What It Is:
Wildcat drilling is the process of looking for oil and natural gas wells in non-typical areas.
How It Works/Example:
Drilling oil and gas wells can be a good opportunity for risk-tolerant investors, particularly if the field where the new well is to be drilled has consistently produced oil or gas or both in the past and is expected to continue. In areas where there has been no commercial production, however, or if the area is otherwise unknown and unexplored for any type of petroleum, then the investment carries substantially more risk. Such exploration is called "wildcat drilling."
Oil wells are typically drilled using limited partnerships, with each participant paying a share of the costs of drilling the well. Wildcat projects carry substantial risk, but they also offer a large payday if the well produces crude or natural gas.
Why It Matters:
Wildcat drilling is a capital intensive and high risk business venture. It is highly dependent on the track record and skill level of the geologist. While the U.S. tax code grants substantial tax benefits for expenses and income from oil and gas drilling, these provisions do not offset the wells' inherent risk.