and gas company or business from scratch can be scary. However, you will find this step-by-step guide very helpful in making it easier for you.
The biggest challenge to an oil and gas entrepreneur is how to raise capital.
However, there are other things you also need to have in place to build oil and gas business.
Let us now dive into the details.
Starting an Oil and Gas Company from Scratch in today’s Economy
I know that you are here because you want to start or build an oil and gas business from scratch. You are interested in investing in oil and gas industry. That is great.
The following are some of the ways in which you can start your oil and gas company from scratch, and possibly grow it into a multi-billion empire.
1. Self – funding
After initial research, you may realize that you have the capital you need right at home. This may be in the form of assets or savings that you already have. While this might seem like the most painful way to find capital for a business, it has some distinct advantages.
Self-funding is the easiest way to provide capital to your business since the only person you need to convince is yourself. Further, you’re making a serious statement to future investors. You’re demonstrating that you have confidence in your production oil or gas and your ability to build a business around it.
By providing the initial capital yourself, you retain full control of the business. Even a single investor, such as an angel investor, will have some say in the direction of the company.
However, by funding the company yourself, the control of its direction and speed remains with you. You will also receive all of the benefits when profits roll in.
2. Crowd-funding
Crowdfunding takes your product and makes it available for investment to anyone who thinks it’s a worthwhile venture. This is very much in your favor. Oil — particularly U.S. oil — is one of the hottest commodities on the market there right now.
There are various types of crowdfunding available, including rewards or equity-based crowdfunding. This does more than simply provide start-up cash for your company. Receiving capital from multiple sources means that you can potentially receive a very high initial amount.
Since crowdfunding is a public offering, you will retain a full record of your crowdfunding history. This means that when pitching to larger investors in the future, you’ll be able to show them your investment history.
You’ll have a history of people who willingly invested in your company and received their compensation — something all potential investors look for.
3. Angel investors.
Angel investors have become a famous feature of prominent business TV shows over the last few years. But who are they?
In short, Angel investors are generally accredited individuals who have a net worth of $2 million or a yearly income of over $200,000. They use their wealth to select new businesses that have the potential to provide a high yield.
Often, Angel investors will limit their personal input to $1 million. However, Angel investors have been known to invest in groups to increase their overall offering.
Angel investors often work through angel investment companies. These companies sift through the many startups in search of an offer with real potential. Because of this, they are often not difficult to locate. Usually, social media or their personal consultation websites are the first places to look.
As a further advantage, investors may also provide business input. This may be especially helpful if they have experience in the oil or gas industry. Of course, you will need to agree where this input begins and ends to maintain control over your company.
Yet, if you can build a good professional relationship with your angel investor, they can be a vital source of business advice. They have personally invested in your business. It’s in their best interest to ensure that your business succeeds.
4. Friends and family.
You may be surprised to learn that friends and family are the second biggest source of business capital in the U.S. Your family will be aware of your employment or management history. They are likely aware of the potential of your gas or oil share and may even have helped you obtain it.
This is also one of the easiest ways to obtain capital, since there’s very little red-tape to delay proceedings.
However, like all sources of capital, there are potential negatives. Your family may be willing investors and ask a lower return than other investors. However, the price for this may be the input that they give. They may have little or no business experience or none at all in the oil or gas field.
Further, while your family may be willing investors, extra problems will arise if the business should falter. Relationships may be strained if you’re unable to quıckly resolve debts and other losses.
Often family and friends are the safety net that catches us after a business has suffered losses. However, if your family and friends are the initial investors, they may not be in a position to help later.
If all goes to plan, this can be one of the easiest and fastest ways to receive capital. Ensure that everything is documented and quickly look to apply for other forms of capital to make this work for you.
5. Taking a bank loan to Start an Oil and Gas Company from Scratch.
Probably the most traditional method of obtaining start-up capital is by getting a bank loan. Bank loans have their distinct advantages.
Bank loans require collateral and a sound financial history and credit rating. However, bank loans are different from investments. The initial application will likely require you to submit a large amount of information, as the bank will want to ensure that you can return the loan. They will also scrupulously inspect your business plan to confirm that it’s sound.
However, despite this, bank loans and their conditions are generally less invasive than investors and leave you in control of your own business.
Ensure that you employ a professional to read the small print and clarify the conditions of the loan. Further, you will want to confirm that the interest rates are not prohibitory.
6. Start-up competitions.
Applying for and winning a competition for new start-up businesses is not as crazy as it may sound. Thousands of businesses receive investment capital this way each year.
This is a low-risk option for new businesses, as there is little investment in time and money to enter these competitions. However, the benfits aren’t limited to a large cash reward.
Entering competitions provides immediate exposure to a rich number of investment companies that examine every entrant. Even the companies that do not win the competition will often be contacted by angel investors afterward. This underscores the need to take the competitions seriously and prepare a professional pitch.
Entering competitions is a win-win situation. You win cash by reaching first place, or you win advertising by pitching the potential of your business.
7. Venture capital.
The highest yielding and most difficult form of capital to get is venture capital. Venture capital is the name given to investors that an investment company provides to often fledgling start-up businesses. It’s considered risky to invest in a business at this stage, so the conditions that the company requires are often high.
Venture capitals generally invest large amounts, often a minimum of $1 million. Since venture capital companies invest so much, they’ll want convincing proof that the business will succeed and how much it will yield.
If you’re approaching venture capital companies, pitch in an effective and efficient manner. You will need to convince them of the long-term viability of your oil or gas field and your ability to produce from it.
You should employ the services of a professional to clarify the conditions of the investment and the degree of involvement the company will have.
