In the United States the mineral rights (Oil, Gas, Coal) are owned by the landowners and not the government. These rights can be separated from the surface ownership and purchased separately; the owners of these rights will own them forever as separate from the land. Mineral owners make money by leasing the minerals to an oil company to develop and they receive a cash bonus for leasing and a cost free percentage of the production from the well (12.5% to 25%)

Minerals and royalties (producing minerals) are valued by location and the future revenue from oil and gas reserves. Like other types of real state the value varies greatly depending on location and the success and pace of development.  

Advantages: Mineral owners get paid to lease their minerals and do not bear any cost of drilling the wells, no cost of operating the wells, and will own the minerals forever. Minerals and royalties also have a low cost of ongoing management. 

Disadvantages: Since mineral owners do not pay developments cost they are more expensive to buy initially and are passive (you wait for an oil company to want to drill). There are generally fewer mineral deals for sale than other types of oil and gas investments so there’s no way to know how much money can be invested or how quickly. 

Oil company’s geologist find places to drill wells based on seismic data, well logs, etc. They buy leases from the mineral owners and then drill and complete the wells. Most small investors in drilling wells don’t operate the well, they just take a percentage of ownership in a larger company’s well. If the well produces the Working Interest owner (investor) gets the revenue less the amount paid to the mineral owner and they can drill as many wells as needed to produce the most amount of oil. 

Exploration deals are valued based on the prospective amount of oil to be produced and the uncertainty of drilling the new well. The amount of information and skill of the geologist can reduce the risk and the investor has to decide how much risk to take for the anticipated oil and gas production. 

Advantages: The money invested in drilling wells is actively finding and producing oil and gas and is not passively waiting for developments. The working Interest owners are in control of where and when wells will be drilled so they can drill wells based on the drilling results and oil prices. They get a greater rate of return and overall return on investment than mineral owners due to the larger risk they incur. This type of investment should generate a multiple rate of return if the wells are successful. 

Disadvantages: Drilling wells is the riskiest type of oil and gas investing because of the uncertainty of how much oil the well will produce; the well might cost more than the oil that it makes. The Working Interest owner also pays for the ongoing monthly cost of producing the well which can cause the well to become uneconomic if oil prices drop. 

Buying existing Working Interests that have already been drilled is less risky than drilling new wells and should provide a reasonable return on investment. Since the buyer can see how much the well is producing and a petroleum engineer can determine the future production it’s possible to buy existing wells based on actual production. There is an active market of buyers and sellers of existing production and is actually a competitive market. The buyers of existing production will have the opportunity to participate in the drilling of new wells in the future if more wells are needed or there are new formations to develop. 

Acquisition deals are valued based on the future revenue from the producing wells as determined by a petroleum engineers reserve report and the cost of producing the wells. Some value can be added to potential future drilling locations. 

Advantages: Buying existing production is less risky than drilling new wells but still provided the chance to drill wells in the future when oil prices are higher. Buyers should get an acceptable return on their investment since the purchase is made based on actual production and oil prices. Future drilling is less risky since the acreage has been proven to be productive for oil. 

Disadvantages: Buying production will usually not generate a the same multiples of investment that drilling new wells will because of the lower risk of buying wells that have already been drilled. There are still monthly operating expenses which affect the profitability if oil prices decline.