Oil Drilling Scams

• Some investors have struck it rich by investing in oil wells, but there are many oil investing scams. Design Pics/Valueline/Getty Images

  Investments in oil drilling, much like any other investment, have their specific risks. This area also has been known to attract scamsters. An investment in a drilling limited partnership means that an oil or gas company sells you partnership units. The company then uses the money it raises from investors to lease property and to drill wells, offering investors the prospect of sharing in any revenue from oil strikes. A part of the money goes to the sponsor's up-front fee. (See references 1, 2.)

Multistate Scams

• One way of running an oil-drilling scam is to incorporate a company in one state, name another state as the location of the oil well, and deal with investors in the other 48 states. This way, it is less likely that you will drop in on the company's offices or the oil drilling operations. And it is easier for the company to evade legal and police scrutiny. (See references 1, 2.)

High-Pressure Sales Scams

• If you hear repeatedly from salespeople about a "can't miss" investment, it could be a fraudulent scheme. Another common oil-drilling scam is to operate a high-pressure, boiler-room sales operation with salespeople who pressure you with outsize claims. You could also get unsolicited email and other Internet offers relating to such deals. (See references 1, 2.)

Protecting Yourself

• The Securities and Exchange Commission has tips for investors to avoid being hit by oil-related scams. For one, ask the right questions, check the answers you get, and look into the company's financials. Contact the oil and gas regulatory agencies of the state in which the company says it is drilling wells. These agencies usually have a record of the company's operations and drilling history. This will give you a reference point to verify the company's claims.

  However, it may be difficult to readily locate the agency regulating oil wells in a state. For instance, in Texas it is the Railroad Commission of Texas that oversees the Texas oil and gas industry. (See reference 2.)