8. Use your network for recommendations.
If you’re an owner of production oil or a gas field, you’ll likely already have significant experience and contacts in the industry. Ask founders of companies like yours how they received their capital, and even whether they want to fund yours.
By doing this, you’re not only receiving unbiased up-to-date advice, but you’re also benefiting from their experience as a new oil or gas startup. You can learn how they overcame initial cash flow issues, source technologies, and other technical aspects of production.
9. SAB – Small Business Administration.
Although around for many years, the SBA is still a useful source of funding. Don’t let the “small” business tag put you off, they offer federally guaranteed loans of up to $5 million.
Further, you will get the capital you need without interference in your business plan. The conditions and interest on the loan will also likely be light. The purpose of the SBA is to stimulate the economy.
The input that a successful oil or gas industry can have on an economy is significant. The SBA will likely look positively on plans to develop it further.
10. List on the stock market.
One way in which you can raise money when starting an oil and gas company from scratch is by listing in the stock market.
To be honest, raising capital will be one of your toughest assignments.
Starting and building a business is also rewarding. You can use the stock market to sell shares as part of your funding needs.
11. Utilize supplier financing.
Cash flow is going to give you headaches from time to time. This happens to all businesses. Actually, I face the same challenges often in my business.
A creative way to solve this problem is by utilizing supplier financing.
Getting credit facilities from your supplier can be one way close the cash flow gaps that you might be facing.
12. Lease financing.
As you start your oil and gas company from scratch, you can explore new ideas like using lease financing.
Lease financing is one of the important sources of medium- and long-term financing. It can work for you.
It is where the owner of an asset gives you the right to use that asset against periodical payments. The owner of the asset is known as lessor and you would be called lessee.
You see, this can be something to consider when you are starting an oil and gas company from scratch, especially in today’s environment.
13. Research and get data.
Starting any business starts with research.
You should spend time to research on the business that you are interested in. Understanding the oil and gas industry, market conditions, and projected growth of the sector is important.
You should also spend time researching and gathering intelligence on potential places you can invest.
An oil and gas exploration company should have clear objectives. You should research on the best locations and regions in the world where to set up your business.
14. Reserve based lending.
This is a more advanced way of raising funds for your business.
It is a type of asset-based lending which is common in the oil and gas industry. Therefore, if you are starting an oil and gas company from scratch, you should consider it.
You can use this option in your early days of oil and gas business, but after you have undeveloped oilfield.
The amount of the loan facility available to the you is based on the value of your company’s oil and gas reserves, as adjusted from time to time.
The loan facility is repaid using the proceeds from sales in the field or portfolio.
15. Get government approval.
Before you get your business going, you should check all the regulations, licenses, and permits, which are relevant for the field, as well as your tax identification number.
If you have previous experience in this area, you are probably aware of some of them, but it is always best to seek the advice of a business or tax attorney when handling legal issues.
Getting into the oil business may take much more effort than starting a company in any other field, but it can also bring much more profit.
If you have the talents and skills needed, enough financial and human resources, as well as a detailed business plan, you may soon see your investment returning.
16. Build a team.
In your journey of building an oil and gas exploration company, having the right team in place is very important.
It is argued that the people you put together are more valuable than the money you get.
In the eyes of private equity lenders, it is important for them to see you have a team with right experience.
Additionally, the team should have the smarts and ability to understand the technology behind oil and gas operations.
You do not have to start with a large team to be successful. We have seen very small and nimble oil and gas companies delivering superb results.
All in all, your company will start with its people, and outside your company, having solid industry networks will count in your success.
17. Have a plan for your oil and gas company.
Once you have a clear notion of what you want to focus on, you should make a detailed business plan, and list all your resources and your liabilities. Your business plan has to incorporate all the projected operating costs, including insurance, permits, licenses, salaries, and ongoing expenses.
Think of your business plan as a framework for running your business. Also, if you are thinking about applying for a loan, or you want to convince investors to invest in your company, your business plan will be a resourceful tool.
If you don’t have any previous experience in creating a business plan, you can find templates you can download.
Conclusion
In conclusion, it is important that you be focused when starting an oil and gas company from scratch. It is not easy, but if there is someone who can do it, it is you.
You will need to ensure that your business capital structure is in place. It is also possible for you to bootstrap your oil and gas business. However, doing this means you will lose out on opportunities in the market due to lack of enough funding.
As you build your oil and gas business from scratch, it will be important that you have the right tools.
Frequently Asked Questions
How much does it cost to start an oil company?
If you are going to start an oilfield, be prepared for at least $6 million in starting costs, and possibly more.
In an industry where earning a profit can take years, having the assistance of my team can make all the difference.
How much do oil company owners make?
A Crude Oil Owner Operator in your area makes on average $226,094 per year, or $5,231 (2%) more than the national average annual salary of $220,863.
How do I start a small oil company?
Getting into the Oil Business—How to Start Your Own Company
- Decide where to invest.
- Make a business plan.
- Identify your investors.
- Build a great team.
- Use top-notch equipment.
- Check the regulations.
You can read more about this in this article I wrote about how to start an oil and gas exploration company.
Related: 11 Steps to Start an Oil and Gas Exploration Company
What is the most profitable oil company?
As you start an oil and gas company from scratch, you might be wondering, which is the most profitable oil company?
As at 2019, the profitable oil companies were as follows;
- China Petroleum & Chemical Corporation – $424bn.
- China National Petroleum Corp (CNPC) – $396bn.
- PetroChina – $360bn.
- Royal Dutch Shell – $345bn.
- Saudi Arabian Oil– $330bn.
- BP – $278bn.
- Exxon Mobil– $265bn